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 Wallet, Google Wallet, and Samsung Wallet are popular examples of 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 providers in each region catering to their customers' cultural preferences. In the West, Apple Wallet and Google Wallet dominate as mobile wallets that securely store cards, IDs, and passes, working with payment services like Apple Pay and Google Pay. In parts of Asia, digital wallets like Alipay and WeChat Pay serve as full-scale payment platforms and financial super-apps, enabling transactions, money transfers, and financial services within a single ecosystem.

With over half the world’s population predicted to use them by 2026, it’s worth understanding how digital wallets can be a tool for businesses to streamline business spend management.¹

What is a digital wallet?

Simply put, a digital wallet stores your payment information securely on 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 Wallet, Google Wallet, and Samsung Wallet, which have led the mobile payment market. Platforms like PayPal and Venmo add a social element, making it easy to send money to friends, family, and 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 devices 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 authorize the transaction, eliminating the need to input card details manually.

3. Technology behind digital wallets:

• Near-field communication (NFC) securely transfers payment information between devices within proximity. Platforms like Apple Pay and Google Pay use this technology.

• Magnetic secure transmission (MST) generates a magnetic signal that replicates the swipe of a card. Samsung Pay has supported MST but is phasing it out in favor 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:

• To accept digital wallet transactions, payment terminals must support contactless payments or QR codes.

• The wallet connects to payment processors, gateways, and banks to finalize 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. Finance teams gain control over spending limits and complete visibility over company spending.

2. Enhanced convenience for employees

Digital wallets can simplify business expense processes for employees by linking directly to business accounts or corporate cards. They allow staff to pay 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 authorized 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 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. Some wallets (like Apple Wallet) require an internet connection to connect cards but not to make in-person payments. However, businesses accepting payments must have internet-enabled POS systems to process transactions.

3. Potential risks with providers

While established digital wallet providers offer robust security, businesses must ensure they and 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 digital wallets

The digital wallet landscape is highly diverse, featuring options from local and regional banks, non-bank providers, super apps, and international players.

Here are five of the most popular digital wallets and payment services:

• Apple Wallet and Apple Pay – Apple Wallet is a digital wallet integrated into Apple devices that stores payment cards, transit passes, IDs, and more. Apple Pay is a payment service that allows users to make secure transactions using stored cards, leveraging tokenization, Face ID, Touch ID, or a passcode for authentication.

• Google Wallet and Google Pay – Google Wallet is a digital wallet that stores payment cards, IDs, transit passes, and more. Google Pay is a payment service that enables contactless transactions in stores, online, and apps.

• PayPal – A widely accepted digital wallet for online shopping, allowing users to link bank accounts and cards for seamless transactions without entering payment details repeatedly. PayPal also supports peer-to-peer payments and business transactions.

• Venmo – Owned by PayPal, Venmo is a popular peer-to-peer payment app in the United States. It enables easy money transfers between individuals and offers social features like transaction feeds. It includes security measures such as two-factor authentication and freezing accounts if needed.

• Alipay – A leading digital wallet in China, Alipay functions as a full-service financial platform. It supports contactless payments, QR code transactions, bill payments, money transfers, travel bookings, and financial services like loans and wealth management. Unlike Apple Pay and Google Pay, Alipay can hold stored balances and does not require a linked bank card for transactions.

How to pick a digital wallet

Consider these factors to decide 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, tokenization, 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, the corporate cards linked to them deliver features like real-time expense tracking and card-specific spending limits. 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 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 eCommerce, 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. Businesses can streamline spending management by issuing digital corporate cards to employees that can be added to digital wallets. This allows employees to spend from company funds and removes the need for out-of-pocket expense reimbursements. Businesses also gain better control over spending through individual card limits and controls and visibility into spending as it happens.

Airwallex offers a Business Account that can hold 20+ currencies in a company Wallet. Airwallex Corporate Cards can be issued to employees via digital wallets like Apple Pay and Google Pay. Employees can then spend directly from the multi-currency balances 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 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 optimize your global spend management and reduce costs.

Source:

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