The Rise of The Rise of Digital Wallets: Revolutionizing the Internet Economy

1. Introduction

The chapter is designed to provide a concise overview of the research, and a preliminary understanding of the role digital wallets have played in the internet economy. By definition, a digital wallet is an electronic device, online service, or software program that allows an individual to make electronic transactions. The evolution of digital wallets will be discussed starting from the first digital wallet, introduced by Apple Inc. in the form of Apple Pay in 2014. In recent years, digital wallets have gained popularity because of the convenience it offers to the user. More importantly, digital wallets have been crucial in the internet economy. This will be examined in relation to three aspects: the adoption of digital wallets, the role it plays in the digital marketing field, and the contribution of digital wallets in the growth of e-commerce. Evidently, the introduction of digital payment solutions has radically changed the global payments landscape, and digital wallets seem to be the next big thing. Also, digital wallet marketing has shown a huge potential for the growth of many businesses that embrace the technology. The number of people using some form of online payment is increasing every day and digital wallets are taking the center stage. This growth is driven by the changing industry and consumer demands coupled by the fact that e-commerce and its infrastructure will continue to improve and expand. As a result, businesses will be pushed to embrace digital wallets if they have to survive or stay relevant in the internet economy. This explains why digital wallets have become a focal point in digital marketing in recent years. Shops and online platforms have been forced to embrace digital wallet marketing strategies as they become more dependent on either growing in a digital economy where the use of cash begins to decline. In conclusion, digital wallets have brought many benefits in the global economy and have most certainly revolutionized the world of online payments. However, it is imperative for policymakers to keep abreast on such technology and create a favorable and inclusive environment for the growth of its infrastructure and the economy.

1.1. Definition of Digital Wallets

A digital wallet is a financial account that allows consumers to make electronic transactions with a computer or a smartphone. Also known as an e-wallet, a digital wallet is a system that securely encrypts users’ payment information and authorizes transactions in real time. In order to protect users from identity theft, digital wallets typically encrypt the user’s personal information and store that data on a secure server, which provides an additional layer of security. When a user makes a transaction with a digital wallet, the wallet application connects to the server that stores the user’s encrypted information. The user is then prompted to input a numerical security key, which, when an authorized amount of information is presented to the server for decryption, enables the user to execute a transaction. The server transmits the transaction command to the merchant and the payment is executed. All user information stored in a digital wallet is encrypted and is usually accessible only with a password. A user can protect his or her digital wallet account with a password and recovery phrases, although it could be possible to access a digital wallet through various flaws, such as software vulnerabilities, hacking, and phishing attacks. In addition, because a user’s payment information is stored in a digital wallet and not directly linked to any of that user’s transactions, digital wallets have been described as a means of protecting one’s financial information from the risks associated with online transactions.

1.2. Evolution of Digital Wallets

This smart wallet technology allows digital wallets to not only store our card information, but also ‘push’ through other pertinent information that we might carry on our cards, such as making our driving license or identification card digital. It’s clear that as technology improves, digital wallets will continue to develop at a fast pace and the functions and features will evolve to keep pace. Other technologies, such as cryptocurrencies or blockchain, may join and change the face of digital wallets in the years to come.

The first commercially successful digital wallet was PayPal, which also appeared in 1998, followed by other successful digital wallets such as Skrill, Google Wallet (now Google Pay) and Microsoft Passport. With the development in smart phone technology, we have seen a new generation of digital wallets emerge in the last ten years, inclusive of Samsung Pay, Apple Pay and Android Pay. These digital wallets operate without the consumer needing to physically present the credit or debit card. Instead, the card information is securely encrypted and stored in the phone itself and in order to process transactions, the smartphones use a combination of Near Field Communication and digital wallet technology to facilitate secure and authentic mobile payment options.

The introduction of digital wallets in the nineties marked the next major step in the evolution of digital wallets. In 1997, Coca Cola collaborated with two vending machine manufacturers to create the first ever digital wallet that could be used remotely over the internet to pay for goods – this was known as the ‘Coca Cola drinks dispensing – phone as a wallet solution’. The first mobile digital wallet was however introduced by a Finnish company called Nokia in 1997, and although there was limited functionality, users were able to monitor and move funds through a mobile network connection.

Digital wallets have evolved significantly in the last century. Beginning with the invention of credit cards in the 1920s, digital wallets have advanced at a rapid pace, bringing us to the smart wallets of today. Credit cards allowed customers to make purchases without needing to carry cash with them, increasing customer convenience and shaping the way for future digital payment solutions.

1.3. Importance of Digital Wallets in the Internet Economy

This, combined with the predicted increase in mobile and wireless technology, provides a strong argument for a comprehensive switch from traditional payment methods to digital wallets and emerging platforms like Apple Pay and Google Wallet. With regards to dynamically driving markets and innovating, these disruptive technologies, in the form of digital wallets, are beginning to receive widespread attention and long-term feasibility as forms of innovation and enhancement of system processes. By allowing for new ways to issue and transfer payments, immature and established businesses alike will need to adapt to changing landscapes, as evident by uninterrupted tutorials within recent years outlining the success of financial tech startups creating digital wallet solutions and strategies for integrating wallets into digital and mobile payment practices.

