What Is a Digital Wallet? Everything You Need To Know About Digital, Mobile & Electronic Wallets
Everyone is a consumer, even business owners. This article looks at digital wallets, such as Apple Pay, Google Pay, and Samsung Pay, from a consumer’s standpoint. We’re going to explain terms, such as digital wallet, mobile wallet, electronic wallet, payments wallet, e-wallet, etc., and go through how they work and where you can use them.
We’re also going to look at some changes in consumer habits, especially in relation to the COVID-19 crisis. The bottom line is that we think digital wallets are here to stay; the pandemic only hastened the inevitable.
Read on for the details!
Table of Contents
What Is A Digital Wallet?
A digital wallet is an electronic method for securely storing various types of sensitive information, including credit cards, debit cards, gift cards, electronic cash, tickets, and IDs. Not every wallet stores every type of payment information. While terms such as digital wallet, mobile wallet, and e-wallet all mean roughly the same thing, they technically cover slightly different services.
What Do Digital Wallets Do?
Below is a list of major functions typically found in digital wallets. While the major brands, such as Apple Pay and Google Pay, have almost all of the functions, others (Venmo and Cash App) focus on less.
- Store Credit & Debit Card Information: All digital wallets can store credit and debit card information. Some, such as Apple Pay, Google Pay, and Samsung Pay, will allow payment directly from the card. Others, such as PayPal, draw funds from a stored credit or debit card but payout through the service itself.
- Pay At A Store: Many digital wallets will allow a user to pay for purchases made at brick-and-mortar locations. Apple Pay and Google Pay allow this type of payment when an NFC credit/debit card terminal is available.
- Peer-To-Peer (P2P) Payments: Most digital wallets allow users to transfer funds to one another. Typically, these payments are small amounts used to split a lunch bill, pay a babysitter, or even pay a share of the rent. Cash App, Venmo, Zelle, Apple Pay, and Google Pay allow users to transfer money this way.
- Online Payments: Digital wallets can be used to pay for online or in-app purchases. At checkout, a merchant who takes digital wallet payments will display the appropriate button for the wallet. PayPal is the most well-known wallet having this type of pay with button, but Apple Pay and Google Pay have similar buttons.
- Hold Funds: A digital wallet can store cash in the same way a gift card can hold cash. The funds are held in a cash account, and a user can link a bank account or a credit card to this cash account to cover shortages. Square’s Cash App and PayPal’s Venmo are examples of digital wallets that hold funds. They even provide users with physical prepaid cards (Visa for Square and Mastercard for Venmo), so the cash can be used at brick-and-mortar stores.
- Hold Coupons & Loyalty Cards: Many digital wallets can hold coupons or loyalty cards, so a user can be given the appropriate credit or discount for using a particular card or shopping at a specific store. Apple Pay, Google Pay, and Samsung Pay all hold coupons and loyalty cards.
- Store ID: Some digital wallets will allow users to store IDs. For instance, Apple Pay will allow a college student to store a student ID and use it to access various buildings or even pay from a student account.
- Store Transit Tickets: Many digital wallets allow users to store transit tickets. Users can tap the phone (or a wearable linked to the phone) on a reader to enter subway or bus stations in an increasing number of cities in the US and abroad.
- Security: All digital wallets have hardware and software security features that keep the stored information safe.
How Does A Digital Wallet Work?
With digital wallets, you typically enter the credit card, debit card, gift card, etc., information into the wallet. The wallet automatically contacts the card networks to get a token and then saves the token securely on your phone. If you wish to save other items, such as a boarding pass, you’re typically asked if you want to save the pass to your digital wallet right after you buy the ticket. If so, the wallet saves the ticket to the wallet.
Some digital wallets allow you to pay with your mobile device at a store. These wallets take advantage of the NFC chip in your device, so you can tap/hover your phone (or paired watch) at the payment card terminal to activate the payment app. Others use QR codes (Walmart app) or bar codes (Starbucks app) to send payment information.
If you’re paying online or inside an app, sometimes, there will be a Pay With Apple Pay or Pay with PayPal button at the checkout, and you can fast-track your payment by using the button. Other times, even without the special button, a digital wallet, such as Google Pay, can automatically pop up when you’re at the checkout page to populate the payment information for you.
Yet other digital wallets only allow you to make electronic cash transfers between accounts, making it easy for friends to split a lunch bill. Ultimately, though, someone will have to pay the merchant using a different method. Apps such as Venmo and Cash App work this way. Zelle works like this too, but most Zelle transfers are initiated from inside your bank’s mobile app instead of the Zelle app.
Digital Wallets VS Mobile Wallets
Some sources distinguish mobile wallets from digital wallets by noting that mobile wallets can be installed on a mobile device, while digital wallets include wallets that can also be used on a computer. That’s not quite right. Pretty much all digital wallets can be installed or accessed from a mobile device, so this definition doesn’t distinguish between the two.
However, we found a difference between what most people instinctively think of as a mobile wallet and a digital wallet. Mobile wallets let the user pay at a physical store’s checkout. The payment is usually pulled directly from a credit or debit card rather than from a cash balance kept in a digital wallet.
When most people speak of mobile wallets, they tend to mean Apple Pay, Google Pay, or Samsung Pay. While digital wallets such as PayPal and Cash App can be installed on mobile devices, they cannot make in-store contactless payments, so they are technically not mobile wallets. (PayPal can be linked to Google Pay and Samsung Pay to draw from a PayPal account for in-store payments, and the Cash App can do P2P transfers with QR codes.) However, Google Pay and Apple Pay let users make P2P payments and send cash, so they’ve crept into the traditional territory of digital wallets. Some wallets, such as Cash App, can even store Bitcoin, while Apple Pay and Google Pay only integrate with specialized cryptocurrency digital wallets for limited functionality.
