In this era of contactless interactions and transactions, many products are changing how we do things, especially in finance. And these game-changing software solutions don’t come better than digital wallets (or e-wallets).
Market projections estimate that the market for mobile payments and digital wallets could grow by 26% before the end of 2025. This explains why companies, retailers, and consumers now prefer these online wallet payments to in-person transactions.
But what is a digital wallet, and how does an e-wallet work?
In this article, we talk about e-wallet technology and how it works. Read on to discover the key features and benefits of digital wallets.
What is a digital wallet?
A digital wallet is a software program, online service, or electronic device that stores users’ payment data and processes payments. Apart from payment information, you can also store passwords, documents, boarding passes, and vouchers on your e-wallet.
How does an e-wallet work?
To understand the working principle of an e-wallet, let’s introduce a sample scenario. Here are the key players:
- Consumer (cardholder)
- Device (smartphone, iPad, etc.)
- Token requestor (powered by the payment service provider)
- Token service (VISA, VisaNet, etc.)
- Issuer (the bank).
Image source: Intellias
When a consumer enters their card details into a payment service provider like GooglePay, their device sends an authentication request to the token service via the token requestor. If the token service approves the request, they forward the transaction details to the issuer bank — and clear the transaction.
How to use a digital wallet
Think of your digital wallet as your standard leather wallet; it is empty until you start stuffing it with bills, coins, emergency phone numbers, pictures, and your Netflix password.
This same principle applies to digital wallets, with the only exception being that you need to create an account first.
So what is ewallet account?
An e-wallet account is a personal profile that gives you exclusive access to the contents of your wallet. You need unique login credentials to create an account and prevent others from gaining access to your funds.
That said, let’s explore how to make e-wallet payments. But hold on, let’s clear up one more term.
What is an e-wallet payment?
e-Wallet payments are transactions that emanate from your digital wallet without any need to pay with cash or swipe your card.
Now back to digital payments…
When you meet a point of sale (POS, like an online shop), you can place your phone close to the card reader to pay for goods or services. The POS interacts with your e-wallet app and confirms or rejects the transaction.
Types of e-wallets
Now that you know how to use a digital wallet, time to explore different e-wallet varieties.
Most people often misinterpret the e-wallet meaning as a software program that performs the same function across the board, but they vary in function and application.
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Open wallets
These are bank-issued wallets that allow users to send and withdraw funds without any restrictions.
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Closed wallets
These digital wallets belong to a specific merchant (company or business). Users can send money to the wallet but cannot withdraw (that would be stealing!).
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Semi-closed wallets
This example of e-wallet services allows users to conduct transactions as merchants. However, these payments are location-restricted based on prior agreement with the payment service provider.
Main benefits of e-wallets
Consumers are shifting their attention to digital wallets because “it is the future.” Apart from that, e-wallets offer more benefits than physical wallets in terms of data and useability.
So, let’s explore the advantages of using digital wallets.
1. Convenience
E-wallets allow users to make quick and easy in store payments without the need to carry physical wallet with cash, credit or debit cards. Transactions can be completed with a few taps on a smartphone via payment apps. You can transfer large sums across the globe at the click of a button. Besides, payment systems like Venmo allow users to add multiple accounts to their personal profiles.
2. Security
Losing your leather wallet in the subway can be a harrowing experience, especially when you have sensitive data in it like identification cards. Even when you store your passwords online, hackers can access them through phishing and malware attacks. But digital wallets protect your funds and sensitive data under layers of encryption and biometric verification (fingerprint or facial recognition) and two-factor authentication (2FA).
3. Speed of Transactions
Mobile wallets enable making payments fast and seamless. Whether paying for goods or services, transferring funds, receiving money, making online purchases, or even paying bills, the process is often instantaneous or much faster than traditional methods.
4. Reduced Transaction Fees
Some e-wallets offer reduced or no fees for certain types of transactions, especially for peer-to-peer payments or international transfers, making it cost-effective for users.
5. Rewards and Discounts
Many digital wallet providers partner with retailers to offer cashback, discounts, or loyalty rewards for using their platform, which can result in savings for users.
6. Personal finance tracking
E-wallets record your spendings and earnings. So, you can consult the app data to track your income. From this information, you can set spending limits to curb your expenses.
Disadvantages of electronic wallets
While e-wallets provide convenience and efficiency, there are several disadvantages associated with their use:
- Security Risks: e-wallets can be vulnerable to cyberattacks, hacking, or phishing scams, especially if proper security measures (like two-factor authentication) are not in place.
