Digital wallets: What they are & how they work?

09 / 12 / 2022

Simplified digital payments: With a digital wallet, carry all your payment methods in one place. Use your smartphone to make purchases, pay bills, and transfer funds securely and conveniently.


What is a Digital Wallet?

A digital wallet is an online payment tool or software application that serves as an electronic version of a physical wallet. It enables users to securely store digital versions of payment methods – UPI, credit and debit cards, netbanking -- to use on the go with their smartphones to make digital payments like bill payments, mobile recharges, travel/movie bookings and money transfers from one bank account to another. A customer can use a digital wallet to make purchases at stores, online or through digital wallet apps.

How do digital wallets work?

Let's take a closer look at the technologies through which digital wallets work:

  • Near Field Communication (NFC)

NFC (Near Field Communication) is a technology enabling devices to communicate with each other when they are close together. NFC is often used for contactless payments.

  • QR codes

Gone are the days of carrying a bulky wallet stuffed with cash and cards. And thanks to QR codes, paying with a digital wallet is easier than ever. To pay with a digital wallet, users simply need to open their app and scan the QR code at the register.
The QR code will automatically transmit the payment information, allowing the user to complete the transaction without pulling out their wallet. Not only is this system more convenient for users, but it also reduces fraud and speeds up the check-out process.

  • Magnetic Secure Transmission (MST)

MST enables smartphones to transact wireless payments with both traditional pre-chip magnetic stripe systems and modern no-swipe credit card terminals. It generates a magnetic signal similar to when someone swipes the magnetic stripe on a credit card reader. MST enables customers and retailers to transact securely without having to upgrade their equipment.

Types of Digital Wallets

Here are some of the digital wallet types you will find in the domain.

        1. Closed

A closed wallet is a digital wallet that can only be used to make transactions with the company that issues it. For example, a company selling products and services can develop a closed wallet just for its customers. The money from returns and cancellations is stored in this wallet and users can only transact with the issuer of that wallet.

        2. Semi-closed

With a semi-closed wallet, users can make transactions at only listed merchants and locations. The payment information is stored in a centralized location for safety purposes, but a user may need to share a key or a password with another person before making a transaction.

        3. Open

Open wallets can be used to manage and track payment information online. Operating as easy-to-use online applications, a user can download an open wallet to any device or browser with an internet connection. Open wallets are compatible across all platforms and users can transact anytime and from anywhere.

Advantages of Digital Wallets


  • Seamless customer experience - Digital wallets streamline and expedite the checkout process, as customers aren't required to fill out lengthy checkout pages or forms. This is a win-win for everyone, as faster checkouts discourage customers from abandoning their shopping carts, which in turn increases the conversion rates for businesses.
  • Safe and secure - Digital wallet providers use tokenisation, which masks credit card details and is transaction-specific to prevent hackers from gaining access to consumers' data. Digital wallets also employ biometrics, including fingerprint and facial recognition technology, which prevents the account information from being stolen.
  • Contactless payments - Contactless payments enable consumers to make payments without having to carry a card or search for one inside their physical wallets. Users can simply scan the QR code at physical outlets or pay via UPI from their phones to confirm payment during the checkout process.
  • Valuable customer insights - Digital wallets help extract real-time data for valuable insights into a customer's shopping habits, including their shopping history and preferences. This helps businesses create targeted marketing campaigns as well as helps with inventory management and budget creation.
  • Access to rewards and offers - With digital wallets, consumers are often rewarded with special promotions and offers, such as cashback, coupons and loyalty programs from their favorite brands and retailers.

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Worldline India Editorial Team

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