“Use Paytm wallet and get 5% additional discount on BigBasket.com“, said my Colleague. “I use Ola wallet while booking Ola cabs and get discount on my taxi fare“, said another one, “No need to carry cash or use credit card. Fill it and use it”. “Google Wallet, ApplePay are also something similar right.” said another one.  What are Digital Wallets , What are Paytm wallet, Ola wallet,Google Wallet, Apple Pay? How do they differ? Is it same as AirTel Money, Vodophone M-Pesa?

What is Digital Wallet?

A digital wallet or E-Wallet refers to an electronic device that allows an individual to make e online (technically e commerce or electronic commerce) transactions. It  serves as a place to hold some of your money online. You make payments using the money stored in your wallet instead of using a credit card, debit card or net banking, which means your card/bank account doesn’t need to be accessed. Of course, adding money to the wallet still requires you to use one of those methods.They can also be used to store loyalty card information and digital coupons. Digital wallets can be used in conjunction with mobile payment systems that allow customers to pay for purchases with their smart phones.  When Digital wallet is used with mobile it’s called Mobile Wallet.  It is a Virtual Wallet which is like prepaid account of the mobile phone.

There are different kinds of wallets some liked to a e-commerce site like Flipkart or Ola which can be used to make purchases from that site only. Some like MobiWik and Paytm or MobiKwik can be used to make purchases at other websites also. Some like Airtel money can be used to Pay Bills and Recharge, shop or transfer money to bank accounts of your friends and family. This is discussed in detail later.

Methods of payment

What is the advantage of Digital Wallets or Mobile Wallets?

Electronic and in-app wallets have emerged as another payment option.

Safety: Every time you hand over your credit or debit card  or use netbanking to pay, your identity is visible. And when you make a purchase, as electronic wallet is used to process your payment your actual credit card numbers or bank details are never shared  with merchants. Mobile wallets use a security layer that can be in the form of passwords, biometrics or voice recognition.  If the wallet  is compromised then the amount of harm that’s possible  is limited  as your bank account isn’t touched.

Ease of Use : With RBI all transactions make all transactions secured by a second verification code or one-time-password,the process of paying online using your credit or debit card becomes extremely cumbersome.  As Apple Pay says  Paying in stores or within apps has never been easier. Gone are the days of searching for your wallet. The wasted moments finding the right card. Now payments happen with a single touch

Discount and Loyalty : As mobile wallets use a software that can also store various discount information, offers by merchants and loyalty points, thus eliminating the need to remember which card to use in order to get the maximum benefit from a particular purchase.  E-commerce firms prefer to settle refunds to customers via wallets.   Wallets will largely be used for encouraging loyalty points and to reduce cost of transactions by e-commerce companies.”Digital wallets can also be used to provide discounts. Wallets might help solve the problem of COD(Cash on Delivery) for the e-commerce market. But as COD is largely being used by consumers who are wary of paying in advance will the lure of discount ad ease of use tempt them away is to be seen. Since the concept of a mobile wallet is still pretty new in India, companies are offering deals, discounts and free top-ups – for example, In Oct 2014, Ola launched its wallet with an offer to double the money you stored in it, and Paytm, MobiKwik have regular discounts on products, offered as credit added to your wallet( that can be used to shop some more ) Some of the offers provided by MobiKwik (on Feb 20 2015)

Offers and Mobile Wallets

Kinds of Digital Wallets

According to the Reserve Bank of India (RBI), there are three kinds of wallets: closed, semi-closed and open.

A closed wallet is issued by a company to a consumer for buying goods and services exclusively from that company. You cannot do cash withdrawal or redemption.With closed wallets, companies don’t need an RBI approval to launch such accounts.   Companies such as Flipkart.com, Jabong.com and Makemytrip.com offer closed wallets. Mostly these function as an account where money gets credited in case of a refund due to cancellation or return of a product or service.  For example in  closed wallet of Ola cabs  the money that you put into the service can only be used to pay for those taxis. It will never expire, though, and since Ola controls the wallet, it can give you loyalty rewards and discounts with ease.

