Everything seems to have an “e” in front of it these days. eCommerce. Email, eCheck, eDating, etc. And one of those things is the e-wallet. For your edification (a word that really does start with e), this letter stands for “electronic.”
But really, it symbolizes that the internet is the landscape in which said activity takes place. Although this is not entirely true of e-wallet technology, obviously electricity is still involved. And so are radio waves.
Powered by some of the same technology that made the telegraph obsolete, e-wallets are changing the face of retail, restaurants, and even service-based businesses. But as with anything else, it can be hard to embrace new technology.
Thankfully, good business owners are quick to embrace ideas that increase their business. Let’s take a look at how this particular type of technology can facilitate instant payments and increase customer satisfaction.
The Old Leather Way of Making Payments
Mobile wallets, as they are also called, store debit and credit cards in your phone. It is not a physical wallet that holds actual plastic cards, but rather, an application that stores card information. When the app is opened at the point of sale, and the phone is held within a few inches of the payment system hardware, the transaction occurs.
Compare this to the traditional method of making a credit card or debit card payment in a retail setting. A customer hands over merchandise or prepares to complete payment for a service. The cashier inputs this information and presents the customer with the cost.
The customer then reaches into their pocket, pulls out their wallet, opens their wallet, and rummages around for the right credit card (among old receipts). Then they swipe the card through the POS terminal (which will soon not exist as a payment option) or insert the EMV chip into the terminal.
They can also wave the card over the terminal if they have a contactless card. This last option is the most similar to mobile payments. But they still have to find the card and pull it out. The whole affair can take up to 20 seconds, or perhaps even a minute for someone with skinny jeans (no insult intended, you do you).
Consumers Always Have Their Phones Nearby
What if there was a way to make faster payments with limited risk? That’s where mobile wallets or e-wallets come into play. All the customer has to do is open the app and bring the phone close to the POS terminal. The payment is completed and everyone can move on with their day.
One reason this works really well in today’s marketplace is that 84% of households have at least one smartphone. Hopefully, more than one, if sharing a bathroom tells us anything about human behavior (particularly teenagers). And people tend to always have their smartphones out. In fact, 74% of people can’t bear to leave it at home.
How Are E-wallets Set Up?
Now back to the mechanism of how e-wallets work. Apple and Google have digital wallet applications on their phones— Apple Pay and Google Pay—and some banks offer digital wallets in their banking apps. Depending on the application, the device stores the card information within its software or it may be stored in a data cloud.
There are closed, open, and semi-open digital wallets. Closed wallets are tied to one company and are typically only used for transactions on that platform. Examples of these types of proprietary wallets include those provided by retailers like Amazon, Walmart, and Target.
Open mobile wallets allow you to store card information from multiple financial institutions, such as different credit cards and debit cards. And semi-open wallets, while provided by one specific company, may allow you to make payments at other businesses.
How Do E-wallets Work?
Most wallets are set up to be server-side wallets as opposed to client-side wallets. This means the payment information is stored remotely (in the cloud). The companies that manage these data clouds have extensive security measures in place to defend them.
Cloud data security itself is a $78 billion industry. In fact, card information stored on server-side e-wallets is arguably more secure than physical plastic cards in your wallet (and easier to find).
When a customer initiates a payment, they will open up their password-protected secure e-wallet and select the card of their choice. The process of uploading these cards has already occurred and involves inputting card information or (in some apps) just taking a picture of it.
By using an e-wallet, the customer can complete an online transaction without exposing their credit card information, as the e-wallet acts as a proxy, generating a unique token for each transaction. The e-wallet creates a secure layer between the user’s credit card information and the merchant.
Bring in the Hardware: Radio Waves
Now the hardware goes to work. The application prompts an NFC or near-field communication chip inside the phone to communicate with the payment terminal. This is the technology used by Apple Pay and Google Pay.
NFC devices use short-range radio waves to communicate. This means that nobody can interfere in the transaction unless they are standing uncomfortably close to you. And maybe breathing very heavily.
