The days of needing to carry bulky physical wallets or purses are coming to an end.
The adoption of digital wallets by consumers is predicted to grow from 3.4 billion users in 2022 to over 5.2 billion in 2026.
This represents a growth increase of over 53% in the digital wallet space in just four years...
So, understanding what exactly digital wallets are is important for consumers and businesses.
In this blog, we will explain the two main types of mobile wallets and how they work.
We will also cover how they process payment information, their security methods, and the concerns consumers may have about them.
What is a digital wallet?
Digital wallets (also known as e-wallets) are financial products that enable individuals to conveniently receive, hold, and spend funds on their mobile or other devices.
These funds can be in different currencies, including the option to act as a crypto wallet. There are no physical cards needed.
A bank's mobile app (or a payments app such as PayPal or Alipay) may already contain a digital wallet.
Mobile payment apps can be downloaded for Android phones or devices, or Apple devices, including iPhones and Apple Watches.
Types of digital wallets
There are two main types of digital wallet. Each serves a different purpose.
1. Open digital wallet
An open digital wallet is a digital wallet for storing virtual versions of traditional bank cards.
Like traditional credit cards, they initiate transactions via traditional payment schemes such as Visa or Mastercard.
Other open digital wallets, on the other hand, use open banking. With these, buyers can send money to sellers via account-to-account (A2A) payments.
These payment apps transfer funds directly from buyers' bank accounts and bypass traditional schemes. This means sellers receive money directly into their bank account in real-time.
Examples of open digital wallets
The three most popular open wallets are:
- Google Wallet: This is currently the most popular open wallet in the world. It is readily accessible on both iPhone and Android devices. Following two rebrands, Google Pay remains a service but the associated app has been retired in most countries. Now, Google Wallet is the popular branded version.
- Apple Pay: Although it has been around longer than Google Wallet, Apple Pay is the second most popular open digital wallet.
- Samsung Pay: This is the third most popular open digital wallet globally.
All of these digital wallets can be downloaded as a digital wallet app on a smartphone. They are widely used around the world by merchants that display contactless payment symbols.
2. Closed digital wallet
Closed digital wallets are digital wallets used to transfer funds and data between the two parties involved - the customer and the wallet-issuer.
Not all merchants can accept payments via a closed wallet. This is because are issued by companies for use exclusively by their own customers, often as part of a customer retention and loyalty strategy.
Examples of closed digital wallets
One of the best known closed digital wallets is Amazon Pay.
Another example is the Starbucks Card. It is a modern electronic version of physical cards that were stamped with every purchase.
How do digital wallets work?
A digital wallet will enable the details of a physical card - usually credit cards and debit cards - to be digitized.
This means merchants accept digital wallets just like regular contactless payment methods. And contactless payments can be made at a point of sale (POS), both in-store or online.
Depending on which digital wallet is being used, the consumer may be able to generate a one-time virtual card number to pay online via their digital wallet.
Near field communication (NFC) technology
Digital wallets use NFC technology. This is built in to most modern mobile devices now. It securely transfers data to a payment terminal for in-store transactions.
The terminal reads this information and then connects to the internet, where banking information is exchanged to complete transactions.
Advantages of digital wallets
1. Convenience
In today's connected world, smartphones are usually close to hand and consumers have plenty of places to use a digital wallet. There is no longer a need to carry cards and bulky physical wallets.
The delays and frustrations of rummaging around bags for purses or wallets are eliminated.
Multiple types of cards that can be stored in a digital wallet, including:
- Credit card
- Debit card
- Gift cards
- Crypto currency cards
- Driver's licenses
Users can also track their payment histories through a digital wallet. This adds further convenience and peace of mind.
2. Financial inclusion
According to the World Bank, 1.7 billion adults (one in three) around the world are unbanked.
Unbanked and financially underserved people often lack access to physical financial institutions. Digital wallets enable them to access a range of financial services and to build credit history.
