How Digital Wallets Work

A digital wallet is a system that securely stores the user’s payment information and passwords. Also known as an e-wallet, it can be used with mobile payment systems that allow shoppers to pay for purchases with a smartphone equipped with the proper app and a near-field-communication (NFC) microchip at an NFC-enabled point-of-sale (POS) terminal.  

Digital Wallet

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How Digital Wallets Work

A digital wallet is a system that securely stores the user’s payment information and passwords. Also known as an e-wallet, it can be used with mobile payment systems that allow shoppers to pay for purchases with a smartphone equipped with the proper app and a near-field-communication (NFC) microchip at an NFC-enabled point-of-sale (POS) terminal. 

There are three major components of a digital wallet: the system, or electronic infrastructure; the application, or software; and the device used by the wallet’s owner. Most digital wallets link the user’s bank account, credit and debit card information to a smartphone app. 

Digital Wallets at the POS 

Shoppers can use a digital wallet to pay for a purchase by simply tapping or waving the enabled device in front of the NFC-enabled terminal at checkout, which is known as a contactless payment transaction. If required, the customer provides a passcode or scans a finger to approve the transaction. The digital wallet software provides security and encryption for both personal information and the actual transaction. 

The NFC receiver in the terminal reads the signal from the device. The Secure Element (SE), a microchip in the terminal where personal and financial information is stored, validates the transaction, which is then authorized by the processor. The shopper’s designated credit card is charged and they receive a sales receipt, just like any other transaction. 

Benefits of Digital Wallet 

More than any other form of payment, the digital wallet requires buy-in from consumers and merchants alike to succeed. Today’s consumers expect their smartphones to simplify and improve their lives. Using a digital wallet to organize and store multiple payment types, loyalty cards, digital coupons and personal data has the potential to do that. 

In addition to managing payments and accounts, a digital wallet user can receive offers from selected merchants and track and spend reward or loyalty points. It can also store digital receipts and warranty information, and receive alerts about the account and spending. 

As more shoppers become as comfortable with digital wallets as they are with their smartphones, retailers need to upgrade their processing equipment to NFC technology to meet their customers’ payment expectations. Fortunately, NFC-compatible terminals come equipped to process EMV® transactions as well, so the transition is simplified. 

Digital Wallets & Secure Processing 

Several recent studies reveal that security and a lack of understanding of how digital wallets function remain the main obstacles to digital wallet adoption by consumers. However, there are important inherent security measures that help to protect each individual digital wallet transaction. 

Digital wallets can be considered safer than traditional wallets because of built-in redundant protections. For example, a passcode or biometric is required to gain access to the application.  And digital wallets heavily encrypt all credit card and banking details to help keep them secure from hackers. 

Today’s smartphones also come equipped with serious security features. They can be locked, providing an extra level of security if the device is lost or stolen — an option that’s simply not available with a traditional wallet and older payment methods like cash and plastic. NFC-enabled smartphones also have an encrypted SE chip that holds the data required to initiate and complete a transaction. 

Transition Now 

As U.S. retailers upgrade their terminals to become EMV compliant, they can easily add NFC capability to accommodate digital wallet customers as well.

 

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