Benefits of Digital Wallets

Compare Banks explores the role and advantages of digital wallets for payment.

Updated: December 30, 2023
Matt Crabtree

Written By

Matt Crabtree

 

With increasingly more of us using Internet banking in the UK, and the world still rippling from the after-effects of the crypto boom, digital payments are becoming a standard element of doing business because of the proliferation of Internet shopping, mobile phone connectivity, and online banking. 

In addition to online card purchases, customers increasingly expect digital payment choices like Apple Pay and PayPal. These days, it's impossible to imagine life without digital payments.

We use digital payment methods for everything from purchasing coffee to online shopping. Knowing how the evolution of technology is influencing the future of digital payments is crucial. 

This article will examine the present condition of digital payments, the technological developments that will shape the future of digital payments, and the effect these developments will have on various sectors.

If you operate a company today, you can't afford to ignore the benefits of accepting digital payments. I have compiled the most salient features and benefits of digital payments and how they affect businesses.

Benefits of digital wallets — At a glance: Pros and Cons

Pros

✔️ Quicker transaction times — This is a major benefit of using digital payment methods. Instantaneous payments, even across international boundaries, are now possible with only a few clicks or taps on a smartphone. This is especially convenient for online buying since it eliminates the need to wait for the processing of paper checks or money orders.

✔️ Exponential convenience — Digital transactions not only save time, but they are also more convenient. You may now make a payment using only your phone or computer, eliminating the need to carry around cash or cheques. Digital payment services also make it simple to keep tabs on your spending and manage your money, allowing you to better stick to your financial plans.

✔️ Enhanced trust and security — Digital transactions also have the advantage of being more secure. Digital payments are often seen as more secure than conventional ones because of security mechanisms like encryption and tokenization. By requiring the user to be physically close to the payment terminal, contactless payments using near-field communication (NFC) technology make it harder for criminals to steal your information.

Cons

❌️ Hidden costs — There are numerous benefits to using digital payments, but there are also some negatives to think about. The costs charged by certain online payment processors are a major cause for alarm. Some credit cards, for instance, have steep transaction fees that can mount up. Consumers should also be wary of international transaction fees and other hidden charges.

❌️ Technical difficulties — These are another concern with digital payments. Even though they don't happen often, they might cause payments to be late or even disappear. In addition, if you lose your phone or any other device on which you have stored your payment information, you may become a victim of fraud or identity theft.

❌️ Digital currency also raises privacy concerns — With ML and AI-powered cyberattacks, concerns have been raised by some customers about the quantity of personally identifiable information that is made available via online payment systems. We don’t all have time to read the tiny print and understand what information we are willing to give, even though most payment providers have robust privacy rules in place.

How digital wallets are changing the way we pay: Present condition — Electronic payment trends

Digital payment methods are now in a stage of fast development. Mobile payments digital wallets, and cryptocurrencies, among others, have seen a meteoric rise in popularity in recent years.

In recent years, mobile payments in particular have expanded rapidly. Business Insider predicts that by 2023, the total value of all transactions made through mobile devices will amount to $3.5 trillion.

Apple Pay and Google Wallet are two examples of digital wallets that make it simple to pay using a credit card or debit card at stores that accept them.

While other digital payment methods have matured, cryptocurrency is still in its infancy but is gaining popularity. There has been a dramatic increase in the value of Bitcoin, the first and most well-known cryptocurrency, during the last several years.

Cash and checks are still widely used for transactions, despite the rise of digital payment methods. However, it is anticipated that the pace of adoption of digital payments would continue to increase going forward.

Technological progress

The future of digital payments is being driven by technology. Thanks to developments in biometrics, blockchain, artificial intelligence (AI), and cybersecurity management customers can now shop and pay online with more peace of mind.

Fingerprint and face recognition biometrics are being used to verify user identities and increase the safety of online transactions. The potential of using blockchain, the technology underpinning cryptocurrencies like Bitcoin, in online transactions is being investigated. Because it is distributed, it provides a safe means of processing and verifying financial transactions.

The use of AI in financial transactions is also in the works. For instance, chatbots powered by AI may aid in areas like as customer care and fraud detection. These advancements are simplifying and enhancing the digital payment process.

In conclusion, technological advancements will be important to the continued success of digital payment systems. Thwarting network assaults like a Distributed Denial of Service (DDoS) attack will be more important.

Biometrics, blockchain, and artificial intelligence innovations are paving the way for safer, more convenient, and more widely available digital payment methods. Digital payment methods are now in a state of fast development, and their widespread use is only likely to increase. 

What are digital wallets?

A digital wallet, often called an electronic wallet, is a mobile app that facilitates the transfer of money across devices. Your passwords and credit card details are encrypted and safely stored in the cloud. Mobile wallets, a subclass of digital wallets, are mostly used on mobile devices. Digital wallets may be accessed from a computer.

