What is a digital wallet and how do they work?

Key takeaways:

• By 2026, more than half of the world’s population will regularly use digital wallets.

• Digital wallets enable businesses to store and use payment methods securely in a single place.

• Apple Pay, Google Pay, and Samsung Pay are examples of popular digital wallets.

In the 15 short years since their introduction, digital wallets have almost become the world’s preferred payment method. Driven by their uber-convenience, they are now responsible for 50 percent of global eCommerce transactions, a figure that is expected to reach 61 percent by 2027.

The digital wallet ecosystem is diverse, with each region represented by providers that cater to their customers' cultural preferences. In the West, Apple Pay and Google Pay dominate. In parts of Asia, digital wallets like Alipay and WeChat Pay are integral to daily life, functioning as super-apps that go beyond payments to include services like booking travel and securing loans.

With over half the world’s population predicted to use them by 2026¹, it’s worth understanding how digital wallets can be a tool for businesses to streamline business spend management.

What is a digital wallet?

In the simplest terms, a digital wallet stores your payment information securely on a device like a smartphone, tablet, or computer. It eliminates the need for cash or physical cards, allowing you to pay with the tap of a phone or just a few clicks.

In the background, a digital wallet is a software-based tool that holds your card or bank account details. It retrieves this information during checkout to complete the payment quickly and securely. Many digital wallets go beyond payments, storing loyalty cards, boarding passes, or gift cards in one accessible place.

Popular examples include Apple Pay, Google Pay, and Samsung Pay, which lead the market in mobile payments. Platforms like PayPal and Venmo add a social element, making it easy to send money to friends and family as well as businesses.

For businesses, adding corporate cards to digital wallets allows employees to pay securely from company funds without relying on physical cards. This reduces administrative burdens like expense reimbursements and ensures transactions are controlled and visible in real time. 

How do digital wallets work?

Digital wallets securely store your payment information and enable transactions through advanced technology, making payments fast, easy, and secure. They support various card types, including credit, debit, and prepaid card options, enabling businesses to cater to diverse payment preferences. Here’s how they work:

1. Storing payment information:

• Users upload card or bank account details to the digital wallet.

• The information is encrypted, ensuring it is secure and accessible only after the user authenticates their device with a PIN, fingerprint, or facial recognition.

2. Facilitating transactions:

• For in-person payments, users tap or hold their device close to a payment terminal. The wallet transmits payment data using one of several technologies (see below).

• For online purchases, users select their digital wallet at checkout and authorise the transaction, eliminating the need to input card details manually.

3. Technology behind digital wallets:

• Near field communication (NFC): Transfers payment information securely between devices when they are within close proximity. This technology is used by platforms like Apple Pay and Google Pay.

• Magnetic secure transmission (MST): Generates a magnetic signal, replicating the swipe of a card. Samsung Pay has supported MST, though it is phasing out in favour of NFC.

• QR codes: Some wallets, like PayPal, use scannable barcodes to initiate payments, especially for peer-to-peer or point-of-sale transactions.

4. Integration with systems:

• Payment terminals must support contactless payments or QR codes to accept digital wallet transactions.

• The wallet connects to payment processors, gateways, and banks to finalise the purchase in seconds.

Pros and cons of digital wallets

Like any payment method, digital wallets have benefits and limitations that businesses need to consider:

Pros of a digital wallet

1. Streamlined company spend management

Digital wallets can link to virtual corporate cards, allowing businesses to issue cards to employees to cover business expenses. This eliminates the need for physical cards, simplifies employee spending, and removes the hassle of processing reimbursements. And finance teams gain control over spend limits as well as complete visibility over company spend.

2. Enhanced convenience for employees

For employees, digital wallets can simplify business expense processes by linking directly to business accounts or corporate cards. They allow staff to pay for company expenses using company funds, often in multiple currencies, without needing physical cards. This enables seamless international transactions and reduces reliance on cash or personal cards, removing the need to wait for company reimbursements of expenses.

3. Improved security

With features like tokenization and encryption, digital wallets protect sensitive payment data from being intercepted during transactions. Biometric authentication ensures that only authorised users can access the wallet. For businesses, this helps to mitigate the risk of fraud with company issued cards. 

Cons of a digital wallet

1. Limited acceptance

Not all businesses or regions have adopted the infrastructure required to support digital wallets. Smaller vendors or those in less technologically advanced markets may lack the necessary point-of-sale systems to accept contactless payments.

2. Dependence on technology

Digital wallets rely entirely on devices and connectivity. For some wallets (like Apple Pay), an internet connection is needed to connect cards to the wallet but not for making in-person payments. However, businesses accepting payments must have internet-enabled POS systems to process the transaction.

3. Potential risks with providers

While established digital wallet providers offer robust security, businesses must ensure they, as well as their employees who link corporate cards, choose reputable platforms. A poorly vetted or less secure provider could expose sensitive financial data to cyber risks, leading to costly breaches or loss of trust from customers.

Popular types of digital wallets in Singapore

Singapore is paving the way towards a cashless economy, with digital wallets becoming a vital part of business operations. The market is highly diverse, featuring options from banks, non-bank providers, super apps, and international players. Government initiatives such as SGQR and PayNow have accelerated their adoption, making Singapore a leader in digital payments.

