If I were to pick one thing dominating the world of payments today, impacting the daily lives of businesses and consumers alike, I’d say it is digital wallets. How significant is this global surge of digital wallets, you ask?

In less than two years, more than half the world’s population will be using digital wallets. Just last year, digital wallets accounted for 50% of e-commerce purchases and 30% of in-store purchases compared to credit and debit cards at 27% and 23%, globally. That’s a whopping $14 trillion in transaction value. This figure is expected to reach $25 trillion by 2027. The numbers are loud and clear—a new age of global payments has dawned upon us and wallets are at the heart of it.

While digital wallets have been around for more than a decade now, their rapid worldwide adoption is relatively recent. Today, wallet capabilities are continuously expanding, from streamlining transactions to offering convenience and speed to transcending their role as mere payment tools and including services such as lending, bill payments, investments, and more within the same universe.

Not just consumers, but a growing number of businesses around the globe are increasingly embracing wallets. As the central component of the future of global payments, digital wallets are simplifying several challenges for B2B payments— potentially transforming the landscape.

As people and businesses around world continue to discover the vast benefits of wallets, let’s understand how wallets work and the technology behind the scenes.

Let’s Start with the Basics: What are Wallets?

This is a useful starting point, because depending on where you are in the world, and who you ask, wallets can be very different things.

In financially well-served countries, wallets are smartphone applications that connect to your credit card or bank account and make your payment life much simpler. They may use technologies like NFC to enable tap-and-pay, or QR codes in countries where QR code-based payment systems are popular.

The other kind of wallet, and perhaps more significant from a financial inclusion aspect, is the stored value account. These wallets are most widely issued by mobile telecommunications companies, and as they use mobile numbers instead of account numbers, they’re called mobile wallets. In emerging markets, notably in Africa and parts of Asia, these are widespread, and the most ubiquitous form of financial inclusion.

Technologies Used by Digital Wallets

With the ease-of-use and seamless user experience at the core, most wallets process payments quickly and securely by leveraging the following technologies:

1. 1. NFC (Near Field Communication)
      NFC is a contactless communication technology that enables secure and quick data exchange between devices placed close to each other (typically within a few centimeters). A mobile wallet and a PoS terminal, for instance, where the user just needs to tap their NFC-enabled smartphone on the NFC enabled PoS terminal to enable the transfer of the encrypted payment information securely, initiating the payment process. NFC is most commonly used to transmit card information, and this is used when a wallet has a linked payment card.

 

1. 1. QR Codes
      These 2D barcodes can store a large amount of data. In the case of payments, the information stored by the QR code are the transaction details and payment information. So, when a merchant displays a QR code, the customer scans it using their digital wallet app which then decodes the information and processes the payment through backend systems.

 

1. 1. Magnetic Secure Transmission (MST)
      The MST technology mimics the magnetic stripe found on physical debit/credit cards. So a user can hold their MST-enabled device near a card reader, which then generates a magnetic signal emulating the card swipe and communicating the payment information securely to the reader. One primary advantage of MST technology is that it works on most NFC-ready terminals, making it compatible with a wider range of card readers.

 

1. 1. Tokenization
      Payment tokenization is essentially a security technology wallets use to replace highly sensitive payment information, such as credit card numbers, with unique tokens that can be securely stored and transmitted. Thus, providing safer transactions.

 

1. Biometric authentication
   Biometric authentication takes payment security another step forward. From fingerprint scans to facial recognition, and even voice patterns, many wallets are increasingly leveraging this tech to prevent unauthorized access and fraud.

Digging into wallet types

To understand wallets better, let’s look at what we expect from future-ready wallets apart from convenience.

• Enhanced security as a top priority
• Seamless cross-platform compatibility
• Decentralized ID support, allowing for more control
• Frictionless integration with other financial services
• Built-in integrations with DeFi platforms
• Global reach and multiple-currency transactions

Now different types of wallets offer different features and functionalities. We can classify them into the following:

Closed wallets
These are proprietary wallets, often issued by specific companies to their customer/user base for making payments or purchases within the same ecosystem. AliPay, Amazon Pay are popular examples.

Open wallets
As the name suggests, these wallets offer more flexibility. Open wallets, like PayPal and Google Pay, allow users to store multiple payment methods, and don’t limit the user to a specific network or ecosystem.

Semi-closed wallets
Similar to closed wallets, these too can be used within the same wallet ecosystem of merchants, e-commerce platforms, and retailers while also providing users with features beyond payments alone. For example, they can be used for person-to-person payments or bill payments. Stripe and Square are both examples of semi-closed wallets.

The high speed of technological evolution demands that digital wallet providers remain ever ready to adapt. As we move toward the future, wallets will continue to be the focal point for innovation for the larger industry. We’re likely to see increased collaborations between fintech, telcos, banks and other non-banking players to tap into this wallet revolution.

As global digital wallet adoption witnesses a meteoric rise, a connected global payments network has never been more important. At TerraPay, we aim to create exactly that. Partnering with more than 100 wallets, we reach over 2.4Bn (and growing) wallets around the globe.

Explore our digital wallets page or connect with us to discover how TerraPay can unlock access to a vast, seamless digital wallets network.