What is a digital Wallet?
A Digital Wallet, as the name suggests, is wallet that allows you to make payments and deposit money in a very simple way. Through an App provided by a mobile device or web application, and without the need to have your cards and bank information on you, it allows you to make payments with just one click. This is the usual and most recurrent way of using wallet technology, a technology that is becoming increasingly common and used by most financial applications in the Fintech sector.
Origin: When did wallets begin to be used and how have they evolved?
But, to get to the technological scenario that we are in now, and looking back, what is the origin of digital wallets and what were they like years ago?
The first example of online payment dates to 1994 with the purchase of a CD. Three years later, in 1997, Coca-Cola installed two machines in Helsinki that allowed the first contactless payments via SMS. In 1999, PayPal, whose founders included Elon Musk, launched its famous payment platform.
At the turn of the 21st century, Alibaba launched Alipay, which operated in China to make payments between its citizens. M-Pesa created the first payment system for mobile phones in 2007 and in 2009 the possibility of making decentralized payments with Bitcoin safely and without tracking was given. In 2013, the famous messaging service that operates in China and developed by Tencent, WeChat, launched WeChat Pay to be able to make payments from the same App. A year later, one of the most popular wallets, Apple Pay would see the light of day.
Digital wallets have evolved remarkably over time. It is true that the general thought is that the wallets have been focused directly to the consumer, or that they have been directed to a B2C market. This is partly true since daily transactions with digital wallet applications are growing remarkably. However, and we will see later in more detail, the Fintech sector is increasingly active and B2B solutions in this sector are more and more present.
There is the example of PayHawk, Pleo and Spendesk that provide a comprehensive expense control service without the need to access the usual banking service. Years ago, it was unthinkable. The evolution that wallets have had is amazing and the future is extremely promising.
How does a Digital Wallet work?
The main concept to understand in digital wallets is that they work through a banking provider, so, there must be a prior configuration in the mobile device App. The configuration for the wallets that we all know and are used by users daily is simple:
1.-First, you must add the data of the bank card where the App requires.
2.-Once that data has been entered, the App recognizes if the provider is authorized to operate as a digital wallet in that App. If so, the card will be configured and ready for use.
3.-The data, for the safety of the users, is not shown in the App nor is it saved.
However, there are other types of wallets that are more focused on B2B. In these cases, the process is not the same:
1.-Companies must access the platform that provides this service.
2.-You must enter the relevant data for the creation of a virtual IBAN on the platform and thus be able to operate.
3.-The platform will become a new banking service without having to enter the usual bank website. Transactions will be carried out in a more practical way. You can review movements, perform operations, grant permissions, etc.
With the configuration done and with the App ready for use, what technologies does a Digital Wallet use?
Wallets normally use the wireless connection of mobile devices such as Bluetooth, Wi-Fi, etc. In the case of digital wallets, this connection is made mainly in three ways:
1.-QR Codes: Focusing the camera on the code shown on the device that receives the payment, the payment method is activated.
2.-NFC: Near Field Communication. Allows two smart devices to connect through the electromagnetic signals. Thus, the device that receives the payment receives information from the device that issued the payment.
3.-MST: Magnetic Secure Transmission. It is the same technology that use dataphones to receive payments via credit or debit card.
4.-SEPA Payments: Some existing Wallets are currently connected directly to the banking infrastructure. In the case of Europe, to the SEPA network. Allowing to make SEPA transfers through the wallet.
5.-ACH: In the United States, the equivalent of the SEPA payment network would be the ACH (Automated Clearing House). Wallets connected to ACH infrastructure in the United States allow payments to be made through the existing bank payment network in the United States.
6.-SWIFT: A wallet can also be connected to an international payment network, for example, SWIFT, or any cryptocurrency that allows the movement of money globally.
Once one of these methods is used, the bank that supports your App receives the transaction information, validating the payment and making it in a safe and simple way.
First, it should be noted that there is not just one type of digital wallet. There are mainly two types of wallets: open wallets and semi-closed or closed ones.
The first ones are commonly used to make online purchases, contactless payments, and all kind of recurring daily payments that we can make, including cash withdrawals from ATMs.
In the case of closed or semi-closed wallets, their use is different. It only allows you to carry out transactions in stores where that type of wallet is accepted.