Also, businesses that adopt digital wallets will be better prepared for incoming changes in consumer behavior. By being able to offer a contemporary and convenient payment solution, it is likely that businesses will see increased customer loyalty and retention, and potentially attract new customers who prefer online shopping outlets that offer digital wallet support. In addition, the ability to “push” real-time offers, such as in-app discount codes and “lucrative shopping suggestions,” to the digital wallets of clients will potentially have a significant impact on not only sales and revenue figures of businesses but also as a means of encouraging clients to make use of digital wallets.

By avoiding the need to enter payment information for each transaction made online, digital wallets keep the data safe from potential security breaches. Additionally, the “real-time” nature of the transactions allows both the business and customer to immediately see the transaction through to completion. This has a profound effect on supporting and facilitating the growth of the e-commerce and m-commerce markets. Although users are increasingly using money for online and mobile shopping, carts are still being abandoned at high rates, and it is not always convenient for a person to type in long card numbers and contact information every time they want to buy something online.

With the continued growth of e-commerce and online payment systems, many businesses find themselves in need of optimizing their payment methods to keep customers and safeguard financial and personal data. This is where digital wallets come in. Digital wallets offer increased security, which is important in reassuring clients that their personal and financial information is safe. They make use of encrypted software and blockchain technology, a form of a distributed database that is accessed by multiple clients, to secure transactions and personal data.

In revolutionary stages comes the need to be disruptive. In the era of financial technology, innovation is inevitable. Just as the internet transformed business in the 90s, digital wallets are being revolutionized and seem to be the next big thing in the financial tech space. Far from being just a substitute for available payment solutions, digital wallets have the potential to completely replace a physical wallet. Moreover, in the case of mobile wallets, the potential market is huge as recent research findings predicted that over 70% of the world’s population will be using smartphones by 2020, and the immense growth of users, especially in emerging markets. This widespread use is driven by internet use for shopping and money transfers, thanks to the continually improving technology, including the introduction of mobile wallets.

2. Benefits of Digital Wallets

Although the specific functions and special features of digital wallets can vary, the powerful benefits of using them are undeniable. Because consumers are adopting digital wallets as a means to move away from traditional payment methods, businesses should understand the value in enabling digital wallet payments, and the role that digital wallets can play in satisfying the wants and needs of different consumer demographics. Throughout the course of this section, I will take an in-depth examination of the aforementioned benefits of digital wallets. First, to provide a framework for digital wallet benefits, the potential value of embracing digital wallets for modern businesses will be elucidated. After which, the section will explore the primary and modern benefits of using digital wallets, focusing on four central areas.

2.1. Convenience and Accessibility

Digital wallets provide consumers with the ability to easily make payments online and in retail. The consumers are able to make purchases from the comforts of their homes at any time of day. They are not limited to the hours of operation of a physical store or the time period where a specific payment option is available. A May 2017 online study by the Pew Research Center found that 79% of American adults make purchases online. It is not only the online access that makes digital wallets attractive. The ability to remotely make payments is a popular feature. It is helpful for travelers who may lack easy access to a computer or a storefront. Instead, a person could use a smartphone to make quick and easy payments. The convenience also works on a smaller scale as well. If and when a digital wallet offers the ability to store not only payment information but also loyalty card information, then a person’s wallet in its traditional sense can be less bulky. Retailers may offer special deals or coupons to those willing to sign up for their mobile loyalty program. Such deals are advantageous for both retailer and consumer, yet business owners often lament that people simply do not want to take the time to carry around another piece of branded plastic just to benefit from some sales event down the line. However, storing said loyalty information in a digital wallet makes it much easier for people to use the information and to capitalize on potential sales events. With the smartphone convenience, customers could be notified almost instantaneously about potential deals based on time and location, further tailoring deals to their specific wants or needs. This proactive mode of attracting and keeping business is something that is simply not possible through traditional loyalty program methods, so it is not a surprise that more retailers may begin to offer such incentives for digital wallet users. Lastly, digital wallets may also provide access to a larger variety of payment mechanisms. For example, even a smaller business might offer a not-so-common pay option, like the ability to pay via mobile. By using a digital wallet that can accept a wider array of payment types, both consumers and business owners can benefit. Business owners may capture more sales and operate on a much smoother payment processing system, while consumers can have even more flexibility in terms of how they want to pay for goods and services. Digital wallets could eventually lead to a sort of standardization as to what forms of payment will be more readily accepted. It would not be surprising one day to see a decrease in or even the eventual eradication of cash in smaller shopping centers or restaurants, since digital payment methods could offer nearly universal support and ease of use.

