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How do online payments via digital wallet work?

GoCardless
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Last editedNov 20224 min read

The process for how digital wallet payments work depends on one important factor - the source of funds.

How do online payments via digital wallet work?

In the same way that the scale of Visa and Mastercard have more or less standardised the card payment experience globally, companies like PayPal have done something similar for digital wallets. Although, there can be noticeable differences from country to country and product to product.

Before we explore the process of how digital wallet payments work, there’s an important factor to consider - the source of funds. 

Digital wallets may act as either (or both):

  • A storage mechanism for payment details (e.g. credit or debit card details, bank details)

  • A storage mechanism for actual funds

Paying using stored payment details

If a customer makes a purchase using a digital wallet in which they’re only storing their payment details for another payment method, the process is nearly identical to a standard payment made with that method.

If it’s credit or debit card details they’re storing, they could effectively make a standard card payment (detailed earlier in this guide). The only difference is that the digital wallet provider may be providing the merchant with the facilities of a payment service provider (see here for a definition).

If it’s bank details they’re storing, they could effectively set up a standard Direct Debit mandate (detailed earlier in this guide), provided the mandate form is made available to them electronically.

In both these instances, the digital wallet is simply acting as an information store - like a digital brain.

Paying with stored funds

An alternative scenario is when the customer has funds stored within the digital wallet. These funds are usually transferred into the digital wallet via a variety of other online payment methods - e.g. bank transfers, credit or debit card payments, or transfers from other digital wallets. 

When a customer wishes to make a purchase using these stored funds, the merchant must typically receive them in their own digital wallet from the same provider. Behind the scenes, no funds are really moved - the digital wallet provider simply applies a virtual debