What's in your wallet: digital wallets and the popularity of contactless payment
Issue 5 | 15 November 2023
Imagine wanting a cool drink on a hot day 🥵, but realizing you’d left your wallet at home. Luckily, you have your mobile phone and you can use that to buy your drink!
This was the scenario in 1997 when Coca Cola launched 2 vending machines in Helsinki, Finland that allowed customers to pay for their drink using a text message on their mobile phone. Coca Cola is generally credited with launching the first digital payment system - they created a digital payment processing system that would accept mobile payments.
Since late 1990s, there have been many digital payment innovations, which were further accelerated by the advances in mobile phone technology. Nowadays, mobile phones are used for a variety of activities - from making and watching digital content to storing and making payments via a digital wallet. In fact, you can use your digital wallet to buy drinks from a vending machine using the tap and go functionality.
In this post, we look at the digital wallet and their popularity in the payment ecosystem, given that their usage increased as contactless payments surged in the pandemic.
What is a digital wallet?
Digital wallets (or e-wallets) are apps or online services that allow consumers to make payments electronically, typically through a mobile phone. Digital wallets store credit cards and payment information as wells as other items that would be stored in a traditional wallet - driver’s licenses, gift cards, tickets for entertainment events, boarding passes and public transit cards. They are generally considered to be more secure than a traditional wallet.
Digital wallets aren’t bank accounts, but some wallets may hold a cash balance that a customer can top up with a debit card or add via their bank account.
The popularity of digital wallets and the fall of cash as king
According to a 2023 Forbes survey, 53% of Americans use digital wallets more often than traditional methods. Digital wallets were already gaining popularity, but the shift towards contactless payments in the wake of the pandemic, has further accelerated their popularity.
Across the globe, digital wallets have become the preferred payment method for both e-commerce and point-of-sale (POS) transactions, overtaking credit and debit cards. Cash usage on the other hand has continued to decline, and while there will still be pockets of cash usage, digital wallets will account for 54% of e-commerce transactions and 43% of POS transactions in 2026 per FIS.
Some of the factors that are driving the popularity of digital wallets are:
Customers want a seamless checkout experience: Customers want simplicity and speed during the checkout process, which explains why digital wallets have gained popularity over traditional wallets
Merchant acceptance: As digital and contactless payments usage surged in the pandemic, more merchants began offering digital wallets as a payment option. In fact, in 2021, 56% of US retailers accepted digital wallets for payments
Shift towards digital payments, away from cash: The proliferation of e-commerce and the shift away from cash as primary payment method has also helped drive the usage of digital wallets
How do digital wallets work?
To use a digital wallet for purchases, customers unlock the wallet app using facial recognition, fingerprint ID or a PIN code, and then select the stored payment method they want to use (e.g., credit card).
For e-commerce transactions within a merchant app, the customer selects the digital wallet of their choice as well as the payment method stored in the wallet, and then continues through the merchant’s checkout process to complete the payment.
For POS transaction, digital wallets use wireless, Bluetooth or magnetic capabilities to transmit payment information from the customer’s mobile device to the POS terminal or card reader. To complete the payment transaction, customers unlock their mobile devices, select their payment method and hold the device near the card reader. Digital wallets leverage contactless payment technologies for POS transactions, such as:
📱 Near -field communication (NFC): NFC is a contactless technology that enables the secure transmission of payment information between the digital wallet and the POS device without physically making contact.
🧲 Magnetic secure transmission (MST): MST is a technology that allows smartphones to emit an encrypted signal that functions like the magnetic strips found on the back of debit and credit cards. Digital wallets use MST to transmit the payment data to the card reader when the mobile device is tapped or held in close range
🏽Quick response (QR) codes: QR codes are matrix barcodes that the customer can scan using the camera on their mobile device. Once the codes are scanned and the customer confirms the purchase, the codes are used to make payments
Once the payment information is captured using one of the aforementioned technologies, the digital wallet will tokenize the payment information and the payment will be processed.
