With the increasing prevalence of online transactions and the constant threat of cyberattacks, digital wallets offer advanced encryption and security features that protect users’ sensitive financial information. Obviously, one of the main benefits of the digital wallet is that it’s easy to use and faster than traditional banking services, which has led to its vast popularity.
Let’s discuss a few things about digital wallets.
What is a Digital Wallet?
A digital wallet is a software-based application or service that allows individuals to securely store, manage, and transact with their digital assets, including cryptocurrencies, payment cards, and personal identification information, typically on a computer or a mobile device.
A digital wallet is also known as an e-wallet or a mobile wallet. It allows users to transact without carrying cash, checks, or cards. All you have to do is store your payment information on a smart device like your smartphone. Since the payment information is sensitive, digital wallets use a password to protect them. The idea of going cashless is a hot trend in the finance sector, with more and more organizations investing in digital wallets and similar concepts.
Another big reason for its popularity is that digital wallets effectively eliminate the lengthy checkout process. And, of course, a user does not have to carry a bulky wallet. On top of it, they can link their ID documents, like driver’s licenses, loyalty cards, etc., to their smartphones.
The Origin Story
When mobile phones progressed, people used them to order pizza, book hotel rooms, buy travel and movie tickets, etc. Until 2003, nearly 95 million mobile users had used their devices to make a purchase.
In 2011, Google was the first organization to launch a mobile wallet. The wallet required users to use NFC (Near-Field Communication) to pay, redeem coupons, and earn loyalty points on their purchases. Although only a few phone models could run the wallet and fewer merchants accepted payment through it, it created many buzzes.
In 2012, Apple launched the Passbook, which you could use for coupons, tickets, and boarding passes. The only thing about Passbook was that it was not meant for mobile payments. Two years later, the company launched Apple Pay in the US, quickly gaining popularity in the UK and China. In 2015, Google released Android Pay, and Samsung followed suit with their Pay application.
How Does a Digital Wallet Work?
A digital wallet securely stores digital representations of various assets, such as credit card information or cryptocurrency keys, and facilitates transactions through encryption and authentication protocols.
Digital wallet software is ideally installed on a smartphone, but people can use it on their desktop, tablet, or other such devices. The smartphone application version of a digital wallet is the most widely used one since people can easily carry their phones around.
For instance, when making an online purchase, a user can select their stored credit card information from the digital wallet app, and the wallet securely transfers the payment details to the merchant’s website, streamlining the checkout process. Similarly, in the context of cryptocurrencies, a digital wallet stores private keys, allowing users to access and transfer their digital assets on blockchain networks, like sending Bitcoin to another wallet address.
You can download the digital wallet app on your smartphone and then complete the KYC (Know Your Customer) process by providing legitimate information. Before you give your details, make sure to check whether the third party is trustworthy. Once you have set up your account, you can pay using your digital wallet at a point-of-sale system that accepts payment from your vendor wallet. Some POS systems even offer Magnetic Secure Transmission technology. While contactless payments might be difficult to spot, most modern POS systems support Magnetic Secure Transmission payments.
Where Can You Use a Digital Wallet?
There are different ways to use your wallet, including these cases:
- In-Store Payments: Many physical retail stores accept digital wallet payments. Customers can make contactless payments by simply tapping their mobile device or smartwatch on a compatible point-of-sale terminal. Examples include Apple Pay, Google Pay, and Samsung Pay.
- Peer-to-Peer (P2P) Transfers: Digital wallets like Venmo and PayPal enable users to send money to friends and family, split bills, or pay for shared expenses.
- Cryptocurrency Transactions: Cryptocurrency wallets are a specific type of digital wallet used for storing, sending, and receiving cryptocurrencies. Users can make cryptocurrency transactions and manage their digital assets using these wallets.
- ATMs: Some digital wallet providers offer features that allow users to withdraw cash from ATMs without the need for a physical debit or credit card. The mobile app generates a one-time code for ATM access.
- Bill Payments: Some digital wallets allow you to pay bills, such as utilities, rent, and credit card bills, directly from the app. This simplifies the process of managing and settling financial obligations.
- In-App Purchases: You can use your digital wallet app to pay for Uber rides or food delivery payments.
Some Advantages of Digital Wallets
The biggest and most apparent advantage of a digital wallet is how easy it is to make a payment. Generally, every transaction you make leads to an immediate money transfer. Once they receive the money, the retailer can process and dispatch your order quickly. The user has already provided their information in the digital wallet during the onboarding process, so they don’t have to give the details. Some digital wallets require biometrics after your standard passwords to provide extra security.
Another crucial advantage of digital wallets is enhanced security. These wallets typically employ robust encryption and authentication measures to safeguard users’ sensitive financial and personal information. Furthermore, digital wallets often require biometric authentication, such as fingerprint or facial recognition, adding an extra layer of protection.
Additionally, digital wallets can generate unique transaction codes for each payment, reducing the risk of fraud or unauthorized access to your financial accounts. Beyond these practical benefits, digital wallets also promote financial inclusivity by providing access to banking services for underserved populations and offer a platform for managing various assets, including cryptocurrencies, contributing to the evolving landscape of modern finance.
Security in Digital Wallets and Identity Verification
As the number of digital wallet users grows, there is an urgent need to beef up security on these wallets. Banks and other financial institutes with digital wallet services use KYC to filter customers during onboarding. It requires clear-cut ID verification of the customer through the documents they provide. Here, accurate identity verification plays a considerable role in stopping identity theft and other security breaches in the system.
Many digital wallets utilize biometric authentication methods like fingerprint recognition or facial scanning. For instance, Apple Pay requires users to authenticate transactions using Face ID or Touch ID. These biometric measures ensure that only authorized individuals can access and use the digital wallet, adding an extra layer of security beyond traditional PINs or passwords.
Here are other examples of how digital wallets increase security:
- Transaction Alerts and Monitoring: Many digital wallet apps offer real-time transaction alerts and monitoring. Users receive notifications for every transaction, enabling them to identify and report any unauthorized or suspicious activity quickly. This proactive approach empowers individuals to take immediate action to protect their financial assets, reducing the potential impact of fraud.
- Tokenization: Digital wallets use tokenization to protect sensitive card information. When a user adds their credit or debit card to a digital wallet, the wallet generates a unique digital token instead of storing the actual card number. This token is used for transactions, making it extremely difficult for cybercriminals to intercept and misuse the card details even if they gain access to the transaction data.
Conclusion
Identity verification is a valuable tool during remote user onboarding for digital wallets. Once you verify your identity, the digital wallet is upgraded with security features like biometric technology to safeguard your data.
With a digital wallet, people can carry their payment methods and important identification virtually on their smartphones or other digital devices, eliminating the need for a physical wallet stuffed with cards. This streamlines the checkout process, reduces the risk of card loss or theft, and allows for quick and secure online and physical transactions.
At iDenfy, we are developing AI-based ID verification technology for businesses and financial institutions that provide digital wallets and related services. We are successfully working and upgrading our technology so that your digital wallet becomes impervious to fraudulent attacks.
See how our identity verification and fraud prevention solutions perform in action, or book a free demo.
This blog post was updated on the 14th of September, 2023, to reflect the latest insights.