A semi-closed wallet can be used to buy goods and services, including financial services, at clearly identified merchant locations or establishments, which have a specific contract with the issuer to accept the payment instruments. Semi-closed wallets also do not permit cash withdrawal or redemption by the holder. MobiKwik, PayU and Paytm offer semi-closed wallets. For example Citrus Cash app can be used not only at multiplexes such as PVR and Inox but also to recharge direct-to-home services such as Sun Direct. In India as per RBI  Semi-closed Prepaid payment instruments which permit only payment of utility bills/ essential services up to a limit of Rs 10,000 can be issued without any KYC being undertaken by the issuer. 

Open wallets can be used for purchase of goods and services, including financial services such as funds transfer at merchant locations or point of sale terminals that accept cards, and also cash withdrawal at automated teller machines or business correspondents. These kinds of wallets can only be issued by banks. An example of open wallet is M-pesa by Vodafone India Ltd in partnership with ICICI Bank Ltd. (Note Vodafone also offers M-pesa as a semi-closed wallet).  As per RBI the maximum value in open wallet  shall not exceed Rs 50,000.

Interested readers can go through RBI  Draft Guidelines for issuance and operation of Prepaid Payment Instruments in India

Are open digital wallets like Payment Banks?

No . Payment banks are meant for simple banking transactions. These institutions are neither allowed to lend or accept term deposits nor can customers keep more than Rs 1 lakh in such accounts. Such payment banks can issue debit cards and offer services like remittances and utility bill payments. They can also distribute simple financial products like mutual funds and insurance. Individuals can use the payment bank account to make daily or monthly cash transactions either through debit cards or through mobiles. This can also help guard against debit card fraud since one can keep a smaller balance in accounts.

As per World Bank estimates, only 35% of the Indian population has accounts with financial institutions. To service the remaining population, the RBI came out with two new banking categories called small finance banks and payment banks.

Which companies provide Digital Wallets or Mobile Wallets?

In India the major companies providing mobile wallet services are telecom service providers such as Vodafone’s M-pesa, Bharti Airtel Ltd’s Airtel Money, Aircel’s Mobile Money and Tata Teleservices Ltd’s mRupee. MobiKwik, PayU and Paytm offer semi-closed wallets

What kind of technologies are used in Mobile Wallet?

Mobile wallets uses a range of enabling technologies  Mobile internet( 2G, 3G or Wi-Fi), SMS (short messaging or texting service), NFC (near-field communication), QR (quick response) codes, Bluetooth and even biometrics.

• NFC is a set of standards for smartphones and similar devices to establish a short-range high frequency wireless communication that enables exchange of data between devices over about a 10cm distance. In Jan 2015 ICICI Bank came out with debit card using NFC technology allowing one to make quick contact less payments.
• QR codes are barcodes that can store large amounts of information and can be read using apps on smartphones and dedicated QR reading devices.
• Biometrics, however, are only available in some phones like Apple Inc.’s iPhone.

Infographic 7 ways to pay using your phone  shows the various technologies used in mobile wallets in US. An excerpt is shown below

Technologies used in Mobile Wallet

History of Digital Wallets

The digital wallet was first popularized by e-commerce giant PayPal in the early 2000s as a way to securely pay for goods online using a credit card. PayPal lets users link their bank accounts, debit cards and credit cards directly to one online account. When shopping online, users can then choose to pay directly from their digital account or digital wallet. Once the iPhone came about and mobile commerce began to take hold, Apple extended this model to iTunes, and Google followed with Google Play, both providing a software solution for repeat online purchase via the mobile device. In Oct 2014 Apple incorporated its mobile wallet solution directly into its operating system, and simultaneously incorporated a SIM-independent  secure memory chip, an NFC radio, and a fingerprint reader.

Is Digital Wallets or Mobile Wallet  the Future?

All countries are trying to move away from using relatively expensive and inefficient paper money and metal coins for making payments. In 2015 Annual Letter, the Bill & Melinda Gates Foundation said that one of their  big bets is how mobile banking will help transform the lives of the poor.

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A smartphone digital wallet will help you pay for stuff, but it will also store your concert tickets, bus and subway passes and gift cards. Retailers will reward your loyalty by offering instant freebies, discounts and coupons. Your digital wallet might even unlock the doors to your house. Mobile wallets are still evolving in terms of their usage, but they will be the next big thing in monetary transactions is to be seen. Have you used any Digital Wallet? How has been your experience? Do you think Digital wallets are future?