{"id":435,"date":"2025-03-17T19:34:04","date_gmt":"2025-03-17T19:34:04","guid":{"rendered":"https:\/\/www.techrepublic.com\/?p=4297905"},"modified":"2025-03-17T19:34:04","modified_gmt":"2025-03-17T19:34:04","slug":"digital-wallets-explained-the-pros-cons-and-how-it-works","status":"publish","type":"post","link":"https:\/\/blog.tecnoartesanos.com\/index.php\/2025\/03\/17\/digital-wallets-explained-the-pros-cons-and-how-it-works\/","title":{"rendered":"Digital Wallets Explained: The Pros, Cons, and How It Works"},"content":{"rendered":"
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Gone are the days of the leather wallet and chunky billfold. Instead, people are turning to digital wallets: mobile phone-, tablet- and smartwatch-based tools that securely store payment details and other information. This technology is used to make payments in a more secure fashion than traditional credit card swipes and cash.<\/p>\n

But there are other benefits too, especially for small business owners. Let\u2019s dive into what digital wallets are, how they work, and how they\u2019re going to help your business up its payments game.<\/p>\n

<\/span>What is a digital wallet?<\/span><\/h2>\n

A digital wallet is a virtual tool that allows businesses and individuals to store and manage payment information electronically through a secure app that encrypts payment info. This safekeeping eliminates the need to carry physical bank cards. Anytime you need to pay someone, you simply tap your smartphone or device and the digital wallet handles the rest.<\/p>\n

These apps are all the rage. Capital One\u2019s 2025 Digital Wallet Statistics research report <\/a>found that as early as 2023, 53% of American shoppers relied on a digital wallet more than a traditional version. Worldwide, there are over 3.4 billion digital wallets in existence, which will swell to over 5 billion by 2026.<\/p>\n

The benefits are mutual for consumers and small business owners. Digital wallets speed up transactions thanks to simplified checkout. They also avoid cumbersome cash transactions and reduce the risk of handling physical cards. These improvements can spawn increased revenue and happier customers.<\/p>\n

It\u2019s not all about the money, though. Digital wallets can also keep frequent flier points, loyalty cards, coupons, tickets, and personal identification documents close at hand.<\/p>\n

SEE: What is a Cashless Society?<\/a><\/strong><\/p>\n

<\/span>How do digital wallets work?<\/span><\/h2>\n

Digital wallets function by securely storing users\u2019 payment information. A person must first create a wallet, and then enable it on their smartphone using an app. Apple Pay and Google Pay are two examples of popular digital wallets. Once an account is created, they add their payment source details to the platform by either entering the information or using the phone\u2019s camera to scan all the relevant data straight into the app.<\/p>\n

When a person makes a purchase, the wallet charges a person\u2019s bank card or other source of funds. However, the merchant isn\u2019t privy to private data. Instead, the wallet sends the money to the business, cloaking actual account numbers. This eye for security protects everyone involved and makes it hard for fraudsters to lift credit card numbers.<\/p>\n

In-person payments via a digital wallet rely on near-field communication (NFC) to enable touchless transactions. For example, a customer can tap their smartphone to an NFC-enabled terminal to complete a purchase. Some wallets also generate one-time codes or use QR codes for added security.<\/p>\n\n\n\n
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Did you know?<\/strong> Digital wallets can also be used to pay for online purchases. Customers will just have to choose their digital wallet from the checkout options and either enter the transaction reference or scan a QR code displayed on the screen to complete the payment. Some are even more sophisticated and can be accessed outside of the app. For example, PayPal users can log on to their PayPal wallet from a web browser.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

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Digital wallets typically support multiple funding sources, such as credit and debit cards, cryptocurrency, and bank accounts. These options grant users flexibility over how they pay. For example, if a customer forgets their billfold at home, they can still pull up their preferred credit card on their smartphone.<\/p>\n

SEE: What is a Digital Payment?<\/a><\/strong><\/p>\n

<\/span>Types of digital wallets<\/span><\/h2>\n

Let\u2019s go over the three main types of digital wallets.<\/p>\n

Closed wallets<\/h3>\n

Closed wallets are specific to a particular company or brand. They allow customers to make transactions only with the issuer of the wallet. For example, Amazon Pay is a closed wallet that enables customers to store funds and perform transactions primarily within the Amazon ecosystem. There is limited use outside this realm. Small businesses yearning to exact control over their customers\u2019 transactions may offer closed wallets.<\/p>\n

Semi-closed wallets<\/h3>\n

Semi-closed wallets enable users to transact with a select group of merchants accepting the wallet. An example is Paytm, which allows customers to pay online and offline merchants, provided they are authorized. This type of wallet is ideal for businesses operating within a specific network of partners.<\/p>\n

Open wallets<\/h3>\n

Open wallets are the most versatile. They allow users to make payments across various platforms and stores, both online and in physical locations. Examples include Apple Pay, Google Wallet, and PayPal. This type is more conducive to small businesses because they reach a broader range of customers.<\/p>\n

SEE: Top 6 Mobile Payment Methods to Consider<\/a><\/strong><\/p>\n

<\/span>Pros and cons of digital wallet payments<\/span><\/h2>\n

Pros<\/h3>\n