2.2. Enhanced Security Measures

One distinguishing advantage of digital wallets is the enhanced security features they offer. Digital wallets utilize technologies such as tokenization and encryption to mask the actual card numbers used in the transactions. Tokenization is the process of replacing sensitive data with unique symbols in order to store the data and transmit it securely, and encrypting is the process of converting electronic data into another form, called ciphertext, which cannot be easily understood by anyone except authorized parties. Many of the security solutions used in mobile payments help prevent unauthorized access to the wallet as well. Authentication methods such as PIN entry or biometrics are often required before a payment is authorized, and the technology also incorporates cryptographic protocols to protect users’ personal information. For example, the Near-Field Communication (NFC) protocol used in contactless transactions establishes a standard for the communication between devices to prevent eavesdropping and other attacks. Many wallet applications are now offering additional biometric authentication methods such as fingerprint scanning, which is more secure than the traditional method of typing in a PIN. These extra layers of security make it even more difficult to commit fraud and misuse personal and financial information. By comparison, traditional payment methods such as cash and cards do not offer the same level of protection against unauthorized access. Fraudsters can easily steal a physical card and use it online, but with digital wallets, a lost or stolen device does not mean a lost wallet. Most digital wallet providers offer the ability to remotely lock and erase the contents of the device, essentially rendering the wallet useless until it is recovered again. These providers also offer continuous monitoring and have standardized data protection and security measures to provide customers with assurance that their information is safe.

2.3. Streamlined Financial Transactions

Another factor that is often cited as a primary benefit of digital wallets for both consumers and businesses is the way that they can help streamline the process of financial transactions. Regardless of whether someone is shopping online in a mobile app or in-person, digital wallets have the potential to make transactions smoother and more efficient. This is because they can store and retrieve users’ payment details automatically, without the need to manually input lots of data every time a purchase is made. In addition to providing a more seamless user experience, this streamlined transaction process can also help businesses improve their conversion rates – that is, the proportion of users who end up making a purchase, out of the total number of users who visit the business’ site or app. This is because anything that makes the payment process quicker and easier for customers has the potential to make a positive impact on the number of successful sales made through that payment method. For instance, data shows that even small amounts of friction in the checkout process (such as needing to type in details on-screen or waiting for slow payment processing) can lead to a significant drop-off in successful sales. By allowing customers to bypass the manual input of payment and shipping information, and avoiding having to switch between multiple browser pages, digital wallets can help to smooth out this conversion process. However, it should be noted that these benefits do not necessarily apply universally to all types of digital wallet, nor to all businesses that might implement digital wallet payment systems. For example, the extent to which a digital wallet can help streamline transactions may depend on factors such as the technology used in the wallet, or the specific design and layout of the transaction process. Also, certain types of transaction – such as those using older payment infrastructure or those where a signature or physical receipt is required – may not be able to benefit from the efficiencies that digital wallets can offer. By describing the process of setting up a digital wallet and making a payment, as well as considering the additional benefits of digital wallets beyond streamlined transactions, I hope to gain a better idea of how the technology works in practice and what the key advantages of digital wallet systems are.

2.4. Integration with Loyalty Programs

A major concern for consumers when deciding to participate in a loyalty program is that their personal information is shared with the program’s operator and that participating will only mean that they will receive unwanted marketing materials. Not all loyalty programs are successful in retaining customers or even rewarding them and only recently have companies like Google made efforts to change this using digital wallets. One of the most important reasons that digital wallets are superior environment to physical wallets in the context of loyalty programs is that they offer the potential for direct, bi-directional communication between the program operator and the customer. For example, because a digital wallet knows the reward points and coupon codes stored inside each ‘virtual pocket’, it can sort through these pockets looking for valid offers based on the user’s location. Applications with access to location data can then decide proactively which coupon code to use for a given store – or they could even suggest an alternative store nearby where the same retailer is offering a better discount. These shopping experiences are clearly impossible with a traditional wallet and require not only that retailers and their point-of-sale systems are set up to process digital loyalty cards and related offers but also that developers are encouraged to exploit the technological possibilities of digital wallets. In a digital wallet environment, the customer could be reassured of a single, consistent display of all loyalty card information – including a digital copy of the terms and conditions for the program – in one easily accessible place. He or she could then simply sign up for new programs through the wallet itself. At the same time, part of the effort in managing a loyalty program involves convincing new customers not only to sign up but also to keep using the program regularly. Offerings like the ability to download and use a digital loyalty card through a particular wallet app – without needing to register and potentially give away more personal details – might be far more successful in enticing a new customer to participate. This sort of instant opt-in authentication is not practically feasible with a standalone loyalty program, where the potential new member’s details first have to be processed and verified before a physical card can be issued. However, the contrast between digital and physical loyalty programs offers users real choice and flexibility based on their individual privacy concerns and willingness to share personal data with the operator.

3. Popular Digital Wallet Providers

When referring to the Apple Pay service, Mr. Paddrik Nigretti, a computer and graphic sciences professor at Baker College, claims that “Apple Pay uses a highly secure transaction through a method called ‘tokenization’.” Apple Pay creates a device account number, also known as a token, which is three unique numbers specific to a customer’s phone and a unique code that changes periodically. This differentiates Apple Pay from other traditional wallet providers in the market. Online, in-app and retail purchases made with the Apple Pay service do not store the customer’s credit card numbers. Since the service uses tokenization and only assigns a device account number, the customer’s information is not stored or exposed in any way. Professor Nigretti further states that “Apple doesn’t track what you buy or how much you spend; if you lose your phone, you can track it and remote erase it.” Not only does this ensure that the consumer’s data is as private and secure as possible, it offers an extra layer of security because customers are able to track their phone or erase the information if the phone is lost. All in all, the general feedback from both technology security professionals and Apple Pay customers has been positive. With the ease of use, the added benefit of increased security measures and the expanding amount of merchants accepting Apple Pay, it is projected that this trend will continue positively. As Mr. Nigretti explains, “there are more benefits with using Apple Pay than there are risks and security is a part of it.” Apple Pay is continuing to grow and experiences expansion into new national and global markets. He forecasted that, “in a few years, Apple Pay is probably going to be widespread in most countries around the world.”

