What is a Digital Wallet?
In simple words, it allows people to make payments using digital currencies. Other names of digital wallets are mobile wallets, e-wallets, or virtual wallets. The personal and financial information of the wallet holder is in an online software-based system. The software can be installed on computers, mobiles, or tablets. The most popular and broadly used version is the mobile application because people can carry phones anywhere. It can also be referred to as mobile banking where people deposit their cash in banks and use the digital variant of it.
The reason is the ease of use, faster checkout process and funds security. As most of the e-wallet providers are using Know Your Customer (KYC) for security, the risk of frauds or crimes declined greatly.
Statista forecasts that there will be 1.31 B mobile payment users in 2023. Another estimate predicts that by 2022 only 17 percent of worldwide payments will be cash-based. Several banks and other financial institutions are providing the services of digital wallets.
Types of Mobile Wallets
- Open Wallets: These wallets are provided by banks or partnered businesses. They can be employed for all payments and also provide the facility of cash withdrawal.
- Closed Wallets: Some businesses selling products or providing services have closed wallets. Customers can use closed wallets for paying to the issuer of that wallet.
- Semi-Closed Wallets: These wallets allow payments to listed merchants only. Users can use semi-closed wallets for payments to the registered business only. If a business wants to use closed wallets for payments, it must partner with the issuer of the wallet.
Where are Digital Wallets used?
There are three possible ways where virtual wallets can be used as a transaction medium.
Many stores are now accepting mobile payments. For instance, when a customer shops from a store he has to pay cash at the counter. But through digital wallets, customers pay their bills through their mobiles phones.
Most of the e-commerce platforms and shops providing online services are supporting cashless payments. It is easy for them to manage financial records in this way, as all the payments will have a transaction history. Customers can choose the mobile payment mode instead of typing card information.
This is the most advanced way of using mobile wallets. The funds are transferred from wallet apps to another mobile app in this method. For instance, a customer just ordered a pizza from a food delivery app. He can pay the bill directly to the food delivery app without any third-party involvement. It is also utilized for in-game purchase where users purchase skins, chips and weapons through it.
Some banks like Bank of America have also allowed using digital wallets at ATMs for cash withdrawal. An account holder just has to link his credit card with the digital wallet and withdraw cash at the contactless ATMs. Customers can also make deposits this way.
Security of Virtual Wallets
The customer’s information on the e-wallets is encrypted. No third-party can read the customer or transaction data. End-to-end encryption provides solid security to virtual wallets.
Near Field Communication (NFC)
This can only be used for in-store purchases, a customer has to hold the mobile phone to the NFC system for some seconds for funds transfer. For additional security, he might have to give a password to the system. The NFC system receives the signal and processes the payment request.
Know Your Customer (KYC)
As discussed earlier, the electronic wallet providers incorporate KYC solutions to counter identity frauds. The reason is, the heavy involvement of money in digital wallets also make them vulnerable to account takeovers. A criminal can access customer credentials through social engineering tactics and use virtual wallets for payments. The legitimate customer can lose his money and account through this.
KYC verifies the identity through supporting ID documents allowing only genuine customers to access the account. The customer just has to upload a selfie holding an ID document to make a payment.
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As digital wallets provide the ease of remote payments. A person does not have to physically pay the invoice if he uses an e-wallet. It also gives the advantage of international payment through a single gateway. Now customers can buy a product offshore and complete the transaction in seconds. As digital wallets are common now, stringent security is essential for making the channel more safe and secure. Currently, KYC is the most convenient method for digital wallets’ security that performs the security check remotely.