Digital wallet apps are rapidly gaining popularity among consumers, but many people are uncertain about how secure these new payment methods really are. How do payment processing systems work to secure digital wallet payment data and protect consumers and businesses alike against the dangers of transaction fraud?
The landscape in the world of payment processing has changed significantly in recent years. While cash continues to decline in its usage for payments, many other cashless payment methods have risen in popularity and are reshaping how businesses process transactions for purchases of all types. The accelerating adoption of digital wallets among consumers is perhaps the most substantial shift over the last few years as people slim down their wallets and purses in favour of more convenient digital payment solutions.
Surging growth of digital wallet usage has made this trend too important for businesses to ignore. In fact, global adoption of digital wallets is projected to exceed 4.4 billion users by 2025 according to recent studies. Here in Canada, particularly among younger consumer segments, preference has risen above 30% as of 2021 for the usage of mobile debit cards and digital wallet apps.
However, as with the development of any new technology that is used when personal and private data is exchanged, there are naturally going to be some concerns among the general public about security. As digital wallets become more mainstream, there will be many who are unsure about how the technology works, and wary about how well their personal financial data will be protected when they use it. Fortunately, the introduction of digital wallets into the payment processing industry has come along with notable advancements in transaction security technology.
What are Digital Wallets and How Do They Work?
Quite simply, a digital wallet is an app for your smartphone or connected tablet that can be used to make payments, just like a credit or debit card, but with far greater flexibility and convenience. Just like a regular wallet, digital wallets can be loaded with a wide range of payment methods, loyalty program cards, gift cards, and more. At the moment of checkout, the user simply opens the digital wallet app, selects their desired payment method, and uses their device just like a tap-to-pay debit or credit card. Simply holding the smartphone up to the merchant’s point-of-sale system will activate the built-in NFC chip of the device and complete the transaction.
The two most popular digital wallet apps at the moment are Apple Pay for iOS devices, and Google Pay for Android OS devices. Both are capable of storing an expansive range of payment methods, including credit cards, debit cards, gift cards, customer rewards cards, and more. There are several other digital wallet apps as well, each performing very similar functions.
Why Should Businesses Be Ready to Accept Digital Wallet Payments?
A common question many businesses have at this point is just how important is it that they are able to accept this new method of payment. The answer is very. In the early stages of introduction for any new payment method there has always been a period of time where it was not 100% essential that merchants had to adapt to them. There was usually time for businesses to let the demand grow to the point where investment in the new technology necessary to process different payment types was unavoidable.
However, advancements in digital technology and the meteoric rise of smartphone usage have drastically shortened the amount of time businesses can wait to adapt to changing consumer demands. In almost no time, businesses can start to incur significant risks for lagging behind the trends occurring in the marketplace. The reality today is that businesses can’t afford to not accept digital wallets anymore. The trend towards cashless payments is irreversible, and digital wallets are simply the next step in this evolution.
Humans are creatures of habit. The more we become accustomed to using digital wallets for payments at a wide range of merchants, the more we will come to expect this option to be available at all merchants. Fewer people than ever are carrying cash, and the same will eventually occur with physical payment cards. Failure of a business to adapt to customer demands for digital wallet payments will almost certainly translate into a reduction in customer satisfaction, and perhaps even an increase in the rate of lost customers.
One of the factors contributing to the accelerating usage of digital wallets is the exceptional level of security and data protection they are able to provide to customers and businesses alike.
What Security Measures Are Used to Enable Digital Wallet Fraud Prevention?
Modern payment systems use a multi-step security process to protect digital wallet transaction data at each stage of the payment processing flow. On their own, each level of protection is substantial, but when combined they achieve a synergy of security that makes them more than the sum of their parts. Each payment is protected with encryption, marked with tokenization, and requires authentication before the transaction can be completed. Authentication, encryption, and tokenization are the keywords that are most important here.
Encryption – The process of encoding transaction data, making it unreadable by a third party that does not have the ability to decode the encrypted data.
Tokenization – The process of assigning a unique one-time signature on the encrypted data, making the unique data from each transaction unusable for future fraudulent payments.
Authentication – The process of verifying the identity of each party involved in the processing of a transaction and confirming they are authorized to transmit the necessary data between them.
Each of these protective elements performs a specific task during the transaction process that makes the others even stronger. Authentication makes it so that fraudulent payment data won’t be approved, encryption makes it so that data thieves can’t read the data even if they intercept a legitimate transaction, and tokenization makes the data useless for anything other than the original intended purchase. With these advantages, digital wallets offer a superior level of protection when compared to many other traditional payment methods. The benefits of these protective measures are profound for businesses, and for customers.
With the benefits of digital wallet security clarified, it’s likely that business owners are curious about how they can take advantage of this new payment technology. Ultimately, it all depends on having a flexible and powerful payment processing system capable of accepting a comprehensive array of payment methods, including digital wallets.