The COVID-19 pandemic accelerated the need for digital wallets and forced companies to swiftly adjust and improve their platforms. Many industry experts report that digital wallets will overtake credit cards as the preferred method of payment by 2023. The focus by businesses and merchants on providing their customers with a positive user experience has seen a wide acceptance of digital wallets in the payments ecosystem. It is easy to understand why as digital wallets offer users an easy, convenient, secure experience across many day-to-day transactions including in payments, the storing of IDs, transit passes, plane tickets and more.
The impact of digital wallets has been mostly seen in payments, particularly in terms of existing systems. In the payments space, digital wallets are being used for contactless payments in-store, P2P (peer-to-peer) or social payments, online payments and in-app payments. These transactions are primarily in FIAT currencies (government-issued currency), but the widespread adoption of cryptocurrencies has seen an increase in this form of payment as well. In addition to better serving their customers, businesses are adopting digital wallets to ensure security during access and transmission of payments instruments.
Encouraging Adoption of Digital Payments
The global pandemic has been a forceful catalyst in pushing the world towards digitization across all age groups. Digital solutions and services have seen an increasing amount of demand and usage, particularly in financial services, with digital banking and contactless digital payments at the forefront.
Accompanying a change in spending habits, social payments across borders and age groups or families will be another strong encouraging factor for the future of payments. Adoption will also increase due to the security that digital wallets offer. When using digital wallets during a purchase, credit card information is not transmitted. Instead, a tokenized number is sent to the merchant for processing, offering a convenient yet secure incentive for people to adopt and utilize digital wallets as their primary form of payment.
Choosing the Best Digital Wallet
The best wallet options can be narrowed down based on the user’s desired use, like holding a cash balance or making contactless in-store payments. However, the common evaluation factor among all potential digital wallet options should be security and understanding how the company verifies the user’s identity, ensures that the user is who they say they are and whether the company securely supports faster payments.
Mitigating Risk in Digital Wallets
Different types of fraud have risen since the expansion of digital wallets. Synthetic fraud and money muling have made it difficult to truly verify people’s identity and the risk associated with a user’s account or transaction. More so, the rise of digital wallets usage has seen fraudsters exploiting gaps in account/card ownership authentication, stolen identity data and account hacks, putting users and businesses at risk.
The good news is that there are technologies that can be used to mitigate fraud when it comes to digital wallets. The rise in digital banking technologies across channels has seen companies implement strong KYC/AML restrictions, utilize AI-powered technology, implement cryptocurrency transaction monitoring and adopt blockchain technology as part of fraud prevention and compliance measures. Stronger KYC solutions are needed to help quickly identify risks in transactions. Using layered solutions for KYC and fraud prevention, instead of a single fraud prevention product, enables businesses to have fraud mitigation strategies rather than depending solely on a single method. Layered, holistic solutions will protect the user and business across all interactions and throughout the digital wallet use, from enrollment to biometric authentication and monitoring real time payments for suspicious activities.
Digital Wallets Support Inclusion
Digital wallets allow those who are unbanked or underbanked, those who rely on alternative financial methods, a method to conduct transactions. The underbanked bring the challenge of insufficient information (acceptable information) to evaluate risk – if one ONLY follows the traditional risk assessment techniques, instead of leveraging all possible data sources and techniques. Every financial institution should be able to offer services that are adequate to the level of information they have about an individual and reassess those services continuously. Digital banking and digital wallets can be readily set up to accomplish this.
Even after the pandemic, digital wallets can support the need for new types of regulatory compliance surrounding those without financial or credit history, the use of cryptocurrencies in everyday transactions, the need for those looking to expand their market to embrace regulatory compliance and the rise of continued alternative financing sources for those who have been missed by traditional financial services.
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