In general, a digital wallet is a software application, usually for a smartphone, that serves as an electronic version of a physical wallet.
Google launched a product called Google Wallet in May 2011. According to Stephanie Tilenius, vice president of commerce at Google, the application has the potential for storing information on other cards, such as driver's licenses and health care cards. Other companies, including Visa, are also either researching or developing digital wallet products.
Because digital wallets are on devices that connect to the Internet, they will eventually be able to access much more information than could be carried in a physical wallet. Jenna Wortham describes the potential in a New York Times story about Visa's digital wallet:
"The company says that a customer's entire financial history could be securely stored in one spot, along with frequent-flier accounts, medical benefits, even appliance warranty information from Best Buy, replacing the jumble of account information that most people have stored in different locations -- on and offline."
In one scenario, for example, the health care card could connect to the owner's electronic health record (EHR), making his medical history immediately available in the event of a medical emergency. Such a capacity could have an impact far beyond the efficiency of current mobile-payments technology that allows a smart phone or vendor transponder to be used for wireless point-of-sale (POS) payments.
While the future of digital wallets may carry personal information such as electronic health information, today's digital wallet formulation largely involves retail information, such as payment methods and applications that enable consumers to get discounts, enter store loyalty programs and receive promotions via a mobile device that they can redeem at the store. These digital wallets, or mobile wallets, help customers pay on mobile devices and receive discounts and other offers.
Mobile wallets employ several technologies, including mobile apps, mobile hardware devices, near-field communication and security methods like tokenization to create a user-friendly, mobile and ostensibly secure payment experience. In some cases, in addition to apps and mobile devices, retailers are experimenting with using devices such as Beacons to send relevant information to consumers.
While mobile wallet technology is still being adopted incrementally, it has gained traction alongside the increasing use of mobile devices in e-commerce (in 2013, mobile devices overtook traditional PCs in online shopping) and the rise of the voice of the customer, whereby customers have more power in the interaction with companies in negotiating the terms of service.
Technologies being used for mobile wallet include near field communication (NFC), Bluetooth, WiFi, and RFI, a short-range transmission system. As of this writing, companies who provide mobile payment systems include Apple, Google, Samsung, PayPal and more.
Beacons are also being used in concert with mobile wallets. They use short-range, low-energy Bluetooth transmitters to send alerts to mobile devices within 100 feet of them. Beacons may tell consumers to redeem coupons, earn points or pick-up items on their shopping lists. When a consumer walks into a participating retailer, the store's beacon will communicate with the consumer's phone and highlight specials, discounts or coupons.
If a consumer makes a purchase, another beacon in the store's cash register can communicate with the pass in the consumer's mobile wallet.
One reason for incremental adoption of mobile wallets is concern about customer data security. Some providers, like Apple Pay and Google Wallet, use tokenization, which masks credit card information and is transaction-specific to prevent hackers from gaining access to consumers' personal data. The random sequence, or token, acts as a substitute value for the actual PAN while the data is at rest inside a retailer's systems. The security space is competitive, so it may take time for security standards to coalesce.
Still, consumers remain leery of using mobile wallet technology. They are, however, more likely to elect for it if they receive discounts and other perks in exchange.