At the end of the day, whether you want to call the app a mobile wallet, an electronic wallet/e-wallet, a payment wallet, or a digital wallet, the nature of these apps is in flux. Below is a table illustrating the fragmentation of the term digital wallet.
|Apple Pay||Google Pay||Walmart Pay||Venmo||Cash App|
|Installable on Moblie Device||✔︎||✔︎||✔︎||✔︎||✔︎|
|Hold Cash Balance||✔︎||✔︎||✔︎||✔︎|
|Contactless In-Store Payments||✔︎||✔︎||✔︎
|Store Cryptocurrency||(can integrate with crypto wallet)||(can integrate with crypto wallet)||✔︎
(end of 2020)
3 Reasons To Make Mobile Payments With Digital Wallets
A few years ago, maybe only the young and hip tended to use digital wallets. These days, those who are older (30 is over the hill, right?) tend to be digital wallet enthusiasts too. Because of the pandemic, nobody wants to touch a credit card terminal if they can help it, driving up digital wallet use. Once they start using the digital wallet, many people discover many reasons to keep using them. (See trend data from TSYS 2018 US Consumer Payment Study, insights 1 and 2.)
Digital wallets make checking out faster. With Google Pay, all you have to do is unlock your phone and hover it over the payment terminal. With Apple Pay, just double click the power button on the side of the phone, and you’ve accessed the app. If you have a paired smartwatch, it’s even easier; all you have to do is hover the watch near the terminal. (If you wish to pay with a debit card, you’ll have to enter a PIN.)
For online web stores, digital wallets often can populate all the payment fields with the push of a button, which minimizes number transfer mistakes.
Digital wallets are convenient for faster checkout. Instead of looking for a credit card at the checkout or digging for cash at the end of a meal, digital wallet users take out their smartphones and pay with just a few taps. The app even keeps the store receipts or money transfer records, so you can stay organized.
Data security issues are one of the top concerns preventing people from adopting digital wallets. Developers know this, so they paid a lot of attention when designing their wallets. As a result, most wallets use multiple types and layers of security to keep your money safe. These measures include:
- Passcode Or Biometrics: To access the wallet at all, you usually have to unlock the phone or the app with a passcode or biometrics (face, iris, fingerprint).
- Encrypted Transmission: For digital wallets such as PayPal, multiple encryption layers are used to transmit data from your phone to the server.
- Secure Storage Of Payment Information: For wallets such as Apple Pay, Google Pay, and Samsung Pay that store credit and debit card information, the information is stored in a specialized, super-secure environment called the Secure Element (SE). Apple uses an SE embedded in a phone’s NFC chip of the phone, while Google and Samsung use one in the cloud. (The Google and Samsung configurations are called host-card emulation (HCE)).
- Tokenization: Lastly, when a customer makes a purchase, instead of the real credit card number, only a tokenized number is sent to the merchant. Here’s a more detailed explanation of credit card tokenization, but for quick reference, a credit card token is just a random number with the same number of digits as a real credit card number. Only the token is stored on your phone, and only the credit card company has a way to match that random number to a customer’s real credit card number. If a token is stolen, the credit card company contains the damage by issuing another token and disallowing payment requests made with the stolen token. The real credit card number is kept safe, and other purchases made with the real number (or other tokens) can continue.
How Businesses Can Support Digital Wallets
Taking off your consumer hat and putting on your businessperson hat, here are a few things you can do to support your digital-wallet-using customers:
- NFC Terminals: If you run a physical store, you typically must have an NFC-capable card terminal to take digital wallet payments. Of the major wallets, both Apple Pay and Google Pay require NFC. Only Samsung Pay can emulate a magnetic card swipe so that you can take payments without an NFC capable terminal.
- Work With Processor To Turn The Service On: A digital wallet payment made at the card terminal is supposed to work as any swipe, dip, or tap of an actual payment card. However, just to be safe, be sure to check with your processor to ensure your ability to take digital wallet payments.
- Have Signage: True digital wallet enthusiasts will always ask if you take digital payments, but it never hurts to broadcast this before anyone asks. You can get free signage from all the major digital wallet developers just by asking.
- Integrate Payment Button On Website: If you run an online store, you can integrate a payment button for various digital wallets. This generally requires help from someone with coding experience, but the major shopping cart platforms have made the integration painless. You can sometimes add the button just by selecting the option from a menu (e.g., Shopify Apple Pay integration).
Are Digital Wallets The Future of Payments?
No question, digital wallets are here to stay. Even before the current pandemic, consumers were moving towards digital wallet payments. As they continue to replace old payment hardware with new ones, physical stores increasingly have NFC-capable terminals ready to take digital wallet payments.
As consumers, digital wallets represent a new level of convenience. Instead of cash and coins, friends can reimburse each other through digital wallet transfers no matter the amount. With some colleges starting to allow students to pay with their student IDs, the younger crowd is making paying with a digital wallet the norm.
But will digital wallets completely replace physical wallets? Probably not yet because government-issued IDs, such as driver’s licenses, must still be carried in their physical form. As well, gas pumps typically still require customers to swipe a credit card. However, laws can be changed quickly, and some gas pumps now show NFC payments as “coming soon.” When things do change, they’ll change very fast. It’s just a matter of time.
So why not try paying with a digital wallet today? If you already use or take digital wallet payments, what has been your experience so far? Leave us a message in the comments!