Digital Wallets Gain Payments Market Share

Many consumers don’t write paper checks at all, thanks to modern payment technologies, and many others never use a physical credit card. For these consumers, the advent of the digital wallet makes payments faster, more convenient and paperless. Many people are switching all or part of their payment processes to their smartphone apps and related online tools.

The digital wallet is a type of smartphone app/online account that enables consumers to a) make payments at cash registers or online, b) securely store all needed bank account, debit card and credit card information and c) communicate wirelessly with cash registers/point-of-sale systems in stores. Most wallets also enable peer-to-peer (P2P) payments directly to the accounts of personal friends or family members.

Apple’s digital wallet is one of the most popular in this sector. This app comes included with Apple devices such as the iPhone. Users store their payment accounts’ information within the app. Then, their credit and debit accounts can be easily used with participating sellers, without the need for cash, paper checks or physical credit/debit cards. The digital wallet has the capacity to store other items for convenience, such as transit or concert tickets, student identification cards, boarding passes and/or loyalty cards (such as Walgreens rewards).

Apple’s own popular credit card is often used in conjunction with the digital wallet. Digital security is very high. When a user receives an Apple Card, they are given a unique iPhone identifier number. Every purchase made on the Apple Card requires both this device number and a one-time code that the iPhone’s digital wallet creates when the purchase is authorized. Purchases are authorized via Face ID, Touch ID or by inputting the password on the iPhone.

Security: Google’s popular Google Pay digital wallet offers another good example of the high level of security utilized in these systems, referred to as tokenization. First, a Google Pay user adds credit and/or debit cards to the Google Pay app. The app will request, from the bank issuing the cards, a token (a unique identification number) to represent the account, creating a “virtual” credit card. Google Pay then encrypts the newly tokenized card, making it ready for use. When a user taps the mobile device on a POS terminal or pays within a mobile app, Google Pay responds with the token and a cryptogram which acts as a one-time-use password. Google Pay can also store reward cards, transportation passes and other vital information. Users can also send and request money with Google Pay through email. Google Pay does not store a user’s physical credit card number in the app, and it requires a PIN for purchases over $100. If the phone is lost or stolen, a user can use the Android Device Manager online to instantly lock the device or wipe it clean of personal information. Some wallets can also be used to store IDs such as drivers’ licenses, and documents such as airline boarding passes.

Digital wallets are also seen as vital tools at major payments platforms including the parent firms of Zelle (owned by financial technology firm Early Warning Services) and Venmo (owned by PayPal). Early Warning Services announced a new digital wallet in early 2023 called Paze. It is expected that both the Mastercard and Visa systems will support Paze. Since Early Warning is jointly owned by a consortium of several of America’s largest banks, it is also expected that tens of millions of bank customers will be able to easily add their bank debit cards to their Paze wallets.

Smartphones as Credit Card Terminals: Smartphones are being used by merchants and service companies as credit card readers, thanks to technology from companies like Square. Using a small scanner that plugs into a smartphone, users can process credit cards for a small fee. Square, for example, makes a device that plugs into the earphone jack of an iPhone or iPad (as well as some other smartphones). Square quickly developed into one of the world’s most innovative payments companies, adding many levels of tools and services for small business, including debit cards and marketing assistance. Likewise, PayPal has an iPhone app with transactions for bank accounts or PayPal accounts. The technology is a boon for small businesses that previously worked only on a cash or check basis. For example, a plumber can get paid by credit card, on-the-spot, after completing a job. Like Square, PayPal has also added numerous important tools for business.

Mobile Commerce: Payments via Smartphones (Digital Wallets): Payment via smartphone is fostered by the fact a vast number of consumers are already managing their banking and investment accounts on their phones, keeping tabs on account balances and making transfers as needed. However, Americans have been slower than people in Asia and parts of Europe in adopting mobile payments. Challenges include the facts that typical American smartphone users are wary of security issues, and there are already hundreds of millions of credit and debit cards in widespread use across the nation. U.S. households are very comfortable with using debit cards for day-to-day purchases, and it has been difficult for wireless payment firms to change their habits.

There are also questions about the fees generated by using mobile phones as payment devices. Every business involved in a transaction, from the credit card company to the smartphone service provider, wants a piece of the immense potential revenue. On the other side of the transactions, many retailers and restaurants are anxious to control mobile payments themselves and reduce their transaction costs.

In the U.S., consumers were barely aware of the payment by smartphone concept until 2014, when Apple announced Apple Pay. Apple Pay users wave their iPhones over sales terminals and their accounts are charged. (Touchless payment features like this are highly desirable due to the Coronavirus.) Money can also be sent by text message or by using Apple’s Siri voice-controlled assistant. Banks pay Apple a tiny fraction of every transaction made. The technology behind it, developed by Visa and MasterCard, replaces credit card information such as account numbers and expiration dates with unique series of numbers that validate the user’s identity. Credit card accounts may be linked to Apple Pay by taking a photo of a card or manually entering card information. Apple promises that credit card information will not be stored on iPhones or on the company’s servers. The technology also works with the Apple Watch. Apple has been growing rapidly in popularity on a global basis.

By working with existing payment networks such as MasterCard, Apple is seamlessly entering the payment market. It doesn’t need to invent a new network or new technology. It is simply adapting it into the iPhone and pushing it to its vast base of very enthusiastic Apple fans. The recent introduction of the Apple Card credit card is a logical extension of its brand.

Digital wallets are also evolving to assist the rapidly growing number of consumers who make payments online. For example, MasterCard offers MasterPass. This service enables users to set up credit or debit card and shipping information in one secure electronic wallet. Once a user has filled out a shopping cart at a participating online store, he or she then clicks the “Buy With MasterPass” icon, logs in, and completes the purchase and payment. The intent is to increase convenience while reducing fraud.

In China, the potential of the mobile payment market is staggering. Social media giant Alibaba’s Alipay mobile payment system holds a major share of the Chinese market. A number of other contenders are attempting to challenge Alipay’s hold, notably major gaming and social media firm Tencent’s Tenpay. WeChat, a multi-service platform in China that has more than 1 billion users, offers a number of simple payment apps accepted by individuals and businesses throughout the country.

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