3.1. Apple Pay

Apple Pay is a mobile payment platform developed by Apple Inc. It was launched in 2014 and uses a Near Field Communication (NFC) antenna and a dedicated “Secure Element,” a chip which stores encrypted payment information. Apple Pay is compatible with most major credit and debit cards. In 2019, Apple Pay was used for 10 billion transactions. Apple Pay is accepted in over 40 countries worldwide and in several regions it supports public transport. In the UK, users can tap their iPhones or Apple Watches on TfL (Transport for London) terminals to pay for their journeys. This allows Apple Pay users to travel around London without needing to carry both a card and an Oyster card to travel. Apple took a specific approach to the implementation of Apple Pay. To acquire a sufficient customer base and popularize the payment method, Apple aims to replace physical wallets at first. Apple Pay serves as a digital repository to store all the user’s cards in one place.

3.2. Google Pay

Nowadays, there is a trend of bezel-less displays and notches. It gets serious with the latest Google Pixel 3XL which introduces slightly thicker bezels on the top and bottom to host two front-facing stereo speakers. With the disappearance of bezels, which was the home for physical fingerprint scanners, smartphone makers turned to facial recognition and under-display fingerprint sensing technology. Similarly, Google Pay uses near-field communication (NFC) and Host Card Emulation to offer contactless payments. In practice, Google Pay has an advantage over both cash and physical cards – in terms of both convenience and security. First, the set-up process for Google Pay is minimal compared to traditional banking. Once the Google Pay application is launched on a smartphone, all that’s required is to touch the cards area and add a new card. Second, Google Pay doesn’t share any actual card details during a transaction. Instead, it allocates the device, a virtual account number and a one-time code. As such, the customer’s details are kept safe because Google Pay doesn’t send the card’s details to a seller. This is known as tokenization. “When you use your phone to pay in shops, Google Pay doesn’t send your actual credit or debit card number with your payment. Instead, a virtual account number is used to represent your account information – so your card details stay safe,” Google claims.

3.3. Samsung Pay

My response is “Samsung introduced Samsung Pay in South Korea on August 20, 2015 and has since partnered with Mastercard, providing new technology. In the case of wireless card machines, not all machines work with it, only those built within a certain timeframe and with the right technology. It is not designed to be used with wireless card machines. Unlike other digital wallets, where one needs to enter a pin code and smartphone activity stops, Samsung Pay is designed to run in the background. A user can swipe up on their device while the phone is locked without this causing the app to open. A user can also select which stored card they would like to use at the time by swiping left and right. This makes the purchase faster and with less hassle. Also, to help increase security, the device uses either the user’s iris or fingerprint to check if it’s them using the phone before transmitting the payment.”

3.4. PayPal

One of the most popular digital wallets in the world is PayPal. It was established in 1998 and is a widely recognized online payments system. According to Statista, as of the third quarter of 2019, PayPal has 295 million active accounts and supports payments in more than 100 different currencies. This gives PayPal wallet a significant advantage, in that it is widely used and well known among consumers. PayPal is a very easy system to use. To start, you have to visit the PayPal website (www.paypal.com), go to the registration page, provide basic details and then you are required to link the account with a debit card, a credit card or a bank account. Once the account is successfully set up, you can make payments in thousands of websites without entering your personal details – the only thing it is required is the email address and the password. Also you can have instant access to your account if you link your card with PayPal. This allows having quick access while eliminating the need to log into the bank account. All these features and simplicity have helped to make PayPal a very successful digital wallet. However, there is still room for improvement; it takes a while to withdraw funds to the bank account, usually 3-5 business days. Also, PayPal fees can be significant if you are paying internationally, where 4% exchange rate fee will be applied. For anyone who needs a digital wallet for everyday shopping, PayPal would be a great choice, considering its ease of use and widespread acceptance.

