Many consumers are choosing to swap their physical wallet for a digital wallet, preferring the safety and convenience of contactless payments. In fact, roughly 75% of consumers are now using digital wallets to pay for goods and services, while the use of cash is lower than ever before.
The following guide will help you join this digital revolution and learn more about how to create and use a digital wallet.
What is a digital wallet?
A digital wallet is an electronic payment tool, usually in the form of a downloadable app. This app allows you to make transactions digitally using your phone or mobile device. Digital wallets store all of your financial information, as well as other items such as gift cards, coupons, driver’s licenses, airline boarding passes, and passports.
Digital wallets go by many different names (e.g., mobile wallet, e-wallet, virtual wallet), but each of these tools allows you to make electronic payments without needing a physical card.
Where can I use digital wallets?
You can use your digital wallet just about anywhere that accepts digital payments. Possible locations include:
- In-person retailers that offer contactless payment options on their credit card terminal
- Participating online retailers that offer digital payment options at checkout
- In-app transactions such as ride shares, coffee, food services, and more
As the technology becomes more commonplace, users can expect more and more vendors to accept digital payments.
How consumers use digital wallets?
Digital wallets can be used for several purposes:
1. Making purchases
You can use your digital wallet app for any type of online or in-person purchase and replace your physical credit and debit cards. This option depends on the retailer having digital technology integrated into their point-of-sale system, but an increasing number of retailers are offering this functionality.
2. Making deposits
Depending on which app you use, you can also add your debit card or bank account information to your digital wallet. This integration allows you to make deposits into your bank account using just your phone or mobile device.
3. Storing promotional material
Some mobile wallets allow you to store things like electronic coupons, boarding passes, concert tickets, gift cards, and more.
4. Sending and receiving money
You can also use your digital wallet to transfer funds to other users or their bank accounts. Most wallet apps allow you to do this from anywhere in the world, which can make it easier to transfer funds even when you’re on a trip.
How businesses can benefit from digital wallets
Accepting digital wallet payments can enhance both the customer experience and your financial processes.
Offer more payment options
Customers love choices, and not everyone likes using debit or credit cards when shopping. Accepting digital payments also allows customers to pay even if they forgot their physical wallet in their car. This benefit might entice buyers to frequent your business and take advantage of these options.
Streamline the checkout process
Thanks to digital payments, retailers can offer a smooth, easy checkout process that minimizes wait times. In-person shoppers can complete their purchase without ever touching their physical wallet, a convenient feature that may keep them coming back.
Eliminate cart abandonment
Online shoppers may get frustrated when they have to complete a lengthy checkout process, and they may just click away from your e-commerce site altogether. On the other hand, digital wallets make the process fast and smooth, ensuring that customers follow through with their purchases.
Protect consumer identity
Data breaches are never good for your reputation. But with additional security features like biometric technology and face-recognition software, digital wallets keep your customers secure when they shop with you.
Access real-time consumer data
Digital wallets make it even easier to access your financial data since every payment is immediate and automatically stored. You’ll be able to analyze consumer trends and spending habits, allowing you to adjust your inventory and budget accordingly.
Types of digital wallets
There are three types of digital wallets: closed, semi-closed, and open.
1. Closed wallets
A closed wallet is one that a company creates exclusively for its customers. Closed wallet users can store funds just as in any digital wallet, but they can only use the app when interacting with the company that created the wallet. For example, Amazon Pay is a type of closed wallet designed for use just at Amazon.com.
2. Semi-closed wallets
A semi-closed wallet means that you can use the wallet to make payments at an approved list of merchants or locations. This setup means that you have more options than with a closed wallet, yet you’re still restricted in terms of where you’re permitted to make payments.
3. Open wallets
Open wallets can be used anywhere that accepts the digital wallet app. Most open wallets are typically issued in partnership with banks or credit unions. Open wallets can be used to make purchases, as well as withdrawing and transferring funds.
How does a digital wallet work?
Digital wallets rely on your phone’s existing wireless capabilities (i.e., Bluetooth and WiFi) to transmit payment information. The merchant’s payment terminal is designed to read these signals to receive money when you pay with your mobile device.
Modern digital wallets rely on several types of technology to accomplish this connectivity, including:
QR codes
Quick response or “QR” codes are specialized bar codes that store information. You can use your phone’s camera or the wallet’s scanning features to make a payment.
Near-field communication (NFC)
Near-field communication allows two devices to transfer information via electromagnetic signals. The devices must be close to each other to connect — usually about 1.5 inches away.
Magnetic secure transmission (MST)
Magnetic card readers read your credit card every time you swipe it to pay for something. Your phone is also capable of generating an encrypted field, allowing you to pay with your smartphone.
Payment processors
The merchant relies on a compatible point-of-sale terminal, which is likewise connected to a payment processor. When a customer pays with a service like Google Pay or Apple Pay, payments are routed through the participating credit card networks and banks to send payment to the merchant’s account.
The most popular digital wallets
Chances are that you’re already familiar with some of the popular options for digital wallets. Here are just a few of the most common third-party apps available:
Apple Pay®
Apple Pay allows users to store money directly in their Apple Pay accounts, then make payments or transfers between users, businesses, or bank accounts. Apple Pay can be used anywhere that offers contactless payment options, whether in-person or online.
