Digital wallets are increasingly becoming the de-facto choice for financial transactions. A recent McKinsey study reveals that nearly 9 in 10 Americans use digital wallets, and consumers using 3 or more digital wallets has grown from 18% in 2021 to 30% in 2022.
As a business owner, offering digital wallets as a payment choice at your online or offline store makes your business more accessible to a broader pool of customers. If you're still uncertain, this guide will walk you through the finer details of a digital wallet—and how accepting them could impact your business.
What is a digital wallet?
A digital wallet is an electronic version of your traditional wallet. You can use it to store virtual versions of your payment options, such as bank accounts and credit and debit cards. Once you’ve set up a digital wallet, you can complete your purchases with just a tap or swipe of your smartphone. Besides storing your payment details, digital wallets can also store digital tickets, e-vouchers, and digital versions of your identification documents.
Digital wallet vs mobile wallet: What are the differences?
Both digital and mobile wallets are a convenient and secure alternative to carrying dozens of physical cards or paying with cash. The primary difference between these two is how you access them.
Digital wallets can be accessed via any digital device like a browser on a computer, tablet or smartphone, while a mobile wallet (as the name implies) is accessible only via a mobile device.
The term “digital wallet” refers to payment software that allows you to store your bank account details, credit and debit card numbers, loyalty cards, vouchers, and event tickets securely in the cloud. You can use digital wallets to pay when shopping online (e.g. PayPal), send money to your friends and family (e.g. Venmo), or pay for fuel at a gas station using your phone (e.g. Apple Pay).
In contrast, a mobile wallet is a specific type of digital wallet that you can access only via an app on a mobile device like a smartphone or a smartwatch. You can use a mobile wallet to “tap to pay” at a physical store or complete online payments using the mobile wallet’s app. Google Pay is a good example of a mobile wallet.
What are the different types of digital wallets?
Here are a few popular types of digital wallets:
Closed wallets are digital wallets that can only be used to pay for items or services at the issuing merchant. The Starbucks Rewards program is a good example of a closed wallet. This means, the money you load onto the Starbucks Rewards account can only be used at Starbucks locations or the website, and cannot be transferred to other merchants or payment systems.
Usually, businesses offer closed wallets as an incentive to encourage customer loyalty. When a customer loads money into their Starbucks account, they’re paying for future purchases at Starbucks. Starbucks incentivizes customers to use their closed wallets by offering various perks and benefits to members such as free drinks and birthday rewards.
A semi-closed wallet has more functionalities than a closed one. However, it's operational only within a particular geographical area and limited to only partner merchants. To accept payments from a semi-closed wallet, small business owners and merchants must enter into an agreement or contract with the wallet issuer.
Zelle is a popular example of a semi-closed wallet. It partners directly with several leading banks so that users can send and receive money in their bank account via the wallet.
The biggest benefit of an open wallet is its flexibility and range of use. With an open wallet, you can link your bank account, credit/debit cards, and other payment sources and use your funds to pay for goods and services, both online and offline at a wide range of merchants. You can also send or receive funds between financial institutions, and even withdraw cash from an ATM.
They are highly versatile, as they are not limited to use at a specific merchant or website. Popular examples of open wallets include Chase Pay, Google Pay, and Apple Pay. Unlike a closed wallet which is limited to a specific merchant, open wallets are accepted at a huge range of merchants and platforms making them a convenient alternative to carrying physical cards or cash.
You can use a crypto wallet to store, send, or receive digital currencies like Ethereum, Bitcoin, and others. Crypto wallets use public and private keys to store and secure users' cryptocurrencies stored on the blockchain. Crypto.com and Coinbase are popular examples of crypto wallets.
An IoT wallet allows users to make payments via smart devices such as wearables like the Apple Watch or appliances like Alexa. Since IoT devices are already connected to the internet, you don't need a separate device to access these wallets. For example, a smart fridge with an IoT wallet can pay for groceries online.
What are the benefits of using a digital wallet?
Digital wallets have numerous features that make them convenient and business-friendly. Here are some of the top advantages of using a digital wallet for your business:
Digital wallets are super-fast and reduce transaction processing times, making it easier for small businesses to streamline cash flow. It lets customers make payments instantly, meaning you receive the funds faster. Similarly, you can use it to pay vendors, suppliers, and utility service providers via a single app or online interface.