3. Customer rewards
A closed wallet is designed to foster loyalty between the two parties involved.
Buyers can therefore usually expect to receive discounts or other incentives to use them. And mobile wallet issuers can achieve higher sales and pay less fees than when customers use traditional credit and debit cards.
4. Improved security
Security is a primary concern for all types of payment methods. It may be even more of a consideration with many digital wallets now, especially open wallets that are likely to contain several cards.
All types of digital wallet are entirely electronic payment methods. This means they have no physically visible security features such as a magnetic stripe on a credit card.
However, they do utilize some very powerful features to secure transactions.
For example, all financial information and customer data goes through a process called tokenization, which is a process of encrypting all transaction and debit or credit card details.
This reduces the chance of sensitive financial information or personal data being compromised if the merchant (or the consumer's app) is ever hacked.
Fraud protection is also often built into digital wallets. For example, 3D Secure 2.0 (3DS2) is a popular payment security protocol that that efficiently authenticates payments for mobile payments.
In addition to this, digital wallets have a range of other security features, including:
- Consumer alerts for attempted fraud
- PIN codes
- Two-factor authentication
- Biometrics authentication
Disadvantages of digital wallets
1. Safety and privacy issues
Digital wallets offer many more layers of security than credit and debit cards in a physical wallet.
However, if a consumer's digital wallet was accessed by an unauthorized individual, the user's personal information and financial assets may be at risk.
2. Over-dependence on a single device
Having multiple forms of digital payments on a single mobile device is convenient, unless that device is lost or stolen...
Unlike losing physical cash, losing a phone can lead to worries about the extent or potential of theft.
3. Potential encouragement of bad spending habits
According to one survey, the average American makes 6 impulse purchases per month. And 36% of UK shoppers said they were more likely to make an impulse purchases whilst shopping online.
To combat this, linked cards can be limited, and features like one-click spend turned off.
However, the convenience digital wallets bring carries the potential risk of some users developing bad spending habits.
How can businesses accept digital wallet payments?
With the number of digital wallet users expected to exceed 5.2 billion globally in 2026, merchants should be planning to meet the increased demand.
They should ensure they have the right payment technology to accept digital wallet payments across all channels - online, through apps, and in-person. They are an important part of the fast-growing alternative payments ecosystem.
Nuvei's digital and alternative payment acceptance solutions
At Nuvei, we offer both hardware and software that enables merchants to accept payment via digital wallet.
Our solution offers over 600 local and global payment acceptance methods.
This helps businesses improve their customers' journeys, reduce cart abandonment rates, gain access to new markets, and more.
Conclusion
Digital wallets are the next logical iteration of electronic payments.
Their fast-growing adoption is fueled by the mass global adoption of smartphones and the convenience of not having to carry a bulky wallet full of physical cards.
They work by digitizing physical cards, like credit or debit cards, enabling users to make payments both in-store and online.
The two main types of digital wallet are open wallets and closed wallets.
The most commonly used type is the open wallet. This can usually be used anywhere that displays the contactless payment symbol. Google Wallet (formerly known as Google Pay) is the most popular open wallet globally.
Apple Pay followed by Samsung Pay are the next most popular brands.
Closed wallets, such as Amazon Pay, serve a different purpose. They are exclusive to specific companies' customers and are issued mainly for customer loyalty purposes.
The advantages of digital wallets lie in the improved customer experience they provide. Users can store multiple card types, including credit and debit cards as well as cryptocurrencies, in one accessible place.
Another important advantage is the security of technology used. This is greatly superior to traditional card payments. It has enhanced security measures, such as tokenization, biometric verification and fraud protection, which all contribute to consumer confidence.
As the number of digital wallet users continues to grow rapidly, merchants must prepare for increased demand.
Working with a modern payment processor will ensure the appropriate payment technology is deployed, both online and in physical stores, to accept digital wallet payments.
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