In today’s world, digital transactions are increasingly becoming the norm. With the rise of online shopping and mobile payments, digital wallets have become more common. This is mirrored in consumer behaviour: in the UK, shoppers make nearly half of their weekly purchases (43%) using mobile phones.
This article will discuss what digital and mobile wallets are, what they are used for, the types of digital wallets available, and their advantages and disadvantages.
What is a digital wallet?
A digital wallet, also known as an eWallet, is a software application that allows users to securely store payment information, such as credit card details and bank account information. This wallet can then be used to make purchases online or in person without entering the payment information each time.
A mobile wallet is a type of digital wallet specifically designed for use on mobile devices, such as smartphones and tablets. Mobile wallets can store payment information, loyalty cards and coupons, making them a convenient way to keep all your payment information in one place.
What is a mobile wallet?
A mobile wallet is a type of digital wallet specifically designed for use on mobile devices, such as smartphones and tablets. Mobile wallets can store payment information, loyalty cards and coupons, making them a convenient way to keep all your payment information in one place.
What are digital and mobile wallets used for?
The COVID-19 pandemic has accelerated the trend towards a cashless society. Many people preferred mobile payments over cash or other traditional methods because of hygiene concerns and limiting contact with surfaces.
Retailers and businesses have adapted to this by accepting mobile payments and making it easier for consumers to purchase via QR codes or NFC technology.
Next, we’ll be sharing a few ways businesses and consumers can use digital and mobile wallets:
Online purchases
Digital and mobile wallets can be used to make purchases online without the need to enter payment information each time. Many digital wallets use biometric authentication, such as fingerprint scanning or facial recognition, to ensure secure access and prevent fraud.
In-store purchases
Many retailers now accept mobile payments from mobile wallets in-store. Through mobile wireless connections like Bluetooth and Wi-Fi, digital wallets transmit payment data securely and conveniently to a point of sale (POS), offering fast and secure payment experiences.
Peer-to-peer payments
Some digital wallets, such as PayPal, allow users to send and receive payments from other users. Sometimes customers also use QR codes that can be scanned using a mobile device’s camera to transmit payment information and initiate transactions securely.
Loyalty cards and coupons
Many digital wallets allow customers to store loyalty cards and coupons, making tracking rewards and discounts easy. They also use automatic loyalty card updates and reminders, ensuring that customers never miss out on earning or redeeming rewards.
Types and examples of digital and mobile wallets
The most popular types of digital and mobile wallets are:
Mobile payment apps like Apple Pay and Google Pay allow storing payment information on a mobile device for in-store and online purchases
Self-checkout systems – such as PayPal, Skrill or Neteller, allow users to store payment information and make purchases online.
Bank mobile apps – many banks now offer their own mobile apps, which allow users to store payment information and make purchases.
Cryptocurrency wallets like Coinbase and Binance allow you to store and manage cryptocurrency.
From providers such as Bitpay, Giropay, PayU to Chinese providers such as Alipay, Trust Payments has a wide range of international digital wallet partners. See the full list.
How Digital Wallets Work
Digital wallets enable users to make electronic transactions using their smartphones, smartwatches, or other digital devices. Here’s an outline of how they operate, focusing on the transmission of payment data and the transaction processing flow:
Initiating the Transaction:
- The user selects the digital wallet app on their device and chooses the payment method (e.g., credit card, debit card, stored value).
- The device uses Bluetooth, WiFi, or magnetic signals to communicate with the point-of-sale (POS) terminal.
Transmitting Payment Data:
- Bluetooth: Establishes a secure connection between the device and the POS terminal to transmit payment data.
- WiFi: Utilizes a secure local network to transmit payment information.
- Magnetic Secure Transmission (MST): Emulates the magnetic stripe on a traditional card, allowing the device to transmit data to standard card readers.
Point-of-Sale Terminal Interaction:
- The POS terminal, connected to payment processors, receives the payment data from the digital wallet.
- The terminal encrypts this data to ensure security.
Processing the Payment:
- The encrypted payment data is sent through processing gateways, which act as intermediaries, directing the transaction to the appropriate merchant acquirer.
- The merchant acquirer receives the data and forwards it to the relevant card networks (Visa, MasterCard, etc.).
Card Networks and Banks:
- The card networks route the transaction to the issuing bank (the bank that issued the card used in the transaction).
- The issuing bank verifies the transaction details, checks for available funds or credit, and approves or declines the transaction.
- The approval or decline message is sent back through the card network to the merchant acquirer, and then to the POS terminal.
Completion of the Transaction:
- If approved, the POS terminal completes the transaction, and the funds are transferred from the issuing bank to the merchant’s account, typically facilitated by the merchant acquirer.
- The user receives a confirmation of the successful transaction.
Current Technologies Used by Mobile and Digital Wallets
QR Codes:
- Explanation: Quick Response (QR) codes are two-dimensional barcodes that can store a large amount of data. For payments, the QR code contains the transaction details and payment information.
- Usage: The user scans the QR code displayed by the merchant using their digital wallet app. The app decodes the information and processes the payment through the backend systems.