- Cross-Platform Restrictions: Some e-wallets, like Apple Pay and Samsung Pay, are limited to specific mobile device or operating system, reducing their flexibility.
- Internet Dependency: e-wallets rely on internet access. If you’re in an area with poor internet connection, you may not be able to use your wallet for purchase.
Popular e-wallets axamples
Popular e-wallet apps vary depending on the region, but globally, several major digital wallets are widely used. Here are some of the most popular ones: Apple Pay, Google Pay, Samsung Pay, Amazon Pay, PayPal, Venmo.
The relevance of e-wallets in 2024
Digital wallets have been flooding the market at an astonishing pace since the pandemic. As it stands, over 1 billion people have completed mobile payments from digital wallets.
Data from eMarketer also shows that 81% of consumers in China conduct all their online transactions and digital payments through mobile e-wallets.
According to Statista, consumers have used e-wallet payments to complete 6.7 million USD worth of transactions.
Source: Statista
Judging from the data, the annual growth rate is 12.2%, meaning that the projected value of transactions will surpass 10 million USD by 2025.
In terms of demographics, Gen Z and Millenials are championing the adoption of mobile payments and digital wallets. As a result, companies are adjusting their business models to meet the needs of this young consumer pool.
Despite the resounding promise of digital wallets, consumers across the globe still hesitate to use them for all their payments.
Data from Simon-Kucher and Partners shows that over 40% of US consumers are concerned about security. And judging from the spike in cybercrimes during the pandemic, these concerns are well founded.
Nevertheless, fintech companies are joining the e-wallet bandwagon — and for good reasons. With top digital wallet providers like Square and Venmo extending their services beyond e-wallets, fintech development companies relish the opportunity to create new digital wallet solutions to fill the gap.
Essentially, digital wallets are addressing the problems in the current socio-economic paradigm, and will continue to improve and adapt to consumers and technological advancements.
6 must-have e-wallet features in 2025
When creating an e-wallet, you need to include features that meet the needs of contemporary consumers. Knowing these features will help you spot the fitting e-wallet solution for your business or hire the right software developers to create your digital wallet.
Judging from current market trends and customer behavior, here are the essential e-wallet features to look out for in 2024.
Artificial Intelligence and Machine Learning capabilities
Any top-notch e-wallet should have AI and ML capabilities; these technologies form the bedrock of any modern e-wallet software. AI tools help you integrate admin panels and detect fraudulent activity.
NFC tag
NFC (Near Field Communication) is a protocol that connects two devices within a 4cm proximity. NFC-enabled devices can carry out contactless payments.
QR codes
Apps like Venmo have QR kits that allow consumers to pay for services instantly. Scan the QR code, and the system will redirect you to the target business’s profile to verify and complete the payment.
Location detection
e-Wallet apps use geolocation features to track the user’s location because some digital wallets are location-restricted. So, the app notifies you if your country of residency is not on the ‘whitelist.’
Two-factor authentication
Google Pay and Amazon Pay use two-factor authentication as an additional layer of protection for sensitive data. This security feature protects your money (and data) from hackers, even if they gain access to your password.
Biometric login
Biometric login is another layer of protection that every e-wallet must provide. In apps like Apple Pay, users can rely on fingerprinting and face ID technology to protect the contents of their digital wallets.
Intuitive dashboard
Digital wallets must have an easy-to-use dashboard that enables end-users to monitor their spending and track their card data. Also, the dashboard should be responsive on all mobile, tablet, watch, and desktop devices.
Rewards program
Google Pay allows users to track cashback and reward programs from their favorite brands. So, add this feature to your e-wallet solution to eliminate the stress of using third-party software to track these rewards programs.
Live chat
E-wallet apps must have Live chat features to assist customers experiencing technical difficulties.
White-label digital e-wallet software platform
Now, let’s embark on a tour of SDK.finance’s demo, where we’ll witness firsthand how this platform empowers developers to build powerful mobile payment and digital wallet apps faster, ushering in a new era of financial innovation and accessibility:
Conclusion
Digital wallets are the wallets of the future; they facilitate instant, secure, contactless payments in a fast-paced world. Users only need to attach their bank accounts to the digital wallet to pay for services.
Also, e-wallets can be open, closed, or semi-closed, depending on the user’s needs. Ensure to choose the perfect e-wallet service with advanced features and secure encryption protocols.
If you want a scalable e-wallet for your business, financial institution, or personal use, we have the perfect solution. Contact us right away to discuss how our fintech development expertise can help you create your own digital wallet solution or add one to an existing product.
