Traditional banks cannot bank the unbanked, but digital wallet companies can.

Digital wallets are emerging and can disrupt traditional branch-based banking networks throughout the world over the next five to ten years. Alipay and M-Pesa have already provided digital wallets to hard-to-reach users in China and Kenya, giving customers access to payment systems, loans, investments, insurance, and asset management. Such wallet ecosystems transform the scaled delivery of financial goods, particularly in emerging nations. Digital wallets have been slower to take root in the United States, where traditional bank networks are well-established until now.

These two digital wallets have attracted 21 million users in the US by the end of 2017, thanks to peer-to-peer applications like Venmo and Square's Cash App, and the number of digital wallets in the US will surpass 200 million by 2023.

In other words, by five years, they will have reached 75% of the adult population in the United States.

The option to divide restaurant costs and rent with friends and make minor purchases at nearby retail outlets allows every user to "acquire consumers" for the network. Product extensions such as merchant point-of-sale integration, loyalty and incentive programs, and personal financial management applications boost engagement.

Perhaps more importantly, these digital wallets have the potential to displace bank offices. Large retail banks rely on real estate to recruit clients, including branches and ATMs. Physical infrastructure is expensive to staff and maintains, increasing client acquisition cost to $350-1500 per person, as seen below.

Surprisingly, although digital wallets are taking off and gaining market share, their offline bank counterparts are doubling down on physical infrastructure expenditures and expensive user acquisition costs. JP Morgan Chase, for example, has announced plans for 400 additional bank branches, 50 of which will be located in Philadelphia.

On the other hand, digital wallet providers may attract clients for as low as $20 per, due to real-time data on income and expenditure. While they may not have all of the operational and regulatory infrastructure required to deliver traditional bank branch services, digital wallet providers should be able to white-label or acquire those capabilities and attract new customers at a fraction of the cost that banks are spending.

Digital wallets should flourish at the top of the banking stack because they get a percentage of the lifetime value of each customer they acquire. Investors are ready to pay a median market price of $3400 per demand deposit for traditional banks.

In-pocket banking has the potential to disintermediate each of those demand deposit arrangements. With 200 million users in 2023, the digital wallet possibility might be valued at up to $700 billion, possibly on a winner-take-all basis, if investors value a digital wallet user similarly to such demand deposit connections.

According to our calculations, Venmo may account for around $15 billion of PayPal's current market worth, while Square's market cap is approximately $25 billion, putting this possibility into context.Square's Cash App, Venmo, and Apple Pay are ideally positioned to capitalize on powerful network effects.

According to Google Search Trends, while all three services are generating comparable levels of interest, Square's Cash App has entered an accelerated growth phase compared to Venmo and Apple Pay.

Digital wallets might serve as a gateway to crypto-assets. Although it is still early in the game, digital services should become crypto-asset native, providing significant economic power to enterprises that provide access to those services. Square is the first digital wallet at scale to roll out this capability with Cash App.