Guide to Digital Wallets: Advantages and Disadvantages

In the world dominated by technological progress, the way we handle our money has seen a tremendous makeover.

Digital wallets have hit the financial space as a cutting-edge solution, making it easier for users to handle their money transactions.

But like any groundbreaking technology, digital wallets come with their own set of advantages and disadvantages that you should think about.

This guide is here to break down the features and possible downsides of digital wallets, helping you decide if you want to use this tech in your daily finances or not.

What Are Digital Wallets?

Basically, a digital wallet is a virtual version of your physical wallet. It’s a place where you collect your payment details — credit and debit card info, bank account details, and even credentials for cryptocurrencies.

The life of digital wallets began in the early 2000s with the rise of online shopping and e-commerce. As consumers looked for easier ways to handle digital payments, the idea of keeping payment details electronically started gaining traction.

Over time, the progress in mobile technology played a big role in shaping digital wallets. The emergence of mobile payment apps and contactless payment options added to their evolution.

As for now, the operation of digital wallets involves a combination of encryption, authentication, and secure storage.

In order to use your digital wallet to pay, you have to check whether there is a contactless payment symbol at the checkout.

If yes, you can simply put your smartphone close to the payment terminal — the devices will communicate with each other utilizing the NFC (near-field communication) technology. It is supported by all modern smartphones.

To complete the transaction, you might need to confirm it by tapping the required button in the app or entering a password.

One more way to pay via a mobile device is by scanning the bar codes to retrieve all the information you need, from the billing data to the bonus card balance.

Advantages of Using Digital Wallets

The features of digital wallets bring value to both ordinary users and businesses. Here is the list of the most significant ones:

Improved comfort

With all the necessary cards and other important data in an app, there is no need to keep dozens of cards and papers inside of a wallet, purse, or backpack as well as for wasting time searching for them. Everything you need is close at hand, easily managed, and easy to use.

Accessibility

Digital wallets go beyond borders, helping users make transactions anytime and anywhere with an Internet connection.

This is super handy for travelers as they can make payments without needing local cash or stressing about exchange rates. The worldwide reach of digital wallets fits right in with our connected world, giving a new level of financial flexibility.

Time-Efficiency

Such an app allows the queues in the stores to move faster since the payment is done in less than a minute. In the case of online shopping, the digital wallet saves time on entering the credit card details and identification because everything is already confirmed within the app.

Better Expenses Tracking

The information about all the transactions you do is stored inside the app, which allows you to analyze it after each week or month in order to control the expenses better. If it is hard for you to stay within a budget, you can set up limits for particular categories of expenses that will prevent you from wasting too large sums of money.

Enhanced Security

All the data you have in the app is encrypted and never sent to third-party organizations. So, the online market you shop at will never know the details of your payment.

Moreover, the transactions have to be confirmed by you (fingerprint, password), and the digital card wallet is additionally protected by your device’s security system (Face ID, fingerprints, passwords).

It means that if someone steals or finds your smartphone, it would be hard to get access to your money (unlike in the case of losing your wallet with all the cards and money).

Special Rewards

Some digital wallet platforms provide users with additional bonuses and special offers in order to stimulate the utilization of their app. It means you not only get a chance to pay for your purchases faster and simpler but also get pleasant perks.

Lower Costs

This benefit refers mainly to companies like stores that hire people to complete sales and take the customers’ money. The growth of the digital wallet market will possibly eliminate the need for cashiers at checkouts, saving companies a lot of money each month.

Disadvantages of a Digital Wallet

Along with the perceptible advantages, the digital wallet revolution also brings some drawbacks to consider. Here are the main of them:

Security Concerns

A big worry about digital wallets is security. Even with strong encryption and authentication, digital transactions can be targeted by hackers and fraudsters. Bad actors might try to find weak points in the digital system, get unauthorized access, and cause financial harm. Therefore, users must stay alert and increase security by regularly changing passwords and monitoring their transactions.

