What exactly is a digital wallet?
A digital wallet is an online payment tool or software application that functions as the electronic equivalent of a physical wallet. It is also known as an electronic wallet, e-wallet, or mobile wallet, and it allows users to securely store digital versions of payment methods such as credit and debit cards, gift cards, cryptocurrency, boarding passes, event tickets, passwords, and coupons to use with their smartphones or smartwatches on the go.
A digital wallet can be used to make purchases in stores, online, or through digital wallet apps. In-store purchases are typically made by tapping their contactless credit card or a payment-enabled smartphone or smartwatch over a contactless payment terminal.
Because not all retailers accept mobile payments, a user should look for the contactless payment symbol on the retailer's POS system or card reader. The contactless symbol looks like a sideways Wi-Fi symbol.
How does a digital wallet work?
Digital wallets use a variety of technologies, including mobile apps, mobile hardware devices, near-field communication (NFC), and security methods such as tokenization, to provide a user-friendly, mobile, and ostensibly secure payment experience.
To use a digital wallet, a user enters their credit card information into the digital wallet app or website. Once the device is unlocked and the user authorises the wallet, the information is encrypted and the wallet is ready to use. To make a mobile payment, the user places their smartphone near the contactless terminal.
The following are the most common technologies used by digital wallets:
QR codes are short for quick response codes. These barcodes encode information into a black and white pattern that a user can access with their smartphone camera or the scanning system of their digital wallet to initiate a payment. Payment apps can encrypt data such as the transaction amount and the intended recipient. For example, in the PayPal app, a QR code can be generated that allows shoppers to pay for items in store using their PayPal accounts.
NFC. This wireless data transfer technology uses electromagnetic signals to allow smartphones, tablets, laptops, and other devices in close proximity to share and transfer data. To connect, two devices must be within an inch and a half of each other.
Secure magnetic transmission (MST). This mobile payment technology allows smartphones to make wireless payments to traditional pre-chip magnetic stripe systems as well as modern no-swipe credit card terminals. It generates a magnetic signal similar to when a credit card reader's magnetic stripe is swiped. Customers and retailers can transact securely using MST without having to upgrade their equipment.
Different types of digital wallets
Digital wallets are classified into three types: closed, semi-closed, and open.
Wallet is closed. This wallet is only available to a few people. A company selling goods and services, for example, could create a closed wallet just for its customers. This wallet holds the money from returns and cancellations, and users can only transact with the wallet's issuer. A closed wallet is something like Amazon Pay.
Wallet that is only partially closed. Users can make transactions at listed merchants and locations using a semi-closed wallet. For security reasons, payment information is stored in a centralised location, but a user may need to share a key or a password with another person before making a transaction. By storing multiple public addresses while keeping private keys offline, a semi-closed wallet makes it easier to use.
Open your wallet. Online payment information can be managed and tracked using open wallets. An open wallet can be downloaded to any device or browser with an internet connection and works as simple online applications. Open wallets are cross-platform compatible, allowing users to transact at any time and from any location.
The Benefits of Digital Wallets
While many factors contribute to the rise of digital wallets, the COVID-19 pandemic has accelerated their adoption due to an increase in online shopping and contactless transactions.
The main advantages of using digital wallets are as follows:
Customer experience has been streamlined. Customers do not have to fill out lengthy checkout pages or forms with digital wallets, which streamlines and expedites the checkout process. This is a win-win situation for everyone because faster checkouts discourage customers from abandoning their shopping carts, increasing conversion rates for businesses.
Security. To prevent hackers from gaining access to consumers' data, digital wallet providers such as Apple Pay and Google Wallet use tokenization, which masks credit card details and is transaction-specific. Biometrics, such as fingerprint and facial recognition technology, are also used in digital wallets to prevent account information from being stolen.
Payments are made with no contact. Consumers can use contactless payments to make purchases without having to carry a card or search for one in their physical wallets. During the checkout process, users can simply use their phones' touch or Face ID to confirm payment.
Excellent customer insights. Digital wallets aid in the extraction of real-time data for valuable insights into a customer's shopping habits, such as purchasing history and preferences. This assists businesses in developing targeted marketing campaigns, as well as inventory management and budget creation.
Gain access to rewards and promotions. Consumers who use digital wallets are frequently rewarded with special promotions and offers from their favourite brands and retailers, such as cashback, coupons, and loyalty programmes.
Digital wallet disadvantages
Digital wallets are extremely convenient, but they also carry a few risks. The following are some drawbacks of using digital wallets:
Concerns about safety and privacy. While digital wallets provide transaction security, there is always the possibility of being hacked if the device is lost or stolen. If hackers gain access to a device running the digital wallet app, they may be able to access the device owner's account and transaction history.
Merchants are scarce. Despite widespread consumer acceptance of digital wallets, not all merchants, particularly small business owners, support them. This means that cash and credit cards are still required for certain transactions.
Budgeting and security. Many people who are accustomed to using cash and credit cards struggle to adapt to contactless payment methods. Some may even believe that carrying physical money is safer, or that paying cash will allow them to better control their spending habits.
Device reliance. Only accessible devices can use a digital wallet. This means that if a person misplaces their device or the battery dies, they will be unable to use their digital wallet to make payments.