To learn more about how tokenization works, you can read the recent post on tokenization.
Digital wallet wars
Digital wallets are used as a mainstream payment method, especially since the launch of Apple Pay (encompassed in the Apple Wallet) in 2014. Other tech companies, such as Google and Samsung have launched their own digital wallets - Google launched their first Google wallet (Google Pay)1 in 2011 and Samsung launched Samsung Pay (now Samsung wallet) in 2015.
Device based wallets (e.g., Apple Pay, Google Pay, Samsung Pay) are not the only digital wallets available in the US. In fact, PayPal is the most popular US digital wallet used by 71% of US adults according to Capital One Shopping Research, which is greater than the share of customers that used Apple Pay or Google Pay.
Internet of thing (IoT) devices, such as smartwatch companies like Fitbit are also offering their own version of digital wallets, as are certain retailers like Target and Walmart.
On the other hand, banks have tried to offer digital wallets to their customers with limited success. For example, JP Morgan Chase launched their digital wallet Chase Pay, a QR-based digital wallet, in 2015. However, JP Morgan Chase discontinued Chase Pay in 2020, due to limited acceptance at merchants. According to a PYMNTS.com study, Chase Pay was accepted by less than 1% of merchants as of mid-2019.
The big banks are taking another crack at digital wallets, with a consortium of banks like JP Morgan Chase, Wells Fargo and Bank of America banding together. These banks will offer a digital wallet called Paze (expected to launched in Q1 2024), which will allow shoppers to shop online without sharing their credit card information.
Benefits of digital wallets
There are key benefits of digital wallets that are driving increased usage amongst customers and acceptance amongst businesses:
🔒 Security: One of the main benefits of the digital wallet is that there is added security for credit and debit cards that are stored and used for payments. Digital wallets leverage a process called tokenization, where they replace the credit card’s primary account number (PAN) with a unique token. In the event that the token is intercepted, the underlying card information stays secure as the tokens are useless by themselves
👍 Convenience: Customers appreciate the convenience of storing forms of payment in their mobile device, meaning they have to carry less in their traditional wallet or they can even leave their traditional wallet at home. Adding payments forms to the digital wallet is extremely easy as well - customers can either scan their card or enter their information manually in the digital wallet app
💨 Accessibility: The use of digital wallets lends itself to a more efficient checkout process. Customers are able to seamlessly pay for purchases or pay bills. Businesses that accept payments via digital wallet at POS have seen increased efficiency using contactless payments from digital wallets, including reduced customer wait times and increased customer turnover
Digital wallets: the next frontier
Almost a decade after Apple Pay launched, digital wallets are pervasive and are evolving to encompass use cases beyond payment cards. Digital wallets are already being used to store entertainment tickets, airline boarding passes and identification.
In 2021, Apple announced that customers would be able to securely add their driver’s license or state ID to their digital wallet. Arizona and Georgia were the first states to allow their residents to add digital IDs to their Apple wallet, with additional states (Connecticut, Iowa, Kentucky, Oklahoma and Utah) planning to offer this capability. Google is following suit with an announcement that they will start rolling out the driver license feature in their digital wallet as of 2023.
It seems that Big Tech’s strategy is to leverage the digital wallet for digital identification, reducing or eliminating the need to carry a traditional wallet. It remains to be seen how banks will leverage digital identification, especially given the vast amounts of money that they spend on Know Your Customer (KYC) requirements. Combining payments and digital identification in a digital wallet could be the next logical step.
Google wallet was first launched in 2011 and only supported Mastercard cards from Citi Bank. The Google wallet has been through many iteration since its initial launch - Google launched Android Pay in 2015, which was built on the original Google wallet base. Eventually Google merged Android Pay and the Google wallet into Google Pay in 2018, and rebranded the offering as Google wallet in 2022, which was positioned as a comprehensive digital wallet