Digital wallets use sophisticated cryptography algorithms, offering increased security and protecting you from cyber fraud and scams. Accepting payments via a digital wallet also reduces the volume of physical cash your business handles, reducing the chances of burglaries and thefts.
Superior customer experience
Digital wallets offer a more streamlined, convenient, and hassle-free payment experience. Customers can make payments directly from their smartphones or tablets. Several digital wallets also accept contactless payments, which enables customers to pay by tapping their phone or a smartwatch on the payment terminal.
Some digital wallets also offer loyalty programs that help customers get discounts, accumulate reward points, and cashback offers, all of which can help improve customer satisfaction and loyalty.
To accept credit card payments, merchants pay an array of fees including assessment, interchange, and processing fees. The average card processing fee ranges from 1.3% to 3.5% for each transaction depending on the network, the type of credit card, and the merchant category code. With card swipe fees increasing regularly, digital wallets provide an appealing alternative for businesses to lower payment processing costs.
Reduce cart abandonment & increase sales
With the rise in online scams and identity thefts, card-based payments are subject to additional scrutiny. For example, multi-factor authentication requires customers to provide additional information, like a fingerprint or PIN code to authenticate the transaction. This additional security requirement becomes a point of friction, causing customers to abandon their purchases. A study by PaymentsDive reveals that 12% of European retailers have seen their customer approval rates decline due to strong authentication requirements.
By offering digital wallets, businesses can securely deliver a first-class customer experience. That’s because digital wallets have built-in authentication measures like face recognition, fingerprint, or a PIN. This means, merchants don’t have to put customers through additional authentication procedures, thereby enabling frictionless payments, which leads to lower cart abandonment and increased sales.
Are digital wallets safe?
This is a common concern. However, you can breathe easy knowing that digital wallets are equipped with the best-in-class security features, such as:
- Encryption: Financial data stored in digital wallets are encrypted using sophisticated cryptographic algorithms. This helps to secure users' sensitive information, such as bank accounts and credit and debit card details, from hackers and other unauthorized users.
- Fraud monitoring: To prevent fraudulent activity, digital wallets periodically implement new fraud monitoring and prevention algorithms.
- Pins and passwords: To access your digital wallet, you must provide a pin or password. This prevents unauthorized users from accessing the app if you lose your mobile phone.
- Two-factor authentication: Several digital wallets have an extra layer of security via two-factor authentication. This requires users to enter a code sent to their email or phone to validate their identity and access the app.
- Biometric authentication: Some digital wallets also use advanced authentication techniques such as fingerprint or facial recognition.
How can I ensure the security of my digital wallet and financial information?
Here are a few tips to protect your digital assets:
- Use strong passwords: Choose passwords that are difficult to guess and include a mix of letters, numbers, and symbols. Avoid using the same password for multiple accounts, and change your passwords regularly.
- Update it regularly: Ensure that your apps and software are up-to-date with the latest security patches and updates. This helps to protect your digital wallet and financial information from known vulnerabilities.
- Enable two-factor authentication: Two-factor authentication requires a code or token in addition to your password. This helps to prevent unauthorized access to your digital wallet and financial information.
- Be wary of phishing scams: Phishing scams trick you into revealing your personal information or login credentials. Be wary of suspicious emails, text messages, or phone calls, and never provide personal information unless you know the request is legitimate.
- Choose a trusted payment partner: Look for trusted and reputed financial partners with robust security protocols to protect your financial information.
Embrace the future of payments processing
As a small business owner, you want to make it as easy as possible for customers to pay for your products or services. Digital wallets are the future of payment processing and offer numerous benefits to both you and your customers. By accepting payments through digital wallets, you'll not only improve the customer experience, but you'll also save time and money on payment processing fees. Make sure to compare the fees, features, and functionalities to find the right one that matches your business requirements.
The best part — you can instantly start accepting and sending payments via digital wallets by integrating it with your accounting automation software like Ramp in just a few clicks. If you’re not already using Ramp, now is the time to start. Our accounting software provides business owners with the best features such as seamless accounting, expense tracking, effortless bill payments, and more.
Schedule a free demo and learn how powerful Ramp can be for your business.