The future of financial transactions in the U.S. is quickly shaping up to be mobile. According to Dovetail Systems and Radix Consulting, cash and paper transactions are quickly falling by the wayside in favor of electronic payments. The proliferation of smartphones and tablets is also fueling the rise of mobile payment mechanisms.
Digital wallets have gotten plenty of fanfare recently as one of those mobile payment methods. Established companies like Google and upstarts like LevelUp alike each have their own unique digital wallet services. But do any of these offerings have what it takes to be successful in the long run?
Wait... What is a Digital Wallet, Anyway?
Digital wallets are the latest form of mobile payment technology, where shoppers can use smartphones and other mobile devices to pay for physical and digital goods. Instead of swiping a debit or credit card, digital wallet users swipe their smartphones at designated point-of-sale (POS) terminals to complete transactions.
These digital wallets are driven by Near Field Communication (NFC), which relies on short-wave wireless technology to communicate between NFC-equipped Android devices and POS terminals with NFC technology.
Some people may mistake NFC for “bump” payments, where users bump their smartphones together to transfer information. Bump Pay is software based, while NFC is a hardware-based technology that doesn’t rely on physical contact to make transfers.
Aside from their considerable convenience, digital wallets offer a greater measure of security than most credit and debit cards. Not only can users lock their digital wallets with a numeric PIN, but the underlying information on LevelUp and Google Wallet servers is also protected via encryption and an additional PIN.
Other technologies, such as the identity theft prevention tools offered byLifeLock, could be combined with built-in digital wallet features to help curb instances of fraud. Considering that over 12.6 million people in 2012 were affected by fraud (to the tune of $21 billion), digital wallets seem like a better alternative for many.
Overcoming Hurdles for Small Businesses and Rural Communities
Transaction fees for digital wallet payments are also lower than those for credit and debit card transactions. In the case of LevelUp, those transaction fees don’t exist at all. However, businesses must first overcome the initial investment of upgrading their POS systems to accommodate digital wallets. As a result, small businesses may be among the last to finally upgrade their terminals, if they decide to do so at all.
Market penetration for digital wallets is still a major concern, especially in areas where mobile coverage is spotty. Rural users who fall outside of most mobile network coverage areas could be out of luck when it comes to using digital wallets.
Where Do Digital Wallets Go From Here?
The success of digital wallets hinges largely on awareness and adoption rates. Many major companies have already upgraded their payment systems to accommodate various forms of mobile payments. For example, McDonalds is currently experimenting with a Visa-based mobile payment system in its Singapore restaurants. Meanwhile, mainstream consumers are leaving it up to first adopters to help Google and LevelUp work out the kinks in their digital wallet systems.