Digital wallet revenue

How do digital wallets make money?

A wallet provider can earn from merchants, which pay a fee when customers pay with the wallet; from users, who may pay for transfers, cash withdrawals or currency conversion; from billers and mobile operators, which pay a commission when users pay bills or buy airtime through the wallet; from card issuers, which pay some wallet providers a fee when their cards are used in the wallet; and from the interest earned on the money users keep in their wallets. Each stream is assessed separately. See fintech accounting and payment processor revenue.

When are wallet fees recognised?

Under IFRS 15, transaction fees are revenue when the wallet completes the service: processing the payment or transfer. Fees that depend on monthly volumes are variable consideration, usually known by the end of each month. For bill payments and airtime, the wallet usually does not control the service the user receives: the utility provides the electricity and the operator provides the airtime, and the wallet only collects the money and passes it on. The wallet is then an agent and its revenue is its commission, not the bill amount. See principal versus agent.

Digital wallet revenue: a month of activity

In a month, users pay merchants US$ 50,000 thousand through a wallet, which charges merchants 1%. The wallet pays users 200 thousand of cashback on those payments to encourage use. Users also send 20,000 thousand to each other, paying a fee of 0.5%, and pay 10,000 thousand of utility bills, on which billers pay the wallet a 1% commission. Users keep an average of 5,000 thousand in their wallets, which the provider holds in safeguarded bank accounts earning 6% a year.

Revenue for the month is 500 thousand: merchant fees of 500 thousand less 200 thousand of cashback, transfer fees of 100 thousand and bill payment commissions of 100 thousand. The 10,000 thousand of bills collected is not revenue, because the wallet is an agent for the billers. The 25 thousand of interest on the float is interest income, presented separately from revenue from contracts with customers. Commissions paid to agents who handle cash deposits and withdrawals are costs of running the network.

Why does cashback reduce revenue?

The wallet's customer for merchant payments is the merchant, and the users who receive cashback are the merchant's customers. IFRS 15 treats consideration paid to a customer, or to parties that buy from the customer, as a reduction of the transaction price unless it pays for a distinct good or service. Cashback buys nothing distinct from users, so it reduces the merchant fee revenue. Where cashback paid to users who pay no fee is not linked to any revenue, or exceeds the related fees, practice varies between presenting negative revenue and presenting the excess as marketing expense, and the policy should be applied consistently. Sign-up bonuses for new users are assessed in the same way. See incentives paid to customers.

How are agent networks accounted for?

Mobile money services rely on networks of agents, often shopkeepers, who take cash from users and credit their wallets, or pay out cash. Agents are paid commissions per transaction, which are costs of providing the service, usually presented in cost of revenue. Cash held by agents for the wallet and balances owed to or by agents are financial assets and liabilities, with expected credit losses on amounts agents owe. Fees charged to users for cash withdrawals are revenue when the withdrawal is made.

How are customer balances and float income treated?

Money users hold in their wallets is a liability of the provider, usually e-money, and the money received is the provider's asset, kept in safeguarded accounts or secure investments as regulation requires. The interest earned is the provider's income, often a large part of its profit when rates are high. In some markets, mobile money is provided by telecom groups through licensed banks or e-money subsidiaries, which hold the funds in trust accounts. See e-money and safeguarded funds.

What about fees from card issuers?

Some wallets do not hold users' money at all but store their bank cards and let them pay with their phones. The card-issuing bank may pay the wallet provider a small fee on each transaction made with its cards. The issuing bank is then the wallet provider's customer, and the fee is revenue as each transaction occurs. The wallet provider does not report the payment amounts, which flow between the bank and the merchant.

How does US GAAP differ?

ASC 606 gives the same answers on principal or agent and on consideration payable to customers, including payments to customers' customers. US payment companies commonly present revenue from transactions separately from revenue from other value-added services and interest on customer balances, and disclose transaction expense and transaction losses. See ASC 606 principal versus agent.

This guide is general information. It is not tax or legal advice for your situation.