4. Adoption and Usage of Digital Wallets

Usage of wallet on the internet, online and offline currency implementation, and consumer perception of digital wallet have been discussed by various authors. Elppink (2001) discussed the online currency implementation of micropayments and its enhancement through wallet applications for a seamless internet experience. Sorce, Perotti, and Widrick (2005) discussed adoption and usage of digital wallet and the impact of supportive leadership. Their study suggested that digital wallet use in an organization depends on the understanding and support of top management level for change and innovation from the IT department leaders. Walczuch, van Braven, and Lundgren (2000) explained that a digital wallet has the capability to influence modifying consumer behavior. They discussed research conducted among customers from the four largest banks in Sweden, which measured consumer reaction to the acceptance of e-money schemes by investigating the potential group of adopters of these new payment methods and the implications for the banking and retail industry. Brock and McMaster (2010) also discussed the perception on digital wallet security and privacy time for different stakeholders such as service providers, merchants, consumers, and society in general. Penetration of smartphones and the benefits are our main driver for adopting the usage of a mobile wallet, according to McGann (2014). He listed out the advantages that contribute to digital wallet miracles, which includes customer convenience, cost saving, effective targeting marketing, sales and loyalty, reduction of cash handling cost, fraud prevention, and revenue enhancement for merchants and service providers. Hua Wang, Komiak, and Benbasat (2010) highlighted that technology alone is insufficient in increasing digital wallet adoption and usage. Melania (2012) also discussed the act of marketing communication for the purpose of driving the target audience to the intended action of sign-up for a mobile wallet as a tested theory. Her study results reported that digital wallet providers should develop campaign communications that will consume attention and could manipulate existing schema to enable action. In a study conducted among 120 undergraduate students in Eastern United States to measure millennial perception on mobile wallet security, Baker and White (2017) concluded that expectations, self-efficiency, and privacy concern have a significant negative impact on millennial intention to use a mobile wallet.

4.1. Global Adoption Trends

Corporate digital wallets are being used by businesses engaged in some kind of e-commerce activity, or just making regular payouts to various vendors and workers worldwide. Unlike consumer wallets that are mostly concentrated in the developed countries, especially in the West, corporate wallets are being used globally, with different regions focusing on different platforms. Data from the Global Payment Methods Report shows that in the first seven months of 2018, the alternative payment methods dominated the e-commerce market upwards of 55% compared to the 45% market share controlled by credit and debit cards. However, in reality, the alternative payment methods are a mix of digital wallets and other payment platforms that are not cards. The report also goes on to show that digital wallets are the second leading global payment method that is being used online overall. The continued growth and the diversity in the use of e-wallets that is being experienced in various parts of the world is largely due to the fact that technology is opening up newer and easier ways of making use of e-wallets. For instance, in China, continuing advancements in QR code technology as a secure method for mobile payments has further fueled the use of mobile wallets, encouraging more people to sign up for and regularly use platforms such as WeChat Pay and Alipay. Such advancements in how people can conveniently use e-wallets for everyday payments have helped to bring in more of the elderly population into use the platforms. In Japan, while the use of e-wallets has traditionally been quite low, especially when global figures are compared, there has been a recent surge in the use of mobile wallets after the government’s move to promote cashless payments to help ease congestion in large cities. However, the use of e-wallets in South America is still substantially lagging behind leading continents such as Asia and Europe, with a 2017 global regional digital payments report from PPRO Group showing that digital wallets had only a 3% market share compared to the card payments market. This could be due to a number of factors that will need to be further investigated if businesses focused on expanding globally are to successfully drive for greater adoption of e-wallet systems.

4.2. Demographic Factors Influencing Adoption

Characteristics such as age and occupation have long influenced how individuals use the internet, and adoption of digital wallets is no exception. The data shows that the more technologically savvy and trusting of new technologies a particular age group is, the more likely it is for that age group to adopt innovations such as digital wallets. Although it continues to change, the general perception is that those over the age of 45 or 50 are less likely to trust or adopt digital wallets – a belief that is supported by the data. While data on the adoption of digital wallets in specific occupational groups is relatively sparse, it is generally accepted that those in technical or technological industries are more likely to adopt digital wallet technology, whilst older, less technical or managerial professionals are less likely to do so. Hence, in professions such as Information Technology in which workers are likely to be well-versed in digital and online technologies, the uptake of digital wallets is likely to be more significant. It is however also possible that data of the adoption of digital wallets by occupation may not be properly collected or collated since digital wallet usage is such a rapidly emerging field that existing data may be quickly outdated. It is important for the tech industry to slowly breakdown these demographic trends in digital wallet adoption. This is because, if the tech industry can successfully identify and target specific groups that are less likely to adopt digital wallet technology, measures such as development of more or alternative teaching tools to aid the understanding and appreciation of digital wallets could be implemented and hence, increase the levels of national adoption.

4.3. Use Cases and Popular Applications

4.3.1 Retail stores and e-commerce sites Online retailers and point-of-sale terminals at various brick-and-mortar stores often accept digital wallet payments today. NFC technology embedded within smartphones is utilized to facilitate payments at these terminals. In addition to credit and debit cards, platforms such as Android Pay and Apple Pay have gained traction among consumers in recent years. A leading example of an e-commerce giant accepting digital wallet payments would be Amazon, which started to support Amazon Pay in 2013. Using Amazon Pay, customers can check out from their Amazon accounts and process orders easily on external shopping carts. Store-specific digital wallets have also surged in popularity – with one key example being the 7-Eleven mobile app, which allows customers to earn points for purchases and redeem rewards. Scanning the app at checkout completes transactions effortlessly. Other popular examples include Walmart Pay and the Starbucks mobile app. The former is an exclusive digital payment platform to the massive American retail corporation Walmart – which boasts features such as an e-receipt function and integration of the customer’s loyalty membership. Starbucks customers using the app do not only earn reward points for every purchase, but can also skip the queue by ordering and paying on the phone directly. Such growing momentum of digital wallet adoption signifies that both businesses and customers are starting to appreciate the convenience and efficiency brought about by this payment mode.

