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Tata Capital > Blog > Generic > What is a Digital Wallet?


What is a Digital Wallet?

What is a Digital Wallet?

The adoption of digital wallets has grown exponentially in India over the past decade. The volume of mobile wallet transactions has increased from 32.7 million in the financial year 2013 to 4 billion in the financial year 2021, highlighting the rising preference for digital payments among Indian consumers.

The Government of India has also provided strong backing for creating a cashless India. The Union Cabinet approved a Rs. 1,300-crore incentive scheme to promote digital transactions using mobile wallet apps linked to UPI in December 2021. Moreover, finance Minister Nirmala Sitharaman, in her 2022 budget speech, emphasised the government's focus on promoting economical and user-friendly payment platforms.

So, what is a digital wallet, and how does it work? This blog will provide you with a deep understanding of online payment wallets and why they have become a preferred mode of transaction.

What is a digital wallet?

A digital wallet, or an e-wallet, is an electronic payment system that lets you make online payments. The key advantage of using a digital wallet is that it eliminates the need to enter detailed information like credit/debit card details every time you make a payment or transaction.

Digital wallets store your information on servers/clouds in an encrypted format. They provide a secure way to make payments without exposing sensitive financial information. When you use a digital wallet to pay a merchant, the e-wallet provider facilitates the transaction by transferring funds from your wallet account to the merchant account.

Leading digital payment solution providers in India include Paytm, PhonePe, Amazon Pay, Google Pay, Mobikwik, and Freecharge.

How does a digital wallet work?

A digital wallet securely stores your payment information, like debit/credit card details and passwords, allowing you to conveniently make payments from your device.

To start using a digital wallet, you need to complete a one-time KYC process. During this process, you will be required to provide your personal details such as date of birth etc, add a payment method such as a credit/debit card or net banking, and set up security measures like an MPIN or biometric authentication. Once you have successfully completed this process, you will be able to use the e-wallet services to make payments easily.

Digital wallets use the following technologies to enable quick and secure transfers:

1. Near Field Communication (NFC): This technology establishes contactless communication between two enabled devices when brought close together. It allows the transmission of information via electromagnetic signals.

2. Magnetic Secure Transmission (MST): MST allows digital wallets to securely emulate the magnetic stripe signal that is generated when a credit card is physically swiped. This enables customers to securely complete transactions using their digital wallet without merchants needing to upgrade their point-of-sale equipment.

3. QR codes: Digital wallets generate unique QR codes that you can scan using your smartphone camera during the transaction.

Types of digital wallets

Depending on your requirements and preferences, there are several types of digital wallets. The main categories are closed wallets, semi-closed wallets, and open wallets.

1. Closed digital wallets

A closed wallet is restricted to transactions within a specific app or website. You can only use this wallet to make payments with the issuer. For example, Ola Money is a closed wallet that can only be used on the Ola app to make purchases.

Closed digital wallets have the following features:

- You can make payments and transfers only to merchants or users within the issuer's application.

- Closed wallets are typically offered by commercial companies instead of financial institutions.

- Most closed wallets do not allow withdrawals or transfers.

2. Semi-closed digital wallets

Semi-closed wallets allow transactions with select merchants or users, not just the issuer. They offer more flexibility compared to closed wallets.

Semi-closed digital wallets have the following key features:

- In addition to the issuing app, you can use semi-closed wallets to make payments with approved third-party merchants, both online and offline.

- Semi-closed wallets permit money transfers to other users on the same platform through options like QR codes.

- You cannot withdraw money from a semi-closed wallet into your bank account.

- Private companies like Paytm and Mobikwik offer popular semi-closed wallets.

3. Open digital wallets

Open digital wallets allow transactions with any business or user. They put no restrictions on payments, transfers or withdrawals.

Here are some key features of open digital wallets:

- Open wallets can pay any merchant, individual or business. There are no restrictions on where you can spend your money.

- You can easily transfer money to any other user on different platforms.

- Money in an open wallet can be withdrawn into your linked account anytime.

- Financial institutions like TATA Capital, ICICI, Kotak, SBI and HDFC offer open wallets.

Why are digital wallets becoming a preferred mode of transactions?

Digital wallets are gaining popularity due to the convenience, security, rewards and hassle-free payment experience they provide compared to traditional payment methods. Here are the benefits that digital wallets offer:

1. Digital wallets allow swift, hassle-free payments. They store user information to enable quick payments. Features like auto-payments and reminders help in making bill payments on time.

2. Digital wallets use tokenisation to protect user data. Transactions generate unique one-time codes rather than exposing actual card details. Other security measures like 2FA and Face ID also add protection.

3. Digital wallets allow the digital storage of debit/credit cards, loyalty cards, coupons, and travel tickets in one place. This declutters physical wallets.

4. Digital wallets do not impact card rewards or points. Users continue to earn points or cashback on purchases made via wallet. Some wallets provide additional exclusive offers.

5. Digital wallets facilitate easy peer-to-peer money transfers using UPI IDs, QR codes or phone numbers. This eliminates cash handling.

Wrapping up

Digital wallets have become a mainstream payment method due to their unparalleled convenience, security and rewards. They enable swift checkouts, contactless payments, and hassle-free money transfers - all through a smartphone. As digital payments gain rapid adoption across India, choosing a secure and feature-rich digital wallet is crucial.

To enjoy the efficiency and ease of digital payments, download the Tata Capital app today and empower yourself with the convenience of smart digital payments in your pocket!

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