With a digital wallet, you may make purchases without worrying about losing your physical credit cards. You may make purchases using your smartphone after entering and storing your payment information (credit card, debit card, or bank account).

They leverage mobile use

To facilitate easier use of a wide range of financial services and goods, “digital wallets” have been developed as mobile apps. By safely holding all of a consumer's payment information in one small space, digital wallets have effectively rendered the traditional wallet obsolete.

In order to securely transfer payment information from your mobile device to a point of sale that is equipped to read the data and connect through Bluetooth, WiFi, or magnetic signals, a digital wallet makes advantage of the device's wireless capabilities. Several different kinds of electronic wallets may be used. Among the most well-known are the following:

  • Apple Pay
  • Cash App
  • Google Wallet
  • PayPal
  • Samsung Pay
  • Venmo
  • Walmart Pay
  • AliPay
  • Dwolla
  • Vodafone M-PESA

The majority of wallets on the market today make an effort to set themselves out from the crowd. If you use Google's digital wallet service, for instance, you may transfer money to your mobile wallet. After that, you may use this money at any shop or website that accepts Google Wallet.

However, Apple has formed a strategic relationship with Goldman Sachs to develop its Apple Pay services and issue Apple credit cards.

You may also keep these in a digital wallet:

  • Prepaid cards
  • Membership cards
  • Admission Tickets
  • Coupons
  • Reservations at a hotel
  • Transportation and airline tickets
  • Driver's licences and vehicle keys

Benefits of digital wallets — Implications of online wallets in banking and financial industries: The research

There has been a meteoric rise in the use of digital wallets, which are payment processing systems that exist entirely in software. Mordor Intelligence predicted in research released last year that the use of mobile payment systems like digital wallets will expand at a CAGR of 26.93 per cent between 2021 and 2025. 

Apple Pay, Google Pay, and Samsung Pay are just a few examples of wallets that can safely store your debit and credit card details. There are other digital wallet applications that provide a wider range of services, such as the ability to store funds, conduct peer-to-peer transactions, and get access to other banking options. 

WeChat Pay and Alipay, the two most popular digital wallet applications, were both founded and are predominantly used in China, making China the largest national adoption of mobile payments technology today.

In 2020, Alipay's monthly active user base eclipsed 1.3 billion, while WeChat Pay's was 1.13 billion. In 2019, over half of China's customers (49%) used digital wallets to pay for purchases totalling more than $49 trillion. In instance, in the United Kingdom, that number is now at 24% and is expected to climb dramatically over the remainder of the Covid-19 crisis.

1. Trends in China

With more of us Brits using online banking, it won’t sound strange to say wallet applications in China are not just linked to larger ‘super app ecosystems', but they are also far more popular than their Western equivalents.

The Alibaba Group, which is Alipay's parent business, expanded from its original focus on e-commerce to include the online entertainment, transportation, healthcare, and financial services industries. 

The West may follow along in the future. WeChat is one of the most multifunctional smartphone applications in the world, providing not only messaging and social networking but also shopping and payments.

Theoretically, a Chinese consumer could go about their entire day, ordering a taxi, purchasing an article of clothing, sending money to a friend, and even investing in a money market fund, without ever having to leave the ecosystem of applications provided by a single corporation, which includes a digital wallet.

2. Trends in the UK and US

Whether or when nations like the United States and the United Kingdom will develop “super app”? Ecosystem is still unknown. The most probable scenario is the addition of new services on top of popular applications. The widespread use of electronic wallets, however, will have far-reaching consequences in both the East and West.

One result will be a quicker decline in the use of cash for everyday transactions; another will be a shift in how people pay their friends and family; and still another will be the expansion of access to financial services. Also, we’ll need to be more aware of things like phishing, which could increase as the amount of money available directly from users grows. 

3. Digital ID EU trends

The potential effects of digital wallet apps on the banking and financial services industries have been brought into sharper focus by recent advances in European Commission legislation to update and enhance laws for digital IDs.

If digital IDs become widespread and regulated so that interoperability is compatible with wallets, financial providers and banks could gain access to PII which will increase how easily customer checks can be carried out, as well as other regulatory and anti-money laundering responsibilities.

It might be a stretch to call the effects described here “transformative”, but they will certainly be substantial. There is, however, an emerging field where digital wallets might be important. Central bank digital currencies (CBDCs) are one area where innovation might have a profound impact.

  • In 2020, a prolonged Distributed Denial of Service (DDoS) assault on a network provider caused the New Zealand Stock Exchange to go down.
  • Seven million users had their personal information stolen from the online stock trading site Robinhood in 2021 due to a data breach.
  • In 2021, a cyber assault on the Pichincha Bank in Ecuador caused disruptions in the bank's clients' access to financial services.