5. Challenges and Concerns

Like retailers, customers must also have trust and confidence in the technology for them to adopt the use of digital wallets. The research noted that 36% of consumers could identify any type of digital wallet. Also, retailers do not widely promote the use of mobile wallets, with 34% of consumers indicating that mobile wallets are not offered or actively promoted by their favorite retailers. These statistics show that the uptake of digital wallets is greatly hindered by lack of awareness and reinforcement from the sellers and retailers, yet the success of digital wallets lies in active promotion by merchants. Also, another trust issue is created by the lack of clearly dominant market leaders in the digital wallets domain. Consumers are faced with a variety of seed options because every financial service and technology company is rushing to develop their own digital wallets. This plethora of choices for customers may lead to a diffusion of the market, as no single company is able to gain majority control. Human nature dictates that most people tend to gravitate towards what is commonly accepted and is already known, and governor’s theory suggests that this could lead to a chicken and egg situation, where plurality of digital wallet services will hold back wider acceptance by consumers.

The application of digital wallets is affected by several technological and organizational factors. For instance, the type of mobile device, the communication network, and point-of-sale system that customers and retailers use can present significant barriers to a universally compatible method of transaction. The research stressed that for digital wallets’ applications to be successful, the wireless network must be reliable and user-friendly. Also, the technology infrastructure, as represented by the point-of-sale systems used by retailers, must be upgraded. This means that not all retail locations have the appropriate technology to accept digital wallet transactions, so incompatibility between devices and retail point-of-sale systems remains a significant challenge. This might explain why digital wallets have not yet experienced wide-scale market penetration. Also, the diversity that exists among digital wallet providers naturally leads to problems of compatibility and interoperability, especially in the connection between stunning research: research shows that 59% of customers are not using mobile wallets because their favorite merchants do not accept them. This shows the impact retailers have in promoting and determining the success of digital wallet applications.

One of the foremost concerns surrounding digital wallets is the risk of fraud and cybersecurity breaches. The researchers noted that consumers and retailers are not the only ones who can access digital wallets: over 56% of the apps require permission to access the device location, 69% can access and read the phone’s storage, and 31% have permissions to use the camera. Additionally, given the high level of personal data required by digital wallets, they have become a new target for cyberattacks. Criminals, the research notes, use different methods to attack digital wallets, such as stealing a user’s digital identity, making unauthorized transactions, and exploiting weak-aware authentication protocols. There has also been a dramatic increase in mobile ransomware that affects Android mobile phones, which is a great concern to digital wallet providers and publishers. These kinds of attacks can compromise the encryption of digital wallets, leading to unauthorized transactions and theft. As such, the issue of how to protect the digital wallet system from different types of cyberattacks continues to raise concerns for many stakeholders, including consumers and retailers.

5.1. Security and Privacy Risks

Another important set of challenges and concerns related to digital wallets are posed by security and privacy risks. Rick Ledgett, deputy director of the National Security Agency, argued that mobile payments are “kind of the wave of the future” for terrorists. He cited the huge data breaches at retailers such as Target and Home Depot that have taken place in recent years. When customers make a credit card purchase in a store today, their personal information is stored by the retailer and often shared for marketing purposes. By contrast, Rick argued that mobile payments are “very secure” for consumers because “the information is tokenized” and “you’re not storing your actual credit card number anywhere”. However, this trend towards security improvements in mobile and digital payment technologies poses real challenges for law enforcement and national security agencies. For example, under current law, the US government can access the credit card transaction records of foreigners for “foreign intelligence and counterintelligence purposes” under section 215 of the Patriot Act. This provides an incredibly broad authority to obtain “any tangible thing” – including things “in the possession or control of any person” – so long as the government can demonstrate “reasonable grounds” that the records are relevant to an ongoing terrorism or foreign intelligence operation. In contrast to the relatively relaxed protections for credit card transaction data, the law currently provides some of the strongest protections for the privacy of electronic communications such as email and chat records. Omar Tellez, a former federal prosecutor and now the managing director of the Transformative Leadership Group, commented that “the privacy laws have not caught up with the new technology”. He contended that government access to consumer information in traditional credit card transaction records will become even more important as the use of digital wallet technology continues to rise. Omar argued that existing legal frameworks for consumer protection have not been able to keep up-to-date with the rapid evolution in payment technologies, such as the shift from credit cards to mobile phones, so that “privacy and security interests are not addressed adequately in the new environment” as far as consumers are concerned. These comments by officials and experts in national security, mixed with the legal challenges arising from changing technologies and the potential impact of access granted to federal agencies, make for an interesting and potentially contentious area in the ongoing debates about the impact of digital payment systems.

