What is a digital wallet?
Digital wallets—also known as electronic wallets or e-wallets—are a payment system for mobile devices. Digital wallets protect their users’ bank-account information and passwords, allowing them to safely conduct transactions with their devices online, in stores or at ATMs.
The rising popularity of eCommerce means that many businesses, of all industries and sizes, are embracing online payments. It is becoming standard to figure out how to make a website and embark on website monetization with a site that will accept diverse forms of transactions—from traditional credit cards to digital wallets. Also with the rise in NFTs and digital art portfolios, they are part of embracing alternative payment methods.
Digital wallets typically hold credit cards and/or debit cards, plus boarding passes, hotel reservations, concert tickets, gift and loyalty cards and even driver’s licenses in some U.S. states.
Prior to the pandemic, a Pew study found that Americans were comparatively slow in adopting contactless payment, reporting that over half said they didn’t trust its security. But the convenience has won over many users: One study found that 60% of the world will be using some form of digital wallet by 2026. Even New York City’s century-old subway system recently completed installing phone-scanners in all of its stations, allowing passengers to leave their MetroCards at home.
How does a digital wallet work?
Consumers can access digital wallets by entering their card information into their digital wallet app of choice. The app then encrypts your financial information and can only be accessed when you unlock your device and authorize its use.
Behind the scenes, retailers and service providers use three types of technologies to facilitate payments between a digital wallet and their point-of-sale system:
NFC (Near-field communication): A short-range wireless technology that can transfer information without contact, as long as it's within a few centimeters of a NFC-reading device (many of them are marked with a symbol that looks much like a sideways WiFi icon). NFC chips are also commonly used in credit cards enabled with contactless payment or pay-to-tap features.
MST (Magnetic Secure Transmission): Samsung uses this technology, which operates on the same technical principle as traditional credit or debit cards, in its digital wallet. Similar to NFC, MST is accepted at nearly all payment terminals that have card readers, but offers a more convenient and safer transaction than its plastic predecessors.
QR codes: Quick response codes are matrix barcodes sporting those identifiable three corner squares. Many businesses (especially restaurants), use QR codes to provide customers a quick and easy way to pay their bill. Users scan the code with their phone’s camera and pay with their digital wallet.
Digital wallets can be used online as well. Many businesses ensure compatibility with the most widely used digital wallets to smooth out their payment processes when making a website.
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Types of digital wallets
Many payment processing apps used today qualify as digital wallets. Here are some of the most widely used digital wallets:
Apple Pay (and its associated Apple Wallet)
Google Pay (and its associated Google Wallet)
From the list above, Apple Pay is among the most widely used digital-wallet systems – it was launched back in 2014, but its presence has skyrocketed in recent years. Google Pay offers similar functionality as Apple Pay, for Android users.
Pros and cons of digital wallets
As more people have a mobile device on them at all times, many have found that one of the biggest pros of digital wallets is convenience. Users prefer tapping their smartphone or watch to use a digital wallet reader, rather than digging a wallet out from their purse or pocket. Additionally, as many eCommerce retailers use digital wallet-friendly infrastructure, checkout processes can become increasingly simplified—even down to one click in some instances. This is streamlined with an eCommerce website builder.
Of course, one of the biggest concerns when it comes to using this technology is security. Most digital wallets employ multiple levels of security—encryption and tokenization, plus identity verification. But, if a device isn’t password-protected, the wallet can be accessed by anyone. Additionally, while more secure than tangible wallets, digital wallets may nonetheless be vulnerable to hackers.
Difference between a digital wallet and a crypto wallet
While digital wallets may be breaking into the mainstream, cryptocurrency wallets linger on the web3 horizon. Crypto wallets take the digital wallet idea and marry it with blockchain technologies to store private keys, as well as spend and receive cryptocurrencies. If you know how to make an NFT (or simply just know how to buy them), you can also store them in your cryptocurrency wallet, too.
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