Sorry Android users; Apple Pay is only compatible with iOS devices such as the iPhone, iPad, and Apple Watch.
Google Pay™
Google Pay allows users to deposit funds directly into their Google Pay accounts or add a credit card, debit card, or bank account. You can also link your PayPal account for added convenience.
Unlike Apple Pay, Google Pay is compatible with both Apple and Android devices. Businesses can even link up loyalty membership rewards to encourage repeat customers.
Samsung Wallet (Samsung Pay)
Samsung Wallet lets users store gift cards, membership cards, and even vaccination records. However, the app is designed for mobile purchases and is not used for managing payments on websites. Additionally, the app is restricted to Samsung devices, limiting those who can use it.
PayPal
PayPal is one of the original digital wallets and can be used to make payments online and transfer money. The app can also be linked to other digital wallets, enabling you to make payments in person as well as online.
Unfortunately, PayPal is also known for having stiff fees for business customers and instant transfers. Still, it’s a way to make free one-day to three-day money transfers.
Cash App
Cash App takes a unique approach to the digital wallet. While it stores payment information like any mobile wallet, the information is converted into tokens that can only be accessed through fingerprint identification.
The advantage of Cash App is in its versatility. Users can store a variety of data in their wallets, as well as access cryptocurrency or purchase other types of investments.
Crypto wallets
Crypto wallets are technically a subset of digital wallets used to store cryptocurrency passwords. This setup means that these wallets don’t actually hold digital currency but store your passwords in a centralized place so that you can access them more easily.
Some companies like BitPay allow you to make purchases using cryptocurrency. For instance, you can link a BitPay debit card to your Google Pay or Apple Pay account, which allows you to convert your cryptocurrency at the current market value to make a payment.
While most crypto wallets are digital, some are available on a USB stick or other hardware. Physical wallets may not be as directly convenient as app-based financial products, but they still allow you to access your currency from your home PC.
Advantages and disadvantages of digital wallets
Digital wallets are relatively straightforward, but it’s still important to weigh the pros and cons of this payment method. The advantages of a digital wallet include:
- Eliminating the need to carry physical payment cards
- No need for a bank account at a physical branch
- Eliminating the hassle of losing your wallet
- No physical contact or touching POS systems when making payments
- Being able to make payments quickly and conveniently
- Digital retention of your entire transaction history
There are a few potential drawbacks, however. These include:
- Possible security issues when using a lesser-known app
- Other people can potentially gain access if your phone isn’t protected
Some wallet apps are not compatible with all mobile devices
Fortunately, you can overcome these drawbacks by choosing the right digital wallet app, ensuring compatibility and security for all types of users.
Are digital wallets safe?
Digital wallets can actually be safer than a physical debit or credit card. For one thing, the wallet itself resides on your password-protected device, which may rely on facial recognition security features to keep all of your data secure.
The wallet relies on advanced encryption to prevent your payment information from leaving your smartphone. Many wallets have additional security features, such as two-factor authentication for certain types of transfers and transactions.
If your device is lost or stolen, you don’t need to replace your credit cards, though you’ll need to disable your device to prevent unauthorized users from gaining access to your wallet. But because your information is stored digitally, you never have to worry about losing the contents of your wallet.
How to create a digital wallet
Creating a digital wallet is surprisingly easy. Just follow these steps:
1. Select your digital wallet
First, decide on which digital wallet to use. Make sure to think about such questions like:
- Is the app compatible with my phone?
- Is the app accepted at most retailers?
- Does the company have a solid security reputation?
You’ll need to weigh the pros and cons of different digital wallet providers. For example, Apple Pay is one of the most popular digital wallets, but you can only use it on iOS devices.
2. Download the wallet app
Depending on your device, you may already have a digital wallet app downloaded (Apple Pay comes pre-installed on iPhones).. Otherwise, you’ll need to download the digital wallet app from the appropriate app store or website. Read the fine print! While most of these apps are free, some may have terms and conditions that can mean unexpected fees.
3. Add your payment information
At this point, the app itself should prompt you regarding the next steps. This undertaking usually means adding your payment information or other important details. You can usually add multiple payment methods, which means you can use the same technology for both credit and debit card payments.
4. Add any additional data
Some apps allow you to store additional data. This data can include your passport, membership cards, your ID, gift cards, and more. These items aren’t necessary to make digital payments, but many users still love the convenience of having their documents at their fingertips.
How to use a digital wallet
Once your payment information is stored within the app, you can use it to make payments, store data, and more.
Stores that accept digital wallets will have a contactless symbol on their point-of-sale terminal. Similarly, e-commerce merchants that accept mobile payments will also list this as an option at checkout.
1. Select your preferred payment method within the app
If you’ve only entered one credit or debit card, the app will use this as the default form of payment. Otherwise, you’ll need to specify your preferred form of payment.
2. Locate a compatible retailer or website
3. Tap your phone to pay at the point-of-sale device
To complete your transaction, you’ll simply hold your phone near the merchant’s point-of-sale device or credit card terminal. Ideally, you can make a payment with no contact, though in some cases, you might need to physically “tap” the machine to pay for your purchase.
Make business payments more efficient with BILL
While the benefits of digital wallets are largely available to individuals, businesses do have options for making payments more efficiently and easily. Learn more about how to streamline your AP processes using BILL's automated accounts payable software.