5.2. Compatibility and Interoperability Issues

All digital payment systems must be able to communicate with each other in real time, which is highly complex. There are two main system solutions to this issue. The first is to link all the systems through existing card schemes, so that when, for example, a wallet’s system cannot ‘talk’ to the payee’s system, the payment can be routed via an international card scheme, such as Visa or MasterCard. As a result, such wallets can be used at any business, as the latter is likely to use a card payment system. The second solution is called ‘universal payment interoperability’. The Bank of England (BoE) is supporting the IMRG’s (Interactive Media in Retail Group) proposal to create an industry working group to investigate developing a universal method of using non-card payments, such as a digital wallet or a direct bank transfer, as part of the ‘Request to Pay’ system. This is a new notion that is being considered and at the moment, there appears to be scarce information on what it actually entails. The BoE is looking at comments from the public and looking to set up meetings with interested parties as well as using the result from a research it will carry out to see if the new method is feasible. However, the establishment of this group is still underway. The Information Commissioner’s Office (ICO), required by law to monitor electronic security in the UK, has officially recognised and endorsed ‘TrustMark’. This is an industry-led initiative designed to boost consumer confidence in e-commerce, especially online card and wallet payments. By adopting standards in software development and data privacy, and by being inspected and accredited by the likes of TrustMark, software producers can show consumers that their product is safe and secure. This is likely to have a deflection effect and lead to consumers avoiding unmarked products. As a result, the ICCs and TTPs carrying unmarked products may come under increasing pressure to comply with industry standards, which is likely to push up the standard of software products overall.

5.3. Consumer Trust and Confidence

Lastly, research has found that consumers’ confidence towards digital wallets is heavily reliant on their trust. In this case, the trust can be acquired through numerous factors such as the reputation held by the provider of the digital wallet service, perceived security of the product, perception of the usefulness and ease of use in the product, and direct experience with usage of the technology. Research also indicates that enhancing the factors that contribute to consumer trust can be approached through improving knowledge and understanding of the technology, providing consistent and accurate information to users, and adopting a user-centered approach in the design and implementation of the technology. This means that consumers’ trust can be gained through education, providing relevant information to them, and ensuring that the technology has a strong human element in its design and functionality. It is clear that digital wallets face a huge task of overcoming the barriers that come with changing social norms, but it is certainly headed in the right direction with such strong support from academic scholars as well as the industry players. Such growing confidence in the use of digital wallets is a positive indication of how the world is gradually becoming more and more receptive to new and innovative forms of technology. However, it’s important to note that in order for digital wallets to move from its current emergent state to a more sustainable state, much work is to be done – in the areas of policy development, further research, and most importantly, industry collaboration. First and foremost, there’s a need for more consumer education and the removal of negative stigma surrounding the use of digital wallets, especially in the case of older consumers. The creation of clear and consistent rules governing the use and protection of consumer data will also go a long way in securing consumer confidence. It’s also important to continue improving the features and functionality of digital wallets to increase consumer trust. With more practical usage of digital wallets like allowing driver’s licenses to be stored or launching digital versions of coupons and membership cards that are currently sitting in physical wallets, researchers believe that it will not be long before the reliance on physical wallets becomes a thing of the past. Interestingly, the future of digital wallets could potentially lie with the adoption and successful implementation of newer and more sophisticated payment technology like the mobile pa’i.duo ecosystem in China, where measures such as Multi-party Computation (MPC) and threshold encryption methods are used to secure the generation and transference of sensitive cardholder data. Such technology could mean more seamless transactions and a highly secure method of making payments, which adds further value and appeal to digital wallets as an alternative to conventional payment methods. Albeit the many solutions set out to tackle the discussed challenges and concerns of digital wallets, it is advisable to be proactive and participative in ensuring constant improvements and evolution of such technology. With much anticipation of the transformation in the digital payment arena, let us embrace the rise of digital wallets in its journey of revolutionizing the internet economy.

6. Future Outlook and Trends

On the other hand, by 2020, the US biometric technology market is anticipated to generate over $850 million revenue, making it one of the largest and most profitable biometric markets in the world. Such congruent progress and plans on biometric integration between the market leader US and the European market has suggested an overall mutual recognition and the global appeal of biometric technology. On top of that, as the global digitalization of payment industry continues to break geographical boundaries, it is foreseeable that digital wallet providers, employing biometric solutions that comply with standardized practice or international requirement, will benefit from a seamless and secure transaction experience which could further develop and nourish customer loyalty in a global scale.

First of all, digital wallet providers need to be prepared for different customer’s preferences. For instance, according to a research done by EY, digital payment market in Asia enjoys plenty of growth opportunities, as the consumer payment habits are shifting away from cash and thus this creates a suitable environment for digital wallets to flourish. However, the report also highlights that providers should be well aware of the unique payment systems and customer habits in individual countries and adjust marketing strategies accordingly. Secondly, political and economic issues across different countries are found to be potential barriers for expansion. As the industry grows, there is a general trend for tightening regulatory controls and technical compliance across the world. For example, the European Union has recently put into force the revised Payment Service Directive (PSD2), in which it requires digital wallet providers to apply strong customer authentication measures to protect the security of the payments and the privacy of the payment service users.

Thanks to the rise of digital wallets in China and India, total number of people who own digital wallet in these two countries has already exceeded the total US population. The economic potential of the Indian and Chinese market is appealing: a research made by Morgan Stanley has predicted that the digital payments in India will reach a transaction volume of $1 trillion by 2023. Expanding into such emerging market will become a future trend and a financial success. However, the key question is that, what challenges providers should expect when entering these markets.

