When was the last time you whipped out your checkbook to pay for something? Like many people in 2022, the odds are you may write one check per month: to your landlord. The world of money is constantly changing, and so are the ways in which we use it. From the big box store to the corner store, you don’t need a wallet or even a physical credit card to pay for services or items. With a smartphone and digital wallet set up, you can just tap. Digital wallets have become ubiquitous — that’s why it’s important to understand what they are, how they work and some of their pros and cons.
Digital wallets are software-based mobile payment platforms that securely store users’ payment information. This happens through the use of a technology called near-field communications (NFC), which allows two devices to exchange information if they’re in close proximity (on the merchant side, one example of an NFC-enabled device is a Square terminal).
Digital payments have grown increasingly popular for merchants and consumers, and the pandemic forced this trend into new territory. Some businesses even stopped accepting cash payments to mitigate health concerns and stop the chance of spreading germs through paper money. It's also eliminates the risk of cash theft and losing credit/debit cards, making it a much more secure form of payment. This has forced many people (not just technology early adopters) to take a more digital approach to payments. In fact, you’re probably using more digital wallets than you realize, for example:
Unsurprisingly, cryptocurrencies are stored in secure, digital wallets. Instead of credit and debit card information, these digital wallets store private keys, which are secret numbers that give access to cryptocurrency holdings stored on a blockchain. They’re large, randomly-generated numbers with often hundreds of digits, which helps to keep users’ information and money secure.
If all this sounds extremely tech-y, don’t forget: The beauty of digital wallets is you don’t even need a bank account to use one. Forget debit and credit cards. Digital wallets can also store gift cards, loyalty cards, plane tickets, concert tickets, and even coupons. The convenience of storing everything in a digital wallet means you don’t need to rummage through a disorganized bag for a gift card or search through your email inbox for plane tickets — or worse, risk forgetting/losing printed tickets.
Merchants love digital wallets because they make it easy to accept payment from anyone with a smartphone. It’s especially smart for online retailers, seeing how a staggering 54% of global web traffic comes from mobile phones. Digital wallets make the buying process seamless for users (no need to input your 16-digit credit card number and shipping address every time you make a purchase). The tradeoff here is a loss of privacy for consumers. Digital wallets help retailers collect consumer data and purchasing habits online and in-store. If you’ve ever wondered why online ads feel eerily bespoke to you, purchases made with a digital wallet might have something to do with it.
In addition to being a secure storage system for payment information, the most significant upside to digital wallets is how they improve financial mobility for unbanked and underbanked communities. An estimated 5.4% of U.S. households (approximately 7.1 million) were “unbanked” in 2019 (meaning that no one in the household had a checking or savings account at a bank or credit union), and another 16% of people in the U.S. were underbanked (meaning they didn’t have sufficient access to banks). In other words, for nearly one-quarter of the American population, the ease of storing, accessing and using money is much harder than it should be. Digital wallets — in all their forms — can expand financial inclusion and services for people as long as they have a smartphone of any kind and internet access.
Now that’s something you can take to the bank.