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What is a Digital Wallet? Types, Pros & Cons


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Entering credit card details online is a thing of the past—the payment option of the future is the digital wallet. By 2025, digital wallets are expected to dominate the global e-commerce payments market, accounting for over 50% of the transaction value.

Like a virtual credit card, a digital wallet moves payments online, so you no longer have to depend on cash or credit cards. Digital wallets offer simplicity and convenience, enabling consumers to make faster, more secure transactions, while companies save time and money.

What Is a Digital Wallet?

A digital wallet (or e-wallet) is a type of software that allows buyers to make quick digital transactions by securely storing their payment and password information. 

Think of a digital wallet as an online bank account that can be used to make payments and store payment history. Users can deposit money into a digital wallet directly or connect it to their banks. 

A digital wallet can do more than complete transactions. It can also store gift cards, loyalty cards, identification, boarding passes, tickets, and anything else you would keep in a physical wallet. They can also be used to authenticate a user’s identity. For example, an e-wallet can verify someone’s age when purchasing alcohol.

How Does a Digital Wallet Work?

A digital wallet is a link between your payment information and the merchant that you’re transacting with. 

First, a digital wallet collects a user’s personal data, such as:

  • Driver’s license
  • Social security number
  • Insurance data
  • Loyalty cards
  • Any other documents needed for identification. 

The 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.

Digital wallets have both a hardware and a software component. To ensure digital payments are secure, the software encrypts your personal data; the hardware provides all of the essential functionality to transfer data from your device to the merchant.

A digital wallet also contains a database that stores user data, which is then shared with the merchant. This includes information like:

  • Credit card information
  • Gift cards
  • ​Shipping address
  • Billing address
  • Contact information

Digital wallets can be used wherever you see the contactless payment symbol—in stores, in apps, or online at most e-commerce websites. 

To use a digital wallet, 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.

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Types of Digital Wallets

There are five main types of digital wallets:

Closed Wallet

A closed wallet is a proprietary digital wallet developed by a company that sells goods and services. This type of digital wallet 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. Major retailers like Target offer closed wallets to enable faster payments online and in-store.

Semi-Closed Wallet

A semi-closed wallet allows users to make transactions at specific merchants and locations that have a contract with the issuer. Although you can’t withdraw cash, semi-closed wallets can be used for both online and offline transactions. 

A popular example is Zelle, which partners directly with banks so users can instantly send and receive money in their bank account.

Open Wallet

An open wallet is issued by or in partnership with a bank. With an open wallet, 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, from Microsoft to Starbucks

To ensure privacy, a crypto wallet stores a user’s private keys, which gives them access to their cryptocurrency coins that live in an online ledger known as a blockchain. Leading crypto wallet platforms include Coinbase and Crypto.com.

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). 

Since Internet of Things (IoT) devices are already online, users don’t need a separate device to access their digital wallet. For example, you can order groceries directly from a smart fridge using an IoT wallet.

Pros and Cons of Digital Wallets for Businesses and Consumers

From versatility to convenience, digital wallets offer many time-saving advantages to both consumers and businesses. But no payment method is perfect, so there are drawbacks to digital wallets.

Pros

  • More convenient: You can leave your physical wallet at home and buy coffee or groceries with just a mobile device. Instead of fumbling through cash or cards, simply tap or click to pay.
  • Enhanced data security: Digital wallets are encrypted to protect your information from hackers. Even if someone steals your phone, they can’t access your digital wallet without a password or biometric authentication, like facial recognition.
  • Better expense tracking: A digital wallet maintains a record of all transactions, so you can easily analyze your expenses. Some digital wallets allow you to set spending limits on specific categories to avoid overspending.
  • Improved customer experience: Digital wallets enable a faster checkout process that will drive up conversion rates, especially for online sales.

Cons

  • Dependent on a mobile device: If you lose, break, or forget to charge your phone, you won’t have access to your digital wallet. Unlike a physical card, if you lose the information stored in your mobile wallet, you might not be able to get it back.
  • Limited availability: Not all merchants accept digital wallets, and only a few digital wallets are widely supported, like Apple Pay or Samsung Pay.
  • Greater investment for businesses: Merchants need to acquire specialized hardware and software to accept digital wallet payments, which add to their operating costs.

The Best Digital Wallets for 2023

The best digital wallets make it easy for users to make purchases without adding extra complications. Other important features include data encryption and a record of all of your transactions, so you can easily keep track of your spending. Below are the best digital wallets based on their security, versatility, and ease of use.

Google Wallet

Available in 45 countries worldwide, Google Wallet is an updated version of Google Pay that stores everything from cards and tickets to digital keys and IDs on your Android device. For added security, Google Wallet always encrypts your card information and requires a fingerprint or password to make payments.

Apple Pay

Exclusively available on iPhones, iPads, Apple Watches, and Mac computers, Apple Pay enables both online and in-store transactions. Thanks to NFC technology, payment is simple; users just need to unlock their devices and hold them near the point of sale for a seamless experience.

Venmo

With over 80 million users, Venmo is one of the most popular digital wallets. Little to no waiting time before transactions are approved enables users to instantly send money back and forth between digital wallets.

PayPal

One of the earliest plays in the digital wallet market, PayPal enables users to send and receive money in over 25 global currencies. PayPay is accessible via a web browser or mobile app so that users can easily manage their bills and subscriptions in one place. 

Zelle

Available only in the United States, Zelle enables users to send and receive funds using their checking account or debit card. It’s the only digital wallet on the market that integrates directly with banks.

Cash App

Cash App meets the highest level of PCI DSS certification for the ultimate payment security. The app also offers additional services like buying stocks, converting cryptocurrency, and storing digital passes.

Dwolla

Built for businesses, Dwolla identifies users by email address or cell phone number instead of your banking information to protect the security of your bank account. You can even remain completely anonymous.

Walmart Pay

With this closed wallet from Walmart, customers can make payments simply by scanning their phone over a QR code displayed on the PIN pad at checkout. Several layers of security protect your payment information from hackers.

Amazon Pay

Although it’s issued by a retailer, Amazon Pay allows users to pay external merchants using their Amazon accounts. This brings the speed, convenience, and security of a digital wallet to more merchants than just Amazon.

Digital Wallets: The Future of Payments

Digital wallets make both online and offline transactions a swift, efficient, and convenient process that’s beneficial for all parties involved. Merchants make quicker sales, and customers waste less time. Although digital wallets still aren’t accepted everywhere, these payment options are growing fast, pushing businesses to adopt them even quicker.

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