Mobile commerce has been growing at an impressive pace over the past few years. In fact, digital wallets have become the world’s most popular payment method, capturing 53% of global online transactions and 32% of global in-store (POS) transactions in 2024, more than any other single payment type.
As such, hand-held devices have played a significant role in shaping modern shopping behavior. Innovations like the digital wallet 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.
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 digital wallets 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. Samsung Pay now primarily focuses on near-field communication (NFC) for in-store payments. While older devices used magnetic secure transmission (MST), Samsung phased out MST support beginning with devices launched in 2021 (Galaxy S21 and newer) due to the rapid global adoption of NFC-enabled terminals.
- PayPal: PayPal is the single most-used digital wallet overall in the US/Europe, especially for online and in-app commerce
How digital wallets work
A digital wallet primarily emulates a physical wallet by holding secure tokens that represent payment cards and loyalty cards. It is important to note that most digital wallets do not hold actual currency; they hold payment credentials.
Digital wallets use a process called tokenization. The card number is encrypted during transmission to the card network, which then issues a unique, single-use, randomized payment token (or Device Primary Account Number – DPAN). This token is stored on the device’s secure element, not the actual card number.
Access is authenticated using biometrics (Touch/Face ID) or a PIN, making the wallet device-locked and secure if the device is lost. Wallets like Apple Pay and Google Pay are designed to be device-dependent—the secure token is tied to that specific phone’s secure element and is not easily accessible from another 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.
The easiest way to start accepting and supporting them is by using a fully integrated payment terminal that is NFC-enabled, like offered with Stax. Any modern EMV terminal is typically already NFC-enabled, meaning your business can accept these payments without hardware upgrades.
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 (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, used by wallets like PayPal and WeChat Pay, are scanned at checkout. For merchants, accepting QR codes typically involves a percentage fee, though often at a lower rate than online credit card processing (e.g., PayPal’s QR code rate is lower than their standard online rate).
The increasing adoption of digital wallets
The pandemic has been one of the biggest drivers of digital wallets. 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 speed up checkout because they eliminate the time spent dipping the chip and often bypass the need for a PIN or signature, even for transactions above the standard contactless limit.
- 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 was 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 tokenized payment credentials and bank accounts, which are ultimately backed by the card network’s zero liability policies and, for bank-linked accounts, FDIC insurance. Crypto assets themselves are not covered by FDIC. 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 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.
FAQs about digital wallet
Q: What is a digital wallet, and how does it function?
A digital wallet is a software-based system that stores payment information and passwords for numerous payment methods and websites. It asks users to enter their debit or credit card numbers, which are encrypted to prevent misuse. Once the account is set up, only the user can access the wallet by entering valid login credentials.
Q: How can customers make payments using a digital wallet?
Customers can make payments using their digital wallets at retailers’ point-of-sale (POS) systems that accept such payment modes. They must bring their mobile device close to the card reader and authorize the payment. The transaction is promptly processed, and the payment is securely transferred.
Q: What are some popular digital wallets in the market today?
Today’s most popular digital wallets are Apple Pay, Google Pay, and Samsung Pay. These digital wallets have top-notch security features, allowing users to verify payments using biometric methods or passwords.
Q: What technologies power digital wallets?
Digital wallets are primarily powered by near field communication (NFC), magnetic secure transmission (MST), and QR codes. NFC and MST are used by wallets like Apple Pay, Google Pay, and Samsung Pay, whereas wallets like PayPal use QR codes.
Q: How is a digital wallet different from a crypto wallet?
Although both digital and crypto wallets facilitate easy digital payments, they are quite different. A digital wallet stores conventional currency that would otherwise be carried in a physical wallet, whereas a crypto wallet stores the keys needed to buy and sell cryptocurrency. Additionally, digital wallets are generally covered against fraud by FDIC insurance, while cryptocurrency operates in an unregulated economic sector.
Q: Why should merchants support and accept digital wallets?
Supporting and accepting digital wallets can provide advantages like faster service, reduced errors, improved security, and convenience for merchants. It also allows merchants to cater to the preferences of younger demographics who favor digital payments, enhancing the overall customer experience.
Q: How can merchants start accepting digital wallets in their businesses?
Merchants can start accepting digital wallets in their businesses by using fully integrated payment terminals, like offered with Stax. These comprehensive solutions eliminate the need for separate customer-facing displays, scanners, and cash registers. Additionally, they can easily integrate with existing software and business applications.