Benefits of digital wallets — Payment changes: Repercussions for various sectors

As Open Banking gains more insight into our daily lives, there will be widespread economic effects from the inevitable rise of digital payment methods. Among the sectors hit the hardest are retail, online shopping, and banking.

Online and in-store retailers alike are increasingly accommodating digital payment methods. In particular, merchants are warming up to mobile payments since they offer a simple and safe option for consumers to make purchases on the go.

However, online stores rely largely on these types of transactions. E-commerce sites will need to make adjustments so that they can accommodate the growing number of customers who choose to pay with various forms of electronic currency.

The development of digital payment methods is also causing disruption in the financial sector. Established banks have new competition from fintech firms that are creating cutting-edge methods of making digital payments. In response, traditional financial institutions are creating their own digital payment products and forming strategic alliances with fintech firms.

In conclusion, the rise of digital payment methods like digital crypto wallets has prompted change across a variety of sectors. Online retailers rely significantly on digital payment processing, and traditional banks are feeling the pressure from fintech startups.

Types of electronic payments

The broad category of “digital payments” includes the following.

  • Credit and debit cards are the most extensively used and accepted digital payment methods and may be used both online and in person. 
  • Customers may securely save their banking and credit card details in a digital wallet. You may use them in person, online, or with mobile phone applications. 
  • Customers may send money to your merchant account straight from their bank accounts using online banking transfer methods including wire transfer or automated clearing house (ACH). 
  • Buy now, pay later (BNPL) is a digital finance business that enables consumers to spread out the cost of a significant purchase into many instalments. 
  • Cryptocurrencies, like Bitcoin, are digital currencies that lack a central issuing authority. They are still not universally acknowledged, but their popularity is rising. 

Explaining the popularity of CBDCs

First, a definition: A CBDC is a digital currency issued by a central bank. Central bank digital currencies (CBDCs) are digital currencies issued directly by national central banks. Although they operate in much the same way as virtual currencies, their value is fixed in relation to the national fiat currency by the government.

Several nations are working on CBDCs and planning to deploy them. Since many countries are considering making the changeover, it's important to educate yourself about digital currencies and what they mean for society.

  • The digital equivalent of a country's fiat money is called a central bank digital currency.
  • The CBDC is issued by a country's central bank and helps expand access to banking services while also making it easier to administer fiscal and monetary policy.
  • Many nations are looking at what impact CBDCs may have on their economy, financial systems, and overall security.

Why the fuss?

The Covid-19 epidemic sped up the shift towards digital currency, which has now exceeded real banknotes in terms of inspiring and encouraging a cashless society and, by extension, the development and widespread usage of CBDCs.

As a result, a larger population was able to make digital payments without opening a bank account. For CBDCs to be widely adopted (especially in poor countries), they must first and foremost be easily accessible, financially inclusive, convenient, and stable.

In what ways might CBDCs pose dangers?

There's been a lot of excitement about the advent of digital currency, but there are also some important dangers to consider whether you're a corporation, a central bank, or a professional, which may explain why Sunak is cautious to swim in this particular pond.

The effect on regulatory procedures

CBDCs pose the greatest threat to the economy because of their potential influence on interest rates and inflation. Those hoping to benefit from a drop in interest rates may feel the effects of its introduction.

This area is still relatively unexplored, although “quantitative easing” is one potential entry point for CBDCs. To encourage spending, reduce unemployment, and increase economic development, central banks often buy assets like bonds in order to cut interest rates on savings and loans.

In a study titled “Central bank digital currencies: a solution in search of a problem?” the House of Lords' Economic Affairs Committee asked whether it was a good idea to start off with: 

According to the study 📖: Many central banks have gotten used to unorthodox monetary policies over the last decade, but it is still unclear whether any prospective UK CBDC would earn income. They would have more tools at their disposal in times of crisis if they had a CBDC.

Confidentiality of Information

A threat to data subjects' privacy and over-exertion of control over their financial data exists if central banks have direct access and linkages to individual bank accounts. When adopting CBDCs, it will be crucial for authorities to think about how to protect citizens' private information.

Cybersecurity

As mentioned earlier in this blog post, central banks will need to make sure there are proper preventatives to detect and thwart duplicate CBDC transactions (and any PII or network breaches), as the Cyber Defence Service notes that double and counterfeit spending are only two of many methods fraudsters can use to “input false amounts via duplicates of the actual amount”.

The CDS suggests increasing trust by using a distributed ledger technology's consensus mechanism (such as blockchain) to safeguard customers' information. 

Centralisation

Will CBDCs follow as digital assets, cryptocurrencies, and other web 3.0 goods become more widely used, or will they get lost in the shuffle as people take a stand against anything that does not match the new decentralised mould?

