Digital wallet usage isn't just a growing trend – it's rapidly becoming the leading way that people prefer to pay for purchases, both online and in person.

In this guide, we'll share what businesses should know about digital wallet payments: how they work, the top digital wallet apps and how to incorporate them into a payment processing strategy.

What's in this article?

• What are digital wallets?
  
• Types of digital wallets
  
• How do digital wallets work?
  
  • Near-field communication (NFC)
    
  • Magnetic secure transmission (MST)
    
  • QR codes
    
• Are digital wallets safe?
  
• How to accept digital wallet payments
  
• Benefits of digital wallet payments for businesses
  
• What types of hardware do businesses need to accept digital wallet payments?
  
• Costs associated with digital wallet payments
  

What are digital wallets?

A digital wallet is an application that operates on mobile devices such as smartphones and tablets and stores payment information, allowing users to pay for purchases directly from their devices instead of using their physical debit or credit cards. Digital wallets eliminate the need for customers to enter their card and billing information manually, making it a fast and simple payment option online.

Digital wallets also allow users to view payment histories and often store other important documents digitally.

Types of digital wallets

The digital wallet space is a crowded and growing one. Companies such as PayPal, Venmo and Cash App offer digital wallet products that allow users to pay for purchases online and in person using their respective apps. Many banks and credit card companies have their own digital wallet functionality within their mobile apps.

Here are some of the most popular digital wallets:

• Apple Pay
  Apple Pay has emerged as a leader in the digital wallet space, accounting for 92% of all digital wallet transactions in 2020. Their wallet app is available on Apple devices such as iPhones, iPads and Apple Watches.

• Google Pay
  With over 100 million users, Google Pay is a leader in the digital wallet space.

• Amazon Pay
  As the third largest company in the world and a fixture in ecommerce, Amazon has a very popular digital wallet as well.

• PayPal
  PayPal's digital wallet builds on its long history in online payments.

• Click to Pay
  Visa, American Express, Mastercard and Discover jointly launched Click to Pay, a unified online payment system that works with most major credit cards.

• Alipay
  Alipay is a leading China-based digital payments platform with more than 1.3 billion active users as of June 2020 and $17 trillion worth of transactions in China per year.

• WeChat Pay
  China's other top digital wallet, WeChat Pay, has over 900 million users.

Digital wallets are most commonly used to store payment methods such as debit and credit cards, but they can also hold a wider range of digital items, including:

• Gift cards
  
• Driving licences
  
• Plane tickets and boarding passes
  
• Event tickets
  
• Membership cards
  
• Insurance cards
  
• Coupons
  
• Hotel and restaurant reservations
  

The takeaway: Digital wallet providers are not only competing to be customers' go-to payment method, but they're also expanding the functionality of these apps to allow them to serve a wider range of uses. Anything a person might place in their actual wallet could soon be held digitally in a wallet on a mobile device. In fact, 15% of digital wallet users reported that they regularly leave their physical wallets at home.

How do digital wallets work?

To use a digital wallet, users must unlock the wallet app using facial recognition, fingerprint identification or a PIN code, and then select the stored payment method they want to use. For online purchases, customers will continue through the business's check-out process once they've engaged their mobile wallet of choice and selected the payment method stored within that they want to use for that purchase.

For in-person purchases, digital wallets use wireless, Bluetooth and magnetic capabilities to transmit payment data from a customer's mobile device to an enabled card reader or payment terminal. To conduct a transaction, users unlock their device, select their payment method and then hold their device close to the card reader. Contactless payments using digital wallets typically just take a couple of seconds to complete and are powered by the following technologies:

Near-field communication (NFC)

Near-field communication (NFC) is the technology that most commonly powers contactless payments. NFC securely enables devices such as smartphones, smart watches and some credit cards to transmit payment information to card readers and payment terminals without physically making contact at all.

Magnetic secure transmission (MST)

Magnetic secure transmission (MST) is a technology that allows smartphones to emit an encrypted signal that acts such as the magnetic stripe on credit and debit cards. Digital wallets that use MST transmit the encrypted payment data to the card reader when the device is held at close range (a few centimetres usually) or tapped.

QR codes

Quick response (QR) codes are matrix barcodes that the cameras on mobile devices can scan to initiate a transmission of information. In the case of digital wallets, these codes can be used to make a payment.

After the customer transmits their payment information from their digital wallet via one of the above technologies, the POS terminal or card reader will route the transaction information to their payment processor, who will communicate with the issuing and acquiring banks to process the purchase.

Are digital wallets safe?

