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Reasons digital wallets are destined to be ‘the’ payment process

The future of payments will be based on three things: versatility (online and offline usage), convenience, and security. Digital wallets provide all three.

September 4, 2015

By Nicole Chan

Money, taken at face value, is largely a symbolic one. It could be a herd of sheep, two loose pebbles or even a grain of sand; the value people agree to place on it has little to do with the physical value of money. The value of money was initially derived as a bartering tool and for the past 3,000 years has allowed civilizations to trade goods and services at rapid speed. Moving into the 20th century, money in the form of cash is slowly being eradicated by the advent of credit cards.

To offer a brief chronological history:

Cash

Fast forward from bartering to the exchange of cash money. Cash offered the benefit of being portable and, for the most part, held a consistent exchange rate. Cash continues to be one of the most widely accepted payment methods, but it is not without its downfalls. Because there is no way to prove a piece of money belongs to you, it is easy to steal or become the prize in a game of Finders Keepers. One major distinction: you can’t make online purchases with cash.

Even if you happen to be someone who prefers to live off the grid, you know that unless you keep all of your money stuffed in a mattress, cash has to be replenished. Banks have found a way to make you pay for the service of turning your digital money into paper money. This happens when you pay ATM or check cashing fees. In that way, cash costs more to use.

Checks

When wealthy business owners struggled to fit wads of cash into the pockets of their trousers, they came up with a new plan: checks. Writing a check was the equivalent of handing somebody one piece of paper instead of multiple bills. The delay between the transfer of the check and the transfer of the funds led to bounced checks and insufficient funds. The instant approval possibilities associated with debit and credit cards are making checks obsolete. From the consumers’ POV, nobody wants to be “that person” in the checkout line who fills in every blank on the check while everyone watches and waits to swipe credit cards. Bottom line: checks are slow and again, don’t work for online purchases.

Credit/debit cards

Enter debit and credit cards. That one piece of plastic that replaces a wad of cash or an entire checkbook is easier to carry, amongst other major advantages. The cards work at self-pay kiosks, gas pumps, and self-checkout lines. Additionally, some major credit cards are recognized and accepted internationally. Because the cards use a series of numbers as identifiers, they can be used to make online purchases, too.

Cryptocurrency

Speaking of online purchases, cryptocurrency is defined as a digital or virtual currency that uses cryptography for security. A buzzword you may have heard get thrown around: Bitcoin. The anonymous nature of cryptocurrency transactions makes them an extremely convenient replacement for a host of illegal activities. Early adopters have found this to be extremely variable; in use and also in value. Cryptocurrencies do not have a central repository so what was worth $10 on a Monday may only be worth $3 the next and maybe even completely wiped out by the following week. Not for the risk-averse.

Repurposing the wallet

A few of the most recognized technology giants have all recognized a need for transactions to be more convenient and safer in the long run. Apple is slowly implementing its much anticipated Apple pay (so far, limited to the U.S. and U.K.) and Google with Google Wallet. Most recently, South Korea’s household brand Samsung announced the launch of its mobile wallet service Samsung Pay in South Korea, a feature that will expand to the US in late September and has plans of rolling out into the UK, Spain and China in the near-future. Unlike Google Wallet and a few other earlier rivals, there is no need to unlock the phone and launch a separate payment app to get started; all you have to do is swipe up from the bottom and Samsung Pay will appear. As different payment technologies begin to roll out, the ease and time with which it takes to complete a transaction shortens, which is a good forecasting measure in expecting what’s to come.

What are banks doing?

In the United States alone, where smartphones account for more than half of mobile subscriptions, one-third of consumers are already using their phones to make mobile payments. Unfortunately for traditional banks, many of these payments are now transacted through mobile apps not controlled by them, but controlled by online-payment specialists and digital merchants; banks are facing the increasing pressure of being cut out of the payment process completely. It is imperative for banks to start competing and in doing so, meet the expectations of a growing digital population that expects better, faster and more convenient solutions.

Although digital wallets and credit cards work together, digital wallets will eventually be the primary means of payment for two key reasons: convenience and security.

Convenience: For the same reasons checks were more convenient that wads of cash and debit cards more convenient than checks, digital wallets are more convenient than credit/debit cards. Everyday consumers are already carrying their smartphones with them everywhere they go. Those miniature computers contain some of the most important things in life: pictures, contacts, email, music, directions, boarding passes, Internet access, and now wallets. Why carry an extra piece of plastic when you could have the same information on the most popular all-in-one device currently in existence: your phone?

Security: The second reason digital wallets will overcome credit cards as the primary means of payment in the future is security. This is the argument that will win over the slow adapters. Simply put, digital wallets are potentially more secure than credit cards. (The word “potentially” is included as a disclaimer because some individuals will not take advantage of all of the security features of digital wallets.)

Currently, your credit/debit card number exists on any number of data storage servers, all of which are subject to hackers and fraudulent activity. Think of all the places you’ve used your credit card number and you’ll begin to see how vulnerable your vital information is:

• Bank
• Utility company
• Supermarket
• Clothing store
• Gas station
• Movie theater
• Restaurants
• Retail establishments
• Charitable organizations to which you’ve donated
• Airlines
• Hotels
• Train station
• Toll authority
• Subscriptions
• Mechanic
• Drivers’ license office
• IRS
• Software developer (apps and programs you’ve downloaded for a fee)
• Post office
• Hair salon
• Doctor’s office
• Delivery driver

Unless each of these locations is set up with end-to-end encryption, your data is vulnerable. Just ask those impacted by the Target and Home Depot breaches. Even if you keep your credit card on your person, there is the possibility of dropping your wallet or having it stolen. The more places the number exists, the more vulnerable you are to becoming a victim of fraudulent activity.

Digital wallets use tokenization to keep your credit card number private, even from all of those institutions listed, by issuing a unique transaction code. If that’s not enough, by using the digital wallet on your smartphone, you have the opportunity to secure your information using biometric authentication. With biometric authentication, your phone or specified apps on your phone can only be accessed with a fingerprint scan. Since nobody else has your identical fingerprint, nobody else can access your information, even if your phone is lost or stolen. How much more secure could it be?

The future of payments will be based on three things: versatility (online and offline usage), convenience, and security. Digital wallets provide all three.

Nicole Chan is director of communications for Bindo, a retail technology company that provides an iPad POS system and soon-to-be launched online marketplace.