Here are five of the most popular digital wallets in Singapore:

• DBS PayLah!: This bank-backed wallet allows for transfers via PayNow and payments at over 180,000 locations, making it ideal for businesses linked to DBS or POSB accounts.

• Google Pay: A global wallet that simplifies online and in-store transactions by linking credit or debit cards, providing businesses with a secure and convenient option.

• GrabPay: A central feature of the Grab super app, GrabPay is widely used for ride-hailing, food delivery, and in-store payments. It offers cashback, rewards, and integration with Grab’s ecosystem.

• SingTel Dash: A comprehensive wallet for payments, remittances, and QR transactions, SingTel Dash is a reliable choice for businesses and consumers alike.

• EZ-Link Wallet: Extends the use of the EZ-Link card, enabling payments for public transport and retail purchases, offering convenience for everyday transactions.

How digital wallets in Singapore compare

Digital wallets in Singapore are designed to meet different needs, but they can be broadly grouped into four categories:

• Bank-affiliated wallets: Solutions like DBS PayLah! and OCBC Pay Anyone provide strong security and easy integration with Singapore’s financial systems. 

• Non-bank providers: Wallets like SingTel Dash focus on versatility, offering features such as remittances, insurance, and bill payments.

• Super apps: GrabPay exemplifies the super-app model, combining payments with services like ride-hailing and food delivery. 

• International wallets: Global players like Google Pay offer international acceptance and cross-border capabilities. These wallets help businesses attract a wider customer base, including international tourists.

How to pick a digital wallet

Consider these factors to make a considerate choice on which digital wallets to use, so you can help improve your security and save costs.

1. Security features and encryption protocols

Strong security is vital for safeguarding sensitive business transactions. Look for wallets that offer encryption, tokenisation, and biometric authentication.

2. Compatibility with your device and regional availability

Consider how device-specific wallets impact usage and security. For instance, Apple Pay only works on Apple devices, while Google Pay is compatible across platforms. Ensuring compatibility across devices and regions ensures employees can access funds wherever they are.

3. Fees and service agreement requirements

Understanding the fee structure is essential to avoid unexpected costs. While global wallets like PayPal may charge higher fees for international transactions, regional wallets often provide more cost-effective solutions for local use.

4. Customer support options

Effective support can resolve issues quickly and prevent disruptions. Bank based digital wallets are known for their reliable customer service, ensuring swift assistance with technical problems.  Look for providers with robust support systems to avoid downtime and maintain smooth operations.

Future trends in digital wallets

Digital wallets are beginning to offer advanced capabilities that extend far beyond payments. Here’s what you can expect in the near future:

Expanding capabilities with advanced features

Emerging digital wallet technologies, combined with advanced card features, are reshaping how businesses manage expenses. While wallets enhance security through biometric authentication and encryption, features like real-time expense tracking and card-specific spending limits are delivered by the corporate cards linked to them. Together, these tools give finance teams the control and visibility they need over company spending.

The rise of super wallets

Super wallets often combine payments with ride-hailing, eCommerce, and even financial products. For businesses, these platforms simplify financial operations by offering features like separate spending categories for personal and business use. Some platforms allow users to designate payments as business-related, ensuring the right card is charged and expense records are easily managed. This dual-functionality reduces administrative burdens and improves expense tracking.

Driving eCommerce and beyond

Digital wallets are transforming eCommerce by enabling faster checkouts and reducing friction. Outside e-commerce, digital wallets are also being adopted in industries like healthcare and travel, where they streamline processes such as payments and record-keeping, providing businesses with more efficient ways to handle operational costs.

Streamline global spend management with Airwallex Cards

Digital wallets can do more than store personal payment methods. They’re also powerful tools for managing business expenses. By issuing digital corporate cards to employees which can be added to digital wallets, businesses can streamline business spend management, allowing employees to spend from company funds, removing the need for out-of-pocket expense reimbursements. Businesses also gain better control over spending through individual card limits and controls, and visibility into spend as it happens.

Airwallex offers Business Account which can hold 20+ currencies in a company Wallet. Airwallex Corporate Cards can be issued to employees and used via digital wallets like Apple Pay and Google Pay. Employees can then spend directly from the multi-currency balances held in the Business Account, avoiding foreign exchange (FX) fees.

How Airwallex Corporate Cards support your business

1. Cut down on costs

Airwallex Corporate Cards allow businesses to avoid hefty FX and international transaction fees. Spend internationally from multi-currency balances held in your business account, with 0% foreign transaction fees. With access to interbank FX rates if you do need to convert currencies, you can save up to 80% on conversion costs.

2. Enhanced visibility and control

Issue cards to employees, set spending limits, and control purchases through merchant category code restrictions, all while tracking expenses in real time.

3. Link to digital wallets for greater flexibility

Once linked to a digital wallet, employees can use Airwallex Corporate Cards for online and in-person payments worldwide. Whether paying suppliers abroad or covering travel expenses, the process is efficient, secure, and easy to monitor.

By choosing Airwallex to manage business finances, businesses can receive and hold funds in multiple currencies, spend from these balances to reduce FX fees, and empower their teams with a business debit card that can be linked to digital wallets. Open an Airwallex Business Account today to optimise your global spend management and reduce costs.

Source:

1. https://business.bofa.com/en-us/content/digital-wallets-adoption-digital-payments-strategy.html