In today’s digital crypto bitcoin world, one of the most revolutionary changes is the advent of digital wallet technology. Entering your own credit card details online is a thing of the past—the payment option of the future is the digital wallet. By 2025, it is expected that they dominate the global e-commerce payments market, accounting for over 50% of the transaction value.
Definition of Digital Wallet
It is also sometimes referred to as an e-wallet, is a software-based system that securely stores users’ payment information and passwords for numerous payment methods and websites. Like a virtual credit card, these software devices move payments online, so you no longer have to depend on cash or credit cards. By using frequently, users can complete purchases easily and quickly with near-field communications technology. In most cases, these are used in conjunction with mobile payment systems, allowing users to pay for purchases with their smartphones.
How Digital Wallet Works and Examples of Famous Digital Wallets
To begin the process of charging a credit card stored in their database, they create an online link between your payment information and the merchant that you’re transacting with. As your information is stored in a backend database, your online transaction can be processed securely and allowing you to make transactions without needing to carry your physical credit, store or debit cards. When your purchase is finalized, it communicates with the merchant’s payment system to transfer the necessary funds.
At first stage, a personal information database collects a user’s personal data, such as:
- Driver’s license
- Social security number
- Insurance data
- Loyalty cards
- Any other documents needed for identification.
At the time of purchase, this data is then passed wirelessly to a merchant via near field communication (NFC). That’s the “tap” between your smartphone and the merchant’s point-of-sale system at checkout.
These software-based devices also contain their own built-in proprietary database that stores user data, which is then shared with the merchant. This includes information like:
- Credit, store, debit card information
- Any Gift cards you have added
- Your Shipping address
- Credit, store, debit card Billing address
- Your Contact information as stored
Their usability is increasing day by day, they can be used wherever you see the contactless payment symbol—in stores, in apps, or online at most e-commerce websites.
Examples of Famous Digital Wallets:
- Apple Pay: Integrated into Apple devices, allowing users to make payments in stores, apps, and on the web.
- Google Wallet: Now part of Google Pay, it allows users to send and receive money, pay for goods, and store loyalty cards.
- PayPal: A widely used digital wallet for online transactions, offering secure payments and money transfers.
- Samsung Pay: Available on Samsung devices, it supports both NFC and MST technologies for payments.
- Venmo: A mobile payment service owned by PayPal, popular for peer-to-peer transactions.
Who is Eligible to Use Digital Wallet
Generally, anyone with a compatible device and a bank account or credit card can use it. Users must be of legal age to hold a bank account or credit card, which typically means they must be at least 18 years old. Additionally, users must have access to the internet to set up and manage their digital wallets.
To start using it, download your bank’s mobile app or use a trusted third-party digital wallet. Although digital wallets are most commonly used on smartphones, they may also be accessed via tablets and computers.
What Kind of Personal Information Can Be Stored
Digital wallets can store a variety of personal information, including:
- Credit and debit card details
- Bank account information
- Loyalty cards
- Gift cards
- Coupons and offers
- Identification documents (in some cases)
Types of Digital Wallets
Digital wallets can be categorized into five main types:
- Closed Wallets: Issued by a company for use only with their services or products (e.g., Amazon Pay). As you can see this type can only be used to make transactions with its issuer. The funds processed from returns, refunds, and cancellations are also stored in the closed wallet (e.g Target).
- Semi-Closed Wallets: Allow users to transact with multiple merchants, but only those who have a contract with the wallet issuer (e.g., Paytm). Although you can’t withdraw cash, semi-closed wallets can be used for both online and offline transactions. Another popular example is Zelle, which partners directly with banks so users can instantly send and receive money in their bank account.
- Open Wallets: Issued by banks or in partnership with banks, allowing users can make any kind of transaction, including withdrawing cash from ATMs and transferring funds between financial institutions. One of the most widely used open wallets is PayPal, which offers the PayPal Debit Mastercard to enable ATM withdrawals in the United States.
- Crypto Wallet: A crypto wallet allows users to send, receive, and store cryptocurrencies like Bitcoin and Ethereum. With a crypto wallet, users can spend cryptocurrency at a growing list of merchants, one such crypto partner is Starbucks.
- IoT Wallet: An IoT wallet enables payments from wearable devices (like a smartwatch), appliances (like a smart home assistant), and other everyday objects (like a car with wireless connectivity).
How Secured Are Digital Wallets
They employ various security measures to protect users’ information, such as encryption, tokenization, and biometric authentication (fingerprint or facial recognition). These software devices are generally secure, users must remain vigilant against phishing scams and ensure their devices are protected with strong passwords and security software.
Top 7 Digital Wallets in the United States
According to Investopedia, the top digital wallets in the United States include:
- Apple Pay
- Google Pay
- Samsung Pay
- PayPal
- Venmo
- Cash App
- Zelle
Pros and Cons of Using Digital Wallets for Businesses and Consumers
Pros:
- Convenience: Quick and easy transactions without the need for physical cards.
- Security: Enhanced security features like encryption and biometric authentication.
- Efficiency: Streamlined checkout process for both online and in-store purchases.
- Integration: Ability to store multiple payment methods and loyalty cards in one place.
Cons:
- Compatibility: Not all merchants accept digital wallet payments.
- Security Risks: Potential for hacking or phishing attacks if not properly secured.
- Dependence on Technology: Requires a compatible device and internet access.
Summary
Digital wallets are transforming the way we handle transactions, offering convenience, security, and efficiency. While they present some challenges, their benefits for both consumers and businesses are significant. As technology continues to evolve, digital wallets are likely to become even more integral to our daily lives.
Frequently Asked Questions
Q1: Can I use a digital wallet without a smartphone?
A1: While most digital wallets are designed for smartphones, some can be accessed via computers or tablets.
Q2: Are digital wallets free to use?
A2: Most digital wallets are free to set up and use, but some may charge fees for certain transactions.
Q3: What happens if I lose my phone with a digital wallet installed?
A3: Most digital wallets offer security features like remote device wiping and require authentication to access, minimizing the risk of unauthorized use.
Q4: Can I use digital wallets internationally?
A4: Many digital wallets can be used internationally, but it’s important to check compatibility and any potential fees with your provider.