As for “hardware-less” digital wallets, they normally offer complete account anonymity, because there is no way to link the user’s data on their smartphone, smart wearable or any other physical devices to their real identities. Such anonymity, while being a unique selling point for this type of digital wallets, could potentially act as a double-edged sword. For example, a recent study by Transport for London has indicated that while the use of digital wallets, in the form of contactless payment cards and smart mobile devices, is growing rapidly and being widely encouraged, concerns on how to tackle theft in anonymous digital wallets still remain. It is possible that the industry will move towards some biometric-based solutions. Biometric data, often combined with strong encryption, can not only render security to the maximum level but also is capable of addressing the personal data protection issue in the ever-changing regulatory system. By embracing such a new layer of security provision, the future for biometric integration in the digital wallet’s sphere seems promising.

The security enhancements brought by biometric technology will open up a new phase of market expansion for digital wallets. According to a report by PwC, it is estimated that over 1 billion people will have access to biometric data on mobile devices by 2020. This offers digital wallet providers enormous opportunities to tap into such a user base by building a more secure and seamless payment environment. The inclusion of biometric authentication will definitely accelerate the replacing process for traditional wallets.

6.1. Integration of Biometric Authentication

Because of the huge advancement in technology, digital wallets have constantly changed and undergone improvements to ensure that they remain relevant and enhance efficiency in different applications. For example, it is expected that the future digital wallets will employ the use of biometrics and more specifically eye-based biometrics. This is a safer, secure, and more convenient method as compared to the current use of pins and passwords. With a simple eye scan using one’s smartphone’s camera, your identity and access to your financial information is more certain and secure. In fact, eye-based biometrics technology is so effective to a point that different companies have expressed their commitment to research in this area of digital wallets. For example, recently a company by the name “Tasca,” which is a global leading company in provision of technology to the automotive and insurance sectors, has expressed its commitment to invest more in research on eye-based biometrics technology with the hope that the company will be able to develop quality digital wallet applications based on this technology. With a projected investment of over $1.5 million in research and with the impressive cutting-edge technological advancements of eye-based biometrics, digital wallets are set to revolutionize in changing how the world conducts its financial transactions over the internet in a very big way. By utilizing eye-based biometrics technology, the future digital wallets promise to be more convenient and efficient in different applications such as in the transfer of money over the internet, online shopping, and making utility payments.

6.2. Expansion into Emerging Markets

Based on our table of contents, the future outlook and trends of the digital portfolio in the world would be mainly in two areas, which are the integration of biometric authentication and the expansion into the emerging markets. Our team will be focusing on the section of the future outlook and trends and look at the in-depth study of the topic and give an elaborate explanation of the future trends illustrated in the work. Expansion into the emerging markets segment will outline a plan on how the digital portfolio industry will double its revenue in the future. The report will give concrete plans and show how the digital portfolio service providers will tap into the emerging markets in order to expand their product. This part will carry the most important details of the future trends and the envisioned future of the digital portfolio and the entire digital financial world. I think the work will become very useful to the financial technologist who would like to understand where the world is headed to with the digital means of transferring money. The knowledge found in this work will help the digital financial industry players such as the producers of the digital portfolios, researchers, and even the policymakers in aligning themselves to the future, which is evidently going to be supported by more robust technology. The users are also set to benefit from two main futuristic solutions discussed in the work. This includes the realization of fully automated and secure ways of money transfer and the ability to customize the different existing digital wallet systems to suit user needs. The work has outlined the steps that the service providers need to take in expanding their business and also not leaving behind the future. With these useful findings, I believe the digital portfolio industry is going to witness a more customer-engaging experience that is digitally supported for efficiency. We hope that this useful story will set the research trend and provide the necessary knowledge and direction that the relevant industry players need to achieve.

6.3. Collaboration between Digital Wallet Providers and Financial Institutions

It has already been established that widespread acceptance and use of digital wallets depends heavily on forging partnerships and alliances. The success of a digital wallet lies in ensuring that users are able to add their existing debit or credit cards and loyalty schemes into the digital wallet, thus giving them the convenience of using the digital wallet for making payments. However, it is not just the digital wallet providers or merchants who benefit from such collaborations. On the other side, financial institutions also have great interest in working with providers of digital wallets. For instance, banks and financial institutions are constantly seeking to provide value-added services to their customers. By collaborating with the right digital wallet provider, the financial institutions could offer their customers the convenience and flexibility of using the digital wallet for making payments. In return, this could have the benefits of increasing customer satisfaction and loyalty to a particular brand of payment cards (be it a credit or debit card) issued by that financial institution. This is because once a card is successfully added into a digital wallet, data that is associated with the card is tokenized and stored in the digital wallet. This means that the actual card details are replaced by a unique digital token. Such tokenized data is useless to hackers because they are unlikely to have the technology or capability to turn the tokenized data back into actual card details, and therefore the benefits of increasing the security of cardholders’ data and reducing the likelihood of fraud. With digital wallets representing one of the key driving forces behind the accelerating trend toward a cashless and cardholder-not-present society, banks and other financial institutions have recognized the need to keep up to date with technology. By working with digital wallet providers, banks and financial institutions could develop their own digital payment solution apps, which in turn provides customers with an alternative method for making payments.