What is a Digital Wallet?
A digital wallet (or e-wallet) is an electronic device or software which allows you to store, manage and pay electronically using a variety of payment instruments such as credit cards, debit cards, Internet banking and digital cash. In banking terms, a digital wallet is a type of prepaid payment instrument like your debit card. You can save your payment details on your digital wallet so that you don’t have to retype the information each time you make a purchase. Digital wallets authenticate the user using digital certificates or other encryption methods. Google Wallet, Samsung Pay, Apple Pay, PayPal and Paytm are some of the popular e-wallets that are in use. Although, they are little different from each other, but they perform the same basic tasks i.e. enable you to complete a transaction using your mobile device(s), such as a smartphones and so on.
Types of Digital Wallets
Depending on the device that is used, digital wallets are divided into two categories, device-based and internet-based wallets.
Device-based digital wallets: These type of digital wallets use NFC (Near Field Communication) technology to allow users to pay for purchases by waving their NFC-capable phones or other NFC-capable devices near a contactless reader (which is also an NFC-enabled merchant terminal). There is no need of physically handing over your credit or debit card, but you need a device such as an iPhone, Apple Watch or Samsung phone. Apple Pay and Samsung Pay are examples of device-based digital wallets.
Internet-based digital wallets: Thiese type of digital wallets offer personal user accounts where a user can sign up for an account and store credit or debit card information in it for faster checkout. When the users make a purchase from an e-commerce website, the users first need to register and create an account. After this, they need to sign in to their account and use the saved payment information to pay for their purchase(s). These type of digital wallets allow users to pay for online purchases without providing their card details to the website from which they’re shopping. Google Wallet, Pa Pal and Paytm are examples of internet-based digital wallets. Google Wallet and Pa Pal both offer apps that can be added to compatible phones, allowing them to be used as device-based digital wallets in store.
Digital Wallet Components
There are two main components of a digital wallet, software component and information component. Let’s briefly learn about these components:
Software Component: The software component provides security i.e. it protects users’ personal information and the actual transaction through encryption. Most digital wallets are stored on the client side. They are self-maintained and fully compatible with most e-commerce websites. A server-side digital wallet, also known as a thin wallet, is one that an organisation creates for and maintains on its servers. It provides enhanced security, efficiency and additional functionalities to the user.
Information Component: The information component refers to a database that is used to store user information such as payment method (credit/debit/net banking), payment details (including card numbers, expiry dates, and security or CVV numbers), phone number, email address, billing address, shipping address and other such information about the purchase. The users can choose whether they want to store payment details or not. Opting to store a card saves the users from retyping the details every time they make a purchase using that card.
How Does an E-Wallet Work?
Digital wallets are complex in nature, with many different interconnected functions. This complexity seeks partnerships between parties to come together to make e-wallets work. It will be extremely challenging for any single service provider to effectively manage and execute an e-wallet. For example, a payment moves through several parties often with varying providers for each transaction. Consider the following example to understand how the money changes hands during an online transaction.
When a customer makes a purchase from an e-commerce site by submitting their payment information that information is sent to the payment gateway. The gateway then encrypts the payment information and then sends it to a series of proved payment processors and networks for authorisation where the payment is either accepted or declined. The decision is conveyed to the customer, and all these activities take place in few seconds. The final step happens after the payment gateway sends the transaction to the payment processors and the money is transferred from customer’s account into the merchant’s account.