Mobile commerce has been growing at an impressive pace over the past few years. This shouldn’t come as a surprise considering that more than 50% of web traffic globally originates from mobile devices.
As such, hand-held devices have played a significant role in shaping modern shopping behavior. And innovations like the digital wallet that has completely revolutionized the customer experience. They are easily accessible, secure, convenient, and provide a more hygienic means of making payments.
In this article, we’ll explore the ins and outs of digital wallets including how they work, the reasons for their popularity, and how you can start accepting and supporting them in your business.Learn More
What Is a Digital Wallet?
A digital wallet is a software equivalent of your physical wallet that carries your money. It’s operable from your computer, smartphone, or mobile device, and eliminates the need to carry cash.
Once you load your credit card information onto the digital wallet app, you can keep paying for your purchases with it—both online and offline. Even when you shop in-store, Near-Field Communication (NFC) technology makes it possible for you to checkout using your digital wallet at the point of sale.
Currently, the most popular ones in the market are:
- Apple Pay. The go-to digital wallet for iPhone, iPad, and Apple Watch users. Its security features are top-notch and users can verify payments using Touch or Face ID.
- Google Pay. Anyone using an Android OS can use Google Pay. Customers can pay using a fingerprint or a password and it secures transactions through encryption.
- Samsung Pay. This e-wallet is most popular among Samsung users. It utilizes both Magnetic Secure Transmission (MST) and NFC for in-store payments.
- Yet another popular digital wallet that allows you to store the details of your cards, bank accounts, and gift cards—all in one place.
How Digital Wallets Work
A digital wallet emulates a real, physical wallet by holding currency and keeping it handy for payments. A mechanism authenticates access and keeps transactions secure.
Digital wallets ask users to enter their debit card or credit card numbers which are then encrypted to prevent misuse. After setting up the account, only the customer can access the wallet by entering their valid login credentials. This makes it device-independent.
Even if a user loses the device, no one else can access their wallet. On the other hand, an authorized user can access and use the wallet from any other device.
To make a payment, customers must keep their mobile device close to the card reader at a retailer’s POS. A contactless payments symbol is often visible at these counters which indicates that the store accepts digital wallet payments. Once the payment is authorized, the amount will be quickly transferred to the merchant..
NFC vs. MST vs. QR codes
From the customer’s perspective, paying with a digital wallet involves similar steps as credit card payments. They select the card they’d like to use and follow the prompts on the payment terminal.
Behind the scenes, the inner workings of a digital wallet will depend on the technology behind it. There are generally three types of technologies that power these wallets. They include:
NFC, which powers Apple Pay, Google Pay, and Samsung Pay. NFC, which again stands for “Near-Field Communication,” works by allowing two NFC-enabled devices (i.e., the smartphone and credit card terminal) to interface with each other through electromagnetic radio fields.
MST aka Magnetic Secure Transmission is used in devices like the Samsung Galaxy S20 and earlier*. It uses magnetic signals (similar to the ones generated by magnetic stripe cards) to enable smartphones to connect to the merchant’s payment device.
Because MST technology works similarly to magstripe cards, it works on a wider range of credit card terminals. Even if you don’t have an NFC-enabled credit card machine, you can still accept mobile payments as long as they’re powered by MST.
*Galaxy S20 and earlier devices use both NFC and MST. However, Galaxy S21, which came out in 2021, no longer supports Magnetic Secure Transmission.
“Due to the rapid adoption of near field communication (NFC) technology by consumers and businesses, beginning with devices launched in 2021, Samsung Pay will focus its support on NFC transactions, across the Galaxy portfolio,” Samsung said in a statement. “While future devices will no longer include magnetic stripe technology (MST), customers with previous, compatible Galaxy devices will be able to continue using Samsung Pay, including MST.”
QR codes, which are used in digital wallets like PayPal. The PayPal mobile app generates a QR code, which is scanned at checkout to initiate payment.
The Increasing Adoption of Digital Wallets
Research suggests that 32% of people who use mobile wallets have three or more of them on their smartphones. This figure was 21% just a year ago. Some Millennials even claim to have nine digital wallets on their smartphones.
The pandemic has been one of the biggest drivers of this trend. COVID-19 necessitated social distancing and avoiding cash payments at stores. Advances in technology and high-speed internet have made it possible to host and run these payment instruments smoothly.
Digital wallets can store the details of a number of cards. Customers can also save loyalty cards, discount coupons, tickets, etc. in their digital wallets. And as more and more customers take to online shopping, the popularity of digital wallets continues to rise.
Digital wallets offer a satisfying customer experience. With encryption, tokenization, and user authentication, they address one of the biggest concerns for most consumers—security. Most customers consider a digital wallet to be more secure than carrying cash or physical cards.
Digital wallets offer a one-stop repository for all your payments. It allows customers to keep track of their past expenses and even plan future ones.
Why Merchants Must Support and Accept Digital Wallets
Digital wallets offer a number of benefits for retailers as well. Here are some of them:
- Faster service. Waiting in long queues is a pet peeve for most shoppers. Customers may even avoid your store if your checkout is time-consuming. Industry data shows that 32% of customers would find a more convenient checkout experience if the line is too long, while 11% said they would abandon a purchase completely. Digital wallets can help you serve customers faster, thus increasing satisfaction and keeping you from losing sales.
- Reduces errors. Sometimes, your cashier may enter the wrong amount in the card reader. Overcharging customers creates a negative experience while undercharging them can result in revenue loss. Digital payments can help to avoid this by keeping payments error-free, particularly if you’re using integrated payments.
- Safe and secure. Not only are digital wallets a much safer option than handling cash or physical cards, but they also provide a high degree of security. Because they come with built-in authentication and encryption features, merchants carry less risk from these transactions.
- Offers convenience. In March 2021, 80% of online shoppers abandoned their carts and did not complete their purchases. One of the biggest reasons for this is friction at the checkout. Entering card information on mobile devices can often seem inconvenient, and more so if the webpage isn’t optimized for mobile. Digital wallets offer a smoother alternative, allowing customers to breeze through the checkout process.
- Targets the younger demographic. Old-school payment methods may well be deterrents for Millennial and Gen Z shoppers. As these groups hold significant purchasing power, catering to them requires being tech-savvy. Digital wallets can help you with just that.
Digital Wallets Vs. Crypto Wallets
The idea behind digital wallets and crypto wallets is the same. Both allow easy payments using digital currency and eliminate the need to pay by cash or enter card details repeatedly. But they’re still quite different.
A digital wallet stores the same currency that you would otherwise carry in your wallet (in the physical form). Crypto wallets, on the other hand, store the keys needed to buy and sell cryptocurrency.
Customers can pay using conventional currency (on a digital wallet) in most stores. However, crypto wallets can be used in a very limited number of stores that accept cryptocurrency.
A digital wallet stores cards and currency that are covered against fraud by FDIC insurance. Cryptocurrency still operates in the unregulated economic sector which is not covered or authenticated by any financial institutions.
How to Start Accepting Digital Wallets in Your Business
Digital wallets are quickly becoming indispensable to retailers who care about providing a seamless shopping experience to their customers. The easiest way to start accepting and supporting them is by using a fully integrated payment terminal.
These terminals function as all-in-one solutions that eliminate the need for having separate customer-facing displays, scanners, and cash registers. Plus, you can easily integrate them easily with the software/apps you regularly use (e.g., loyalty programs, inventory management, returns, etc.). This helps you offer a smoother customer experience thus increasing conversions and loyalty.
Stax offers a range of credit card machines to power all your payment needs.