21/08/2024
Digital Wallet: how do they work & where?๐
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What is a Digital Wallet:
A digital wallet, also known as an electronic or e-wallet, is any application that enables individuals and businesses to make transactions over computer networks using multiple payment options โ credit and debit cards, preloaded funds, cryptocurrencies, Buy Now Pay Later (BNPL), etc.
To ensure safety, e-wallets apply several layers of protection, such as data encryption, multi-factor authentication, and tokenization (the app replaces real payment details with a unique token)
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Basically, there are 3 distinct groups of B2C wallet apps:
1๏ธโฃ ๐ฃ๐ฎ๐๐-๐๐ต๐ฟ๐ผ๐๐ด๐ต ๐๐ฎ๐น๐น๐ฒ๐๐; commonly designed as mobile-first, keep tokens that link to your credit and debit cards instead of storing sensitive data or money directly.
They donโt take part in moving funds. Once a transaction is initiated, such apps just pass encrypted information to a merchant โ hence, the name.
In the course of further payment processing, the token travels to a payment network to be decrypted and checked against the actual card or account information in the issuing bank. After verification, the payment gets approved and sent to a merchantโs acquiring bank.
Known for high security, pass-through wallets act essentially as extensions of credit and debit cards, so they are more widespread in regions with high card adoption, such as Europe and North America.
Major examples: Apple Pay, Samsung Electronics Wallet, Chase Mobile app
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2๏ธโฃ ๐ฆ๐๐ฎ๐ด๐ฒ๐ฑ ๐๐ฎ๐น๐น๐ฒ๐๐; also house tokenized payment details but donโt transmit them anywhere. Instead, they perform transactions in two stages.
At the funding stage, the wallet acquires money from a customerโs bank account, credit line, or other source. Then, at the payment stage, it sends funds to a merchant.
In this scenario, a wallet provider can make additional fraud assessments. At the same time, a payment network or card issuer may know nothing about details of a particular transaction that are disclosed during operations with pass-through solutions.
Major examples: PayPal, Google Wallet, Cash App (US & UK).
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3๏ธโฃ ๐ฆ๐๐ผ๐ฟ๐ฒ๐ฑ ๐ฑ๐ถ๐ด๐ถ๐๐ฎ๐น ๐๐ฎ๐น๐น๐ฒ๐๐; work as prepaid cards. Before making a transaction, a user must load money to a walletโs balance from a bank account, debit or credit card, via peer-to-peer transfer, etc.
The availability of funding sources differs across providers, depending on the location and targeted users. A merchant withdraws money directly from the wallet
Stored wallets are especially popular in unbanked & underbanked countries since they enable people to deposit money without having a bank account
Major examples: Apple Cash (US only), Alipay, WeChat Pay, Paytm Wallet (Indiaโs largest platform for instant payments) & work of art merchant wise โ Starbucks โ๏ธ