Digital wallets are very safe. Their amplified level of security stems primarily from the way they transmit data at the point of sale, where digital wallets use a process called tokenisation. Here's how it works: Instead of sending a customer's actual credit or debit card number, the digital wallet generates a one-time code – called a token – made up of random numbers and sends that to the card reader instead. In the event there's a data breach with the business or payment processor, any payments that were processed with digital wallets will be safer than other card payments, as no card numbers were used (and therefore can't be stolen).

Additionally, digital wallet apps almost always require extra security measures, such as face recognition or a PIN number, before they'll even initiate a payment. Compared to card transactions that use magnetic stripes or EMV chips, digital wallets are currently the most secure way to pay.

How to accept digital wallet payments

To accept digital wallet payments from customers, businesses need to set up their online and in-person payments system to be able to accept them. Most payment processing providers, including Stripe, already have hardware and software for businesses that are enabled to accept digital wallet payments. Here's the rundown on accepting wallet payments online, in person and on mobile apps:

• Accepting wallet payments in person
  Businesses need to have POS terminals or card readers that are equipped with NFC technology in order to accept contactless digital wallet payments for in-person transactions. Most newer payment terminals, including Stripe Terminal, have built-in capabilities that allow businesses to accept wallet payments.

• Accepting wallet payments on web
  If your business is already accepting payments on your website, you're already using a payment gateway from a processor such as Stripe, and it is likely to support digital wallet payments. Stripe offers businesses a single integration for all wallets that works across Stripe products. With Stripe Checkout, Apple Pay and Google Pay are automatically enabled. Customers can also scan a QR code with their mobile phone to complete transactions.

• Accepting wallet payments on mobile
  Stripe Checkout supports digital wallets as a payment method on mobile as well, allowing customers to confirm the transaction by authenticating their wallet credentials at checkout using fingerprint or face recognition, their mobile passcode or by logging in to their wallet app.

Benefits of digital wallet payments for businesses

Many businesses are not only accepting digital wallet payments, but also overwhelmingly prefer them as a payment method. In an annual outlook survey conducted by Visa in January 2022, 82% of small and micro businesses said they will accept digital payment options in 2022, and 46% of customers polled said they intend to use digital payments more often in 2022. Additionally, almost 60% of the businesses surveyed said they are exclusively accepting digital payments now or plan to start only accepting digital wallet payments within the next two years.

Here are a few of the main reasons why so many businesses prefer digital wallets:

• Increased sales
  Digital wallets reduce friction in the checkout experience, which leads to higher conversion rates and revenue. Having a seamless checkout process that supports a variety of payment methods such as digital wallets is a crucial way to remove barriers that might dissuade new customers from converting and lower the lifetime value of existing customers.

• Better conversion rates on mobile
  Customers generally don't want to pull out a credit card and input their payment information manually into a mobile device to complete a purchase. Not accepting digital wallet payments for mobile purchases leads to increased abandoned baskets and lower conversion rates.

• Convenient and easy
  For both businesses and their customers, digital wallets are about as effortless as payments get. For businesses that accept payments in person, the efficiency of accepting contactless payments from digital wallets can cut down on waiting times and increase customer turnover. And no matter where you accept payments, creating an efficient payment experience is something your customers will appreciate.

• Highly secure
  Again, digital wallets are very secure compared to other card payment methods. Tokenisation outpaces other security efforts and helps mitigate the risk of credit card fraud. Digital wallets' security helps businesses reduce operating costs in addition to cutting down on fraud claims and chargebacks, all of which cost businesses money.

• Customers are adopting digital wallets quickly
  Customers are embracing digital wallets. A study found that there were over 2.6 billion digital wallet users worldwide as of 2020, with an expected 4.4 billion by 2025. From the Visa survey, 16% of customers are already exclusively using digital payment methods, and 25% say they anticipate making the transition over the next two years.

What types of hardware do businesses need to accept digital wallet payments?

In order to accept digital wallet payments for customer purchases in person, businesses need to have a card reader that's NFC-enabled and POS software that supports this payment type. Stripe's card reader for in-person transactions is enabled for contactless digital wallet payments.

If you do business through an online platform or marketplace, most of them are equipped to accept a range of digital wallet types, so there's probably nothing additional you need to do to enable them for your sales. For your website, you need to ensure your payment provider supports wallet payments and that the payment type is built into its checkout experience.

Costs associated with digital wallet payments

Stripe customers don't pay any additional fees to process wallet payments, and the pricing per transaction is the same as other card transactions. For most businesses, the cost to accept digital wallet payments is the same as other credit card transactions, so at most, you might have to upgrade your hardware to be able to accept wallet payments.