NFC technology is in the same genre as RFID (radio frequency identification). Which is used by plastic cards with a contactless chip. However, there are some subtle technical differences. Suffice it to say that the NFC chip essentially makes the phone into a contactless card. Which can be waved over the payment terminal.
Some digital wallets (as they are also called) use a technology called magnetic secure transmission or MST. This method generates a magnetic signal instead of radio waves. Which is sort of a cross between payment technology and the old-fashioned swipe. Samsung is one company that uses this technology, although they also use NFC.
Credit Card Skimming
In continuation of how e-wallets work, we should address the question of their security. e-wallets use something called encryption technology to facilitate the change of information with the POS. Types of encryption vary from device to device, but in general, they have the same basic premise: protecting sensitive data.
That sensitive data (in this case) is credit card information. To understand the benefit of encryption, let’s take a look at the old magnetic strip way of making payments, and its particular susceptibility to something called skimming.
Skimming is a type of credit card theft where a criminal will install an actual device in POS terminals that collects information from credit card swipes. The magnetic strips on credit and debit cards contain static (unchanging, permanent) information about the card: number and CVV, for instance.
A skimmer can install their device at something like an unsupervised gas station. Then they can move to a nearby location, perhaps a vehicle. The skimmer will collect customer data without customers knowing. This data is sent to the criminal, who can then use it to shop online, or even create fake cards.
Encryption Keeps E-wallet Payments Secure
Now onto encryption methods and how encryption works (in broad terms). Card information is translated into meaningless, one-off pieces of randomly-generated information through an encryption algorithm. This encryption cannot be deciphered back into relevant payment information unless someone has the keys to decrypt it.
Card networks can encrypt and decrypt this information using their private key. Cryptographic keys generally facilitate transactions in two ways: symmetric encryption versus asymmetric encryption. Symmetric encryption means that both parties (sender and receiver) have the same symmetric key. Asymmetric encryption means different keys are used by the sender and receiver.
That discussion begins to veer off into some technicalities about different ways of transferring data. Suffice it to say that payment information sent with a mobile wallet is totally obscured.
Moreover, it’s ultimately meaningless for future transactions because it’s only a one-off exchange of information. As a result, criminals cannot sneak in and steal any data at rest on the card or wallet, because that data is only relevant for immediate payment.
What Are QR Codes?
QR codes are checkerboard patterns that customers can scan with their phones. They are then prompted to a payment gateway where they can complete their payment. If they don’t have a digital wallet, they will have to input this payment manually. But if they do have a digital wallet, the payment information will automatically populate.
QR codes take longer to complete than mobile payments conducted over a POS. But they have certain advantages in certain settings. For instance, if you have a QR on a business card, you can give it to a client at the end of a meeting, and they can make a real-time payment right then and there.
Alternatively, if you are a business owner and want to open a pop-up shop at a mall kiosk or festival, you can use QR codes to have customers complete payments. Note that the drawback to this method is that it will only work if their phone has battery power.
Incidentally, that’s a drawback to e-wallets and mobile payments in general. Thinking ahead, it may behoove you to have some wireless charges in-store, or if you are at something like a festival, solar-powered chargers. You should also have a small POS you can plug into your own phone to take payments. Which is a piece of hardware your payment processor can provide.
Restaurants Love Mobile Payments
Restaurants are finding some serious benefits to mobile payments and e-wallets, particularly through the QR code. The QR code can guide the customers to a menu or ordering application.
Despite what you may think, this does not necessarily cut out the need for a waiter who can answer questions and make recommendations (which is really what a good waiter does anyway if they want good tips).
When the meal is done, the diner can even complete their payment by using the QR code, instead of handing their physical card to the waiter. Although it’s a ritual immortalized by American Express (and Diner’s Club before that, for those who remember), it was (and is) also a security concern.
Mobile Wallets Can Make Your Business More Efficient
QR codes can facilitate the settling of the tab right from the customer’s phone. If they have digital wallets, the checkout process will be even faster. The upshot for restaurants is that turning tables (not literally, but clearing them for the next party) is more efficient. Collecting a tab the old-fashioned way can add even as much as 5 minutes to a dining experience.
