The article first appeared on OMFIF on March 19th , 2025

Lewis McLellan is Editor of the Digital Monetary Institute, OMFIF.

Regulators are eyeing their dominance with concern

Digital wallets have already begun to take hold of our payments behaviour, accounting for 29% of card transactions in 2023, up from 8% in 2019. Their capabilities are only set to grow as identity solutions, new forms of money and other functions come online. But regulators are starting to become concerned that there are only really two games in town: Apple and Google. Their respective wallets, bundled with iOS and Android respectively, absolutely dominate the market.

From a Borkian perspective, as yet, there is little cause for worry. It is hard to argue that consumer welfare has been harmed by the growth in digital wallet use. For one thing, if people didn’t want to use these wallets, they could still pay with cards or cash. It is only the convenience of wallets that has driven the immensely rapid growth of digital wallets in payments.

But the Financial Conduct Authority and the Payment Systems Regulator are concerned. A report published in February reveals several potential worries. Chief among these is the possibility that the control Apple and Google exert over their mobile ecosystem is anti-competitive.

‘Digital markets are a challenging area in competition, because incumbents can have huge user bases and significant market positions,’ said Dan Moore, head of strategy, analysis and engagement at the PSR. ‘The risk is that, without other wallets that are able to compete, we could see quality of service reduced, opportunities for innovation missed and additional charges enter the system and eventually be passed onto consumers.’

What is the central issue?

Are Apple and Google to blame for their market dominance? Or is there a dearth of attractive alternatives?

Apple at least was ruled to be engaging in anti-competitive behaviour by restricting access to its iOS near field communication system to Apple Pay. The European Commission investigated this and, in July 2024, extracted legal commitments from Apple to open this functionality to third-party app developers. With the release of iOS 18.1 in October 2024, Apple complied with this both in the European Union and in the UK, although the details in the UK are slightly different. However, we have yet to see a third-party wallet app achieve traction even with access to NFC systems.

This has at least theoretically improved the competitive environment, but if NFC access were the only limiting factor, then we would surely have seen competitors to Google Pay arrive on the Android app store. The fact is that Google and Apple have enormous user bases already and therefore benefit tremendously from network effects and economies of scale that other potential wallet providers simply cannot match.

Again, we return to the question: is this a problem? If users still get access to digital wallets, does it matter if they are only provided by big tech companies?

Protecting consumer welfare

The fundamental question is: is healthy competition valuable for its own sake or is it only worth pursuing if its absence is harming consumer welfare?

When answering this, regulators need to consider not just present consumer welfare, but possibilities. Even if a small group of companies achieves a dominant market share through innovation and improvements to efficiency, if viable alternatives do not exist, over time this market share may create the opportunity for these companies to extract value and degrade the service they offer at the expense of consumers.

The extreme concentration of market power is visible already. Apple Pay and Google Pay do not rely on open banking application programming interfaces but are driven by bilaterally negotiated contracts with the underlying card providers. The growing importance of these wallets means that Apple and Google have an immensely advantageous position in these negotiations. It is possible that this could result in them pushing costs onto other elements of the ecosystem, i.e. card issuers and banks, and that these could be passed onto merchants and eventually consumers.

To some extent, this may already be happening in the case of fraud. Card issuers are ultimately liable for unauthorised transactions, even if these take place through digital wallets. Although wallets typically have good security standards like biometric authentication, they can still be a vector for fraudsters to attack. Card issuers and merchants will end up bearing the additional overheads and chargebacks without being able to address wallet providers’ security standards themselves.

Open banking has not lived up to its promise

The FCA and PSR report highlights that digital wallets are entrenching card payments, and regulators would prefer account-to-account payments enabled by open banking to grow. But open banking has not yet lived up to its promise. Despite the support of regulators, successful, scalable business models built on making use of open banking APIs remain thin on the ground.

Does this suggest a lack of innovative spirit among payments fintechs? Open banking’s failure to take off reflects the challenge of encouraging grassroots innovation in payments. The industry runs on networks. Adoption, scaling and usability are everything. This gives incumbent payment system operators a huge advantage and means that only technology companies with their own adoption networks have managed to insert themselves into the industry.

Digital wallets are likely to form a core component of any solution that scales A2A payments. Moore said: ‘If A2A is going to provide a real competitive alternative to other payments systems – which we very much hope to see – it will have to be available for a variety of types of payments, including in-hand at point of sale. That probably means we need digital wallet solutions which include A2A over time.’

Perhaps the problem of excessive dominance of Apple and Google in wallet provision and the problem of a lack of vehicles for A2A payments have the same answer: a digital wallet offering convenient A2A payment solutions. As yet though, none has emerged and, even if one does, gaining traction will be a struggle given Apple and Google’s ability to steer users towards their own tools.

Encouraging innovation over regulation

So, what can regulators do? The PSR is certainly doing everything it can to encourage innovation from small players. Moore said: ‘My preference is always to encourage competition and for good outcomes to arise through that, rather than detailed regulation, wherever possible. We should remember that these wallets are producing a lot of convenience and consumer benefit, and that maintaining a positive regulatory environment for innovation is important.’

But at some point, we may be forced to confront the possibility that good ideas are not enough to compete with the big players in payments. The Competition and Markets Authority is investigating this and will issue a decision on the wallets’ ‘strategic market status’ by October 2025.

In an era where so much economic growth takes place in big tech companies, governments might be unwilling to apply too many brakes to their growth in order to create a generation of smaller fintech challengers. At that stage, we will have admitted that competition is no longer our main priority and we will have to hope that we have other levers to ensure that their market position does not compromise consumer welfare.