NFC (Near Field Communication):
- Explanation: NFC is a short-range wireless communication technology that allows data exchange between devices placed close to each other (typically within a few centimeters).
- Usage: The user taps their NFC-enabled device (like a smartphone or smartwatch) on the NFC-enabled POS terminal. The device and terminal communicate to transfer the encrypted payment information securely, initiating the payment process.
Magnetic Secure Transmission (MST):
- Explanation: MST technology emulates the magnetic stripe on a traditional card by generating a magnetic signal that standard card readers can detect.
- Usage: The user holds their MST-enabled device near the card reader. The device generates a magnetic signal mimicking the card swipe, transmitting the payment information securely to the reader. This technology is especially useful for compatibility with older POS systems.
How Mobile Wallets Work
A mobile wallet is a digital version of your physical wallet, storing card information on your mobile device and enabling easy, secure payments. Here’s a breakdown of how it works:
Storing Card Information:
- When you set up a mobile wallet, you add your card information (credit, debit, loyalty cards, etc.) to the app. This information is encrypted and securely stored on your device or in the cloud, depending on the wallet service.
Making Payments:
- Contactless Payments: Mobile wallets can be used for contactless payments where supported. Examples of contactless payment solutions include Apple Pay, Google Pay, and PayPal.
- In-App and Online Purchases: Besides physical stores, mobile wallets can also be used for in-app and online purchases, offering a seamless and quick checkout process.
Security:
- Authentication: To access the mobile wallet and authorize payments, you need to unlock it using Face ID, fingerprint ID, passcode, or PIN. This multi-layer authentication provides a robust security mechanism, ensuring that only you can authorize payments.
- Encryption and Tokenization: Mobile wallets use encryption to protect your card details. During a transaction, many wallets employ tokenization, which replaces your card details with a unique token, reducing the risk of your actual card information being compromised.
Advantages and disadvantages of digital and mobile wallets
Like any technology, there are advantages and disadvantages to using digital and mobile wallets. We’ll dive into them next:
| Advantages | Disadvantages |
|---|---|
| Convenience. Digital and mobile wallets are very convenient, allowing users to store all their payment information in one place and make purchases quickly and easily. | Limited acceptance. Some retailers don’t accept mobile payments, which can limit the usefulness of digital and mobile wallets. |
| Security. Digital and mobile wallets are generally very secure, with many using encryption to protect payment information. | Fees. Some digital wallets charge fees for certain transactions, such as transferring money to a bank account. |
| Loyalty and rewards. Digital wallets often include loyalty programs and virtual cards, so customers earn rewards faster. | Compatibility issues. Some digital wallets are not compatible with all devices or operating systems. |
| Speed. Digital and mobile payments are generally faster than traditional payment methods, such as cash or checks. | Security risks. While digital and mobile wallets are generally secure, there is always a risk of security breaches and fraud. Using strong passwords and authentication measures is important to protect your payment information. |
| Frictionless experience. Using an eWallet simplifies the checkout process, which improves the customer experience and minimises frustration. | |
| Real-time monitoring. Digital and mobile wallets offer real-time monitoring of transactions, making it easy to track spending and account activity. | |
| Analytics. Digital wallets allow you to see a customer's shopping history and preferences, which makes marketing more targeted. |
How do you set up a digital wallet?
Setting up a digital wallet is a pretty straightforward process:
- Choose a digital wallet provider. Choosing the one that best fits your needs and preferences is important.
- Contact your payment processor. If you already accept credit and debit card payments, contact your payment processor to see if they support your chosen digital wallet provider.
- Create a business account with your digital wallet provider. You may be required to go through an application process.
- Add payment methods like credit or debit cards, bank accounts, or other payment options to your eWallet.
- Integrate your payment gateway. If you have an e-commerce website, you may need to integrate your payment gateway with your digital wallet provider.
- Test your payment system before accepting digital wallet payments to ensure that it is working correctly.
Trust Payments can help you set up a digital wallet and offer online and in-store payments through our digital payments gateway. You can request digital wallet functionality on your account, and we have a comprehensive guide to help you set it up. Find out more.
FAQs
Yes, PayPal is considered a digital wallet. Any financial app that stores a customer’s account information electronically is a digital wallet.
- Closed wallet – funds are stored in the wallet and can only be used to transact with the issuer of the wallet. Any money from refunds, cancellations or refunds is stored in these wallets.
- Semi-closed wallet – allows users to make transactions with listed merchants and locations. Offline and online buying can be done. However, agreements need to be set between merchants and issuers for accepting these payments.
- Open wallet – these types of wallets are issued by banks or institutes partnered with banks. Open wallets allow for all transactions. Funds can be withdrawn from a bank or ATM, or they can be transferred.
There are slight differences between a mobile wallet and a digital wallet. A digital wallet stores card information and facilitates transactions electronically. A mobile wallet refers to a digital wallet that resides on a mobile device, storing payment information and facilitating transactions through an app.
You don’t need a digital wallet; however, they are convenient and an easy way to purchase. This saves you from having to bring your credit and debit cards with you when you want to make a purchase.