If you’re a restaurant (or bar) owner, picture what 5 minutes could do in terms of turning tables and getting waiting customers to sit down. Now (as a point of interest) picture a large chain restaurant like the Cheesecake Factory (what can we say, everyone loves Cheesecake).
Picture how many more customers they can get in on a busy evening. Now multiply that by their hundreds of locations. Cha-ching! All thanks to mobile wallets (and QR codes). This is probably why 52% of restaurants are already using QR codes.
What Do Consumers Think About E-wallets?
Now onto the real reason that e-wallets have a competitive edge: consumers. As they say, the customer is always right. Of course, you’ve probably run into a number of customers who aren’t right…but that’s not what you tell them if you want to keep their business.
In any case, consumers love mobile wallets, and smartphones in general. Smartphone users may spend an average of 4 hours or more on their phones per day, checking them dozens (or hundreds) of times. As many as 80% of consumers use their phones even while shopping in a brick-and-mortar location, presumably checking for coupons and discounts.
Around 70% of consumers believe that mobile wallets are going to become the normative way to make payments. If some states shift to allowing ID cards and driver’s licenses to be stored on mobile wallets, this will likely accelerate the trend toward their exclusive usage.
Some rewards wallets also offer points, while others can offer flexible financing options such as BNPL, or buy now, pay later. BNPL applications are often serviced by third parties (Klarna, Affirm, and Afterpay), or via the merchant with a POS loan. However, some companies offer flexible financing or even credit cards through their mobile wallet, such as Apple.
Do You Need the Internet to Accept Mobile Wallet Payments?
Thankfully most tech and fintech companies have foreseen this problem and set up mobile wallet tech to facilitate payments without internet connectivity. Some wallet applications may still require an internet connection, but most do not.
The main piece of technology connecting the phone to the POS is the NFC chip embedded in the phone. Which can be operated independently of the internet. And moreover, the phone needs to be held within a few inches of the terminal, making it far different than Bluetooth technology.
The same is true for your POS terminal. Card networks are not part of the greater internet. They are a separate set of closed networks managed by Visa, Mastercard, Discover, and some dude with a Roman Centurion Helmet (we refer to Amex). You can accept mobile payments just as you could accept traditional plastic payments, without internet connectivity.
Are There Any Downsides to E-wallets?
First from the consumer end of things: e-wallets are not accepted everywhere. While most large companies and franchises now accept e-wallets, small businesses may not. Incidentally, if you can start accepting digital wallet payments, that will give you a competitive edge over other small business owners who are not set up to do so.
Another potential downside for consumers is similar to the downside of credit cards: the ease of mobile wallet spending may facilitate overspending. Studies have shown that consumers do tend to make much larger purchases when paying with cashless methods, of which a mobile wallet application is one.
Finally, the last obvious downside is that a phone needs to be on. If a phone has run out of battery power, no payment can be made. This is why your POS terminal should still accept traditional plastic cards. And it’s also why you should consider having wireless chargers near your point of sale, or at least somewhere in your store.
There are not really so many security downsides to mobile wallets. The application often needs to be unlocked with a password, and companies are shifting to biometric locks. This means that even if a criminal steals the phone or finds a lost phone, they cannot use anything in the wallet.
But as mentioned, mobile wallets are arguably more secure than traditional plastic for a few reasons. One is that the stored information is well-defended (and often encrypted, to boot). Another is that the transactions themselves are encrypted and the exchanged information only relates to the immediate sale.
E-wallets: A Wrap-Up
e-wallets are convenient for consumers who are always on their phones anyway. They are secure. They make for very quick payments. And they can integrate with points or alternative types of financing.
For all these reasons, mobile wallets are (as 70% of consumers believe) probably the way of the future. At least when it comes to taking payments.
If you have any questions about how mobile wallets work, how much they cost to accept, and the hardware behind collecting mobile payments, give us a call. Alternatively, you can fill out the contact form below. We’d love to hear from you and discuss this easy way of making payments, which more and more consumers are using.