Compatibility Issues

Digital wallets aren’t everywhere. While big cities and developed areas usually love digital payments, some places might not have the right setup for these techs. This can cause issues, making digital wallets less effective in certain spots. Users might have to switch to other payment methods if their digital wallet isn’t accepted.

Time and Money Investments

In order to allow customers to pay with digital wallets, the companies have to get special hardware or software facilitating those operations. Those companies that want to develop their own digital wallet solution need to find software engineers with relevant experience and spend money and time on the development.

Limited Merchants

Due to the reasons we mentioned in the previous point, not all merchants support digital wallets. The adoption of digital wallets by consumers and businesses also depends on the popularity of particular applications: one will likely be able to pay via Apple Pay rather than Chase Pay.

Dependency on a Device

It is very convenient to have everything you need inside of a smartphone unless it gets out of charge, breaks down, or has problems with the network connection. If the device turns off right before the checkout, you would better have a credit card or paper money in your pocket.

Reckless Spendings

Even though digital money has been around for a while, some people still tend to spend more when they cannot see and touch real money. It means that regardless of the ability to monitor and analyze their spending within the digital wallet app or in an online banking account, it might be challenging to control your budget.

Comparing Different Types of Digital Wallets

There are several types of digital wallets, each with its own unique features and perks. Let’s look at the three main types and compare them in terms of their features, security, and how easy they are to use.

Mobile Wallets

Mobile wallets are apps on smartphones that let you safely keep and handle your payment info. These wallets use Near Field Communication (NFC) tech, so you can make contactless payments at places with the right terminals.

Examples:

• Apple Pay: Apple Pay is made for iOS devices like iPhones, Apple Watches, and other Apple products.
• Google Pay: Google Pay is made for Android users and works with many different Android devices.
• Samsung Pay: Samsung Pay is versatile — it supports not just NFC but also Magnetic Secure Transmission (MST), making it compatible with a wider range of payment terminals.

Advantages of using a mobile wallet:

• Convenience: Mobile wallets consolidate various payment methods into one app, offering a streamlined and convenient payment experience.
• Improved Security: Biometric authentication features, such as fingerprint scans and facial recognition, enrich the security side of mobile wallets.

Online Wallets

Online wallets, also known as web-based wallets, operate on cloud platforms accessible through Internet browsers. Users can store and manage their payment information on these platforms.

Example:

• PayPal: One of the most widely used online wallets, PayPal allows users to link their bank accounts and credit cards for secure online transactions.

Advantages of using an online wallet:

• Broad Acceptance: Online wallets like PayPal are widely accepted across various online platforms and e-commerce websites.
• Ease of Use: Users can access their online wallets from any internet-connected device, which makes this type highly flexible and convenient.

Cryptocurrency Wallets

Cryptocurrency wallets are specialized digital wallets designed for storing and managing cryptocurrencies. These wallets can be hardware-based or software-based, depending on user preferences.

Examples:

• Ledger Nano S: A popular hardware wallet, the Ledger Nano S provides secure offline storage for various cryptocurrencies.
• Exodus: As a software wallet, Exodus supports a wide range of cryptocurrencies and provides users with a user-friendly interface.

Advantages of using a crypto wallet:

• Security: Cryptocurrency wallets employ advanced encryption techniques, providing a high level of security for digital assets.
• Ownership and Control: Users have complete ownership and control over their cryptocurrency wallets, which reduces reliance on third-party financial institutions.

Understanding the differences among different types of digital wallets allows users to choose the one that fits their preferences, needs, and lifestyles. If you want a detailed comparison of cryptocurrency wallets, check out this guide.

The Bottom Line

Digital wallets bring a bunch of benefits, meeting the needs and preferences of various users.

And though we should watch out for security issues, embracing the efficiency and ease of services like Apple Pay allows us to confidently step into the digital finance world.

As technology keeps advancing, digital wallets are likely to get even more user-friendly, making our cashless experiences even better.

If you want to reap the maximum benefits of this digitalization, interested in digital wallet app development, or want to build a crypto application, SCAND is here to help. Our team has created many solutions for the banking and finance industry and will gladly share its expertise.