Digital Wallets and the Cashless Future
March 8, 2019
As digital payments become increasingly popular, it seems more than ever that our culture is heading toward a cashless future. Understandably, cost-conscious organizations may be wary of updating their point-of-sale systems without knowing the ins and outs of this new technology. To address that issue, we offer this brief look into the world of digital payments.
The different types of digital payments
Digital transactions occur when a transfer of funds between payer and payee involves an internet-enabled intermediary. If you’ve ever purchased something through Amazon or sold something through eBay, you’ve participated in a digital transaction.
Today, both online marketplaces and brick and mortar organizations accept digital payments.
Contactless payment cards
To address the fact that billions were being lost annually to the vulnerabilities of magnetic stripe cards, the major credit brands developed a standard for payment cards called EMV. The new standard introduced clone-proof cards with embedded microchips that protect payment data via tokenization.
Through tokenization, payment card data is replaced with an algorithmically generated random numbers sequence called a token. Token data can be transmitted across payment networks to facilitate transactions, but it can’t be decrypted into usable card data. In late 2015, a shift to the EMV standard was initiated in the United States and financial institutions began issuing chipped cards in masse.
In the U.S., the most common type of EMV chipped card is of the “chip-n-dip” variety, meaning they must be inserted into a card reader for a transaction to be processed. However, in Asia, Canada and the United Kingdom, EMV payments with the chipped cards that can transmit data wirelessly via near-field communication (NFC) are the norm.
In late 2018, Chase announced it would be transitioning all of its cardholders to contactless payment cards by the end of 2019. Given the size of Chase’s customer base, it’s likely that contactless payment card usage will surge into America in the next few years.
Digital payment services
Although digital payment services, which allow for the online transfer of money, have become increasingly popular since the 2010s, they’ve actually been around since the 1990s.
PayPal was one of the first of such services to gain prominence, as it was the payment method of choice for the majority of eBay members during its early years.
Today, banks, large retailers and electronics companies all offer boutique digital payment services that allow users to make purchases using stored payment data via the internet, NFC and QR codes. Digital payment services are very popular in America, with PayPal alone boasting more than 235 million users worldwide.
Digital wallets function similarly to digital payment services, although they are designed to allow customers to make purchases using their mobile devices at a variety of different retailers. Popular digital wallet services like Apple Pay are EMV compliant and utilize NFC to transmit tokenized payment data and security interfaces to protect users’ sensitive payment information.
As a result, digital wallets are protected from fraudsters in two ways. Tokenization of card data means that thieves can’t access the device owner’s payment details or make purchases without the owner’s unique passcode or thumbprint.
While only 25 percent of U.S. consumers currently utilize digital wallets, that number is expected to increase greatly in the near future. Presently, 63 percent of millennials use digital wallets, as do 38 percent of Generation Xers and 17 percent of Baby Boomers.
And the majority of the 110 million digital wallet users in the United States use the payment method for the same reason: its unparalleled convenience factor. Paying by smartphone is just faster and easier for customers than fishing out a card or cash from their wallets or purses.
Why digital payments are good for retailers
Although digital payments are still coming into maturity in the United States, there are a few key reasons why merchants should consider accepting them now.
The first and potentially most lucrative reason is faster transaction times. Contactless payment cards, digital payment services and digital wallet sales can all be processed faster than cash, check and traditional credit card transactions. The ability to get customers through the point-of-sale process faster means a lower rate of cart abandonment and an improved customer experience.
The second reason is that customers tend to spend more when it’s easier to make purchases. A recent study found that consumers spend 2.4 percent more if they use a mobile payments system. And retailers who evolve to accept digital payments experience a 23 percent increase in sales.
Lastly, digital payments offer an added degree of security for merchants. When someone makes an EMV payment with a chipped card or through an app, their payment information won’t be stored in the merchant’s database — just their token data.
As a result, if that merchant later suffers a data breach, hackers won’t retrieve any payment card details. That will not only reassure consumers that they can safely do business with an organization post-breach, but it also prevents the merchant from being subjected to class-action lawsuits and regulatory fines and penalties.
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