Now, the uses that can be made of digital wallets are extensive. It can be used from cash withdrawal to cryptocurrency trading. Therefore, we will see what the most common uses are:
Wallets for financial management applications or payments between friends
It is common to download financial management applications when we go on vacation with friends, family, etc. Verse or Tricount, for example, are Applications that allow you to manage your daily finances and the debts you may have with the people you are sharing the expenses with. The times you must pay the debts, you can do it directly from the application with the IBAN or even with PayPal. To do it directly with the IBAN, the recipients and issuers of the payment must have the bank details previously registered in the application. Once everything is registered, the payment process becomes something agile and simple for users.
Wallets behind corporate debit cards
The debit card is an excellent tool to be able to make the daily payments. Now with the option of entering the card data on mobile devices, as we have mentioned before, it is not necessary to go out with the physical card, but we can have it in our terminals.
Wallets behind Iban virtual accounts to make B2B payments
Digital Wallets are already here to add value to companies in B2B payments. The traditional payment method leaves a lot to be desired due to its lack of fluidity and unsatisfactory user experience in many cases. PayPal provides quite fluid solutions, however, more and more organizations (especially in the United States), integrate their payment platforms to the banking infrastructure, enabling payments to be made between companies outside the banking interfaces. Examples of these would be Bill.com, Melio, Routable, Modern Treasury, among others.
Wallet in cryptocurrencies
The wallet in cryptocurrencies is a kind of key that gives us access, on the one hand, to store cryptocurrencies and, on the other, to carry out transactions with them. This type of digital wallet is protected with passwords that must be well taken care of since it is the door that gives access to all the cryptocurrencies you have. There are mainly two types of wallets in cryptocurrencies: Public and private. With the former, based on a public key that can be shared with other users, you can receive cryptocurrencies without running the risk of having your funds extracted. With the second, known as a private key, only you can have access, that is, it is like the pin of your bank card. If others know the key, you risk your funds being siphoned off.
What applications today use wallets?
In the increasingly common use of digital wallets daily, more and more applications are being added that support this type of service. Apple Pay, Google Pay, Samsung pay, Paypal, etc. In addition, from these platforms, purchases can be made from different famous applications such as Airbnb, Booking, American Airlines, Apple Store, etc.
Where do the wallets come from? Who generates them?
We are attending an era where the traditional infrastructure of banks has become practically obsolete. More and more companies in the Fintech sector are emerging with an alternative solution to the traditional one. With the integration of banking services in a single site without the need to be redirected to the current bank websites (embedded finance), more and more organizations are providing this kind of digital wallet as a solution to a reality that is very different from what it was before. some years.
Closely related to this is banking as-a-service, a great solution for B2B transactions. The Fintech ecosystem is also becoming stronger in Europe, especially in the United Kingdom, Germany, and France. As we have mentioned before, it is shown as a real alternative solution to the old bank model, notably accelerating the digitalization of financial services.
What are the advantages and disadvantages of using digital wallets?
Next, we will show the most common advantages and disadvantages with the use of digital wallets in our day to day:
-Agility: In a simple way you can make transactions quickly with your mobile device.
-Security: By not having the cards and keys on you, the risk of theft is reduced. Also, to access applications, most smartphones use facial recognition or fingerprint recognition.
-The saving of time is considerable since it allows making transactions from the mobile. There is no longer a need to go to a bank branch or fill out paperwork to make transactions.
-You still must enter the data manually in the wallet since it is not fully automated with the banking applications.
-Theft or loss of mobile phones is very common today. In that case, you will have to lock everything and start from scratch again on another device.
-Still, all establishments are not up to date and many lack this service, especially small businesses.
Snab as a cloud platform for managing and automating payments, collections, and treasury connected to the banking infrastructure.
Snab is a pioneering platform in Europe as it embeds banking infrastructure within the platform, allowing customers to connect their existing banks. In addition, Snab uses wallet technology for some specific use cases, such as paying bill remittances in one click. In addition, thanks to the automation of processes, Snab avoids inserting invoice information manually in the system. Both the payment information and the payment itself is fully digitized, thus avoiding all the manual processes that were previously necessary to pay bills.