The blockchain industry has recently gained widespread attention, and it is expected to have a significant impact on the future of the financial sector by helping to shape it in a manner that will reduce the role of middlemen.

We anticipate that the dangers and drawbacks of CBDCs will end up being more significant than the positives.

People want to be able to handle their financial affairs discreetly and with a high degree of independence. In a “controlled” or “permissioned privacy” setting, where the Government selects who may view what, CBDCs may lead to the transfer of funds between higher levels (central institutions).

When limitations and limits on usage and expenditure are implemented, central banks run the danger of being seen as agents of the Government.

Advantages of digital wallets — 7 top benefits

Here are the most common benefits of digital wallets for making payments today:

1. Convenience

You and your customers may save time and effort by switching to digital payments. Consumers may make purchases without worrying about transporting cash or physically visiting a store. They can pay with a touch or swipe instead of fumbling with cash while they're already there. 

Digital payments provide a simple method to “set it and forget it”, making it more convenient to make regular payments and requiring less of your time to process. With a single click, you may choose which payment options you'll take and add more as required. It's a simple and quick method of payment. 

2. Quicker payments

Traditional forms of payment might make the checkout process more difficult than it needs to be. Payments in the form of cash or checks must be physically deposited into a bank account, which slows down cash flow and adds administrative overhead. 

Digital transactions provide for instantaneous settlement and a streamlined checkout experience. Digital payments may be made with a simple touch or swipe, both in-store and online. The funds are then placed into your account without your having to physically go to a bank. It streamlines your operations and boosts your current income. 

3. More trackable

Transactions using actual cash might be difficult to monitor in real-time. Manual record-keeping is required for foolproof bookkeeping. When paying with cash, unlike with electronic transfers, you run the risk of having your money lost or stolen. 

When you make a digital purchase, the transaction is automatically logged. That makes it less of a hassle to track purchases, check for signs of fraud, and process any necessary refunds or exchanges. The Pay Dashboard may help you learn more about your consumers by analysing their payment preferences and past purchases.

4. Improved safety

Digital payments are often far safer than cash, cheques, or even actual credit cards, all of which may be stolen and exploited. That's because high-tech safeguards like tokenization are often used in digital payment systems. 

Online credit card purchases often use multi-factor authentication methods to verify the cardholder's identity and safeguard businesses from fraudulent transactions. Biometrics such as fingerprints or face ID are used to authenticate purchases in other digital payment systems, such as mobile applications. 

5. Better satisfaction for the consumer

Offering digital payment methods to clients may improve their overall shopping experience. With digital payments, you can streamline the checkout process, which may increase consumer satisfaction. 

Because there are so many different digital payment methods, you may cater to your consumers by providing the ones they want. The rate of shopping cart abandonment drops as more customers complete their purchases.

6. Influence on a global scale

With the proliferation of internet retailers, consumers are no longer bound to purchasing goods in their immediate vicinity. As a matter of fact, Statista estimates that the total value of international payments would exceed $156 billion by the year 2022. You may reach a wider audience, get more exposure, and generate more revenue when you accept digital payments.

7. Scalability

Your company's growth potential will be severely constrained if you insist on accepting just conventional forms of payment. The use of digital payment methods facilitates business expansion and development. Online sales and/or a subscription service are just two examples of how digital payment processing may benefit a company. 

Adopting digital payment methods may ease expansion, even if you're only opening new physical stores. You may save time processing or collecting payments across locations and even attract new clients as a result. 

What are the advantages of digital wallets: The Verdict

There has been a recent and rapid rise in the use of digital wallet payment options among consumers worldwide. Customers will appreciate the added convenience, and you'll see less shopping cart abandonment if you accept these payment options. 

The future of financial transactions is bright as long as technology keeps improving. New payment systems are constantly being developed, and the use of contactless payment methods is on the rise. New digital currencies that are safer and more decentralised than current payment systems may also emerge as blockchain technology develops.

In sum, there are several advantages to making digital payments, such as speed, convenience, saving, and safety. However, there are also certain negatives that should be taken into account, such as costs and privacy issues.

In the end, each person has to weigh their own tastes and circumstances to decide whether or not to embrace digital payment methods. If you do your research and take precautions, you may safely use digital payment methods without compromising your privacy.

If you join the digital revolution, you may be paid more quickly and easily. Keep yourself updated and take precautions to safeguard your personal data. Thanks to technological progress, the future of financial transactions is bright, and we eagerly anticipate what lies ahead.

See how to save money in 2024.

Related Guides:

Digital Payments: Advantages – FAQs

When can I start accepting online payments for my company?

Do digital payments have any benefits or drawbacks?

Can you explain the advantages of digital payments over physical currency?

What does financial cyber security entail?

What is the future of money is digital payments?

How can digital payments be done safely?

What is a CBDC?

Are CBDCs the same as cryptocurrencies?

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