What is a Staged Digital Wallet Operator (SDWO)?
Digital wallets have soared in popularity, accounting for more than a third of global consumer-to-business spending in 2024, exceeding US$15.7tn; and by 2026, there will be more than 5.2 billion people using digital wallets, accounting for over 60% of global e-commerce transactions.
Consumers are becoming more comfortable with using digital wallets for day-to-day transactions, both online and offline. While there are hundreds of different digital wallets available globally, they are typically categorised into two main types.
Pass-Through Wallets
These are primarily mobile-based solutions that allow customers to make payments both in physical stores using tap-to-pay functionality and online. These wallets typically use tokenization to generate a secure digital representation of the customer’s physical card. Examples include Apple Pay and Samsung Pay.
Staged Digital Wallets
These operate through multiple ‘stages’ to complete a transaction, involving a ‘funding’ stage and a ‘payment’ stage. Essentially, the wallet acts as an intermediary in the transaction process. With a staged wallet, the card issuer or card network may not have access to specific card details or other relevant information. Examples include PayPal and Alipay.
In this article, we will look at the role of Staged Digital Wallet Operators (SDWOs) in the payment ecosystem.
What is a Staged Digital Wallet Operator, and how does it work?
A Staged Digital Wallet Operator (SDWO) is a payment provider that allows customers to store funds in a wallet and make purchases from merchants without directly sharing their bank or card details.
The process of using a Staged Digital Wallet to make a purchase is as follows:
1. Customer loads funds into the wallet:
- Funding methods include:
- Bank transfers (via Open Banking, SEPA, Faster Payments)
- Credit/debit cards (Visa, Mastercard)
- Local payment methods
2. Customer makes a purchase via the wallet:
- Instead of using a card directly, the digital wallet processes the transaction.
- The merchant receives funds from the wallet provider, not the customer’s bank.
3. The wallet provider settles payments to merchants:
- Merchants receive funds from the SDWO, not directly from banks or card networks.
- This staged process adds security and privacy but creates regulatory challenges.
Unlike a Merchant of Record (MoR) or Payment Facilitator (PayFac), an SDWO does not act as a direct intermediary for each individual transaction. Instead, funds flow through the wallet before reaching the merchant.
This means that the wallet’s name will appear in the customer’s bank statement, sometimes, but not always, with additional information to help customers identify the transaction, such as the name of the merchant or a transaction ID.
Unlike payment facilitators and marketplaces, which must quickly distribute settlement funds, a SDWO allows cardholders to preload funds for future use. Depending on legal requirements, it may invest or use these funds before transferring them. The SDWO model is also unique in enabling consumer-to-consumer transactions via credit or debit card.
As a consumer-facing entity, a SWDO is responsible for resolving disputes concerning its services.
Due to the nature of how SDWOs work, it is the most likely payment aggregator type to face money transmission licensing and compliance challenges.
How are Staged Digital Wallet Operators regulated?
How SDWOs are regulated depends on the jurisdictions they operate in.
In the UK, SDWOs must be authorised by the FCA (Financial Conduct Authority) as an E-Money Institution (EMI). In the EU, wallets must register under the European Banking Authority’s (EBA) e-money regulations. Digital wallets must implement Strong Customer Authentication (SCA) for secure payments, and as they store sensitive payment data, must adhere to strict encryption and security protocols.
In Asia, where the use of digital wallets is high, the regulatory landscape is fragmented, with the majority of countries developing their own frameworks to regulate digital wallets, and other payment institutions via central banks.
An SDWO must be registered with card schemes and follow their rules as both a merchant and a third-party service provider. For SDWOs working with Visa/Mastercard, the ‘Back-to-Back Rule’ applies. Back-to-back funding refers to a transaction where a customer's card funds a digital wallet, and then the wallet funds a merchant transaction, even if the wallet itself doesn't have sufficient funds.
The ‘Back-to-Back Rule’ prevents SDWOs from directly passing card payments through to recipients without first holding the funds in the wallet. This ensures that transactions occur in two distinct stages: loading funds into the wallet and then using them separately. The rule helps maintain regulatory compliance, prevents unlicensed money transmission, and aligns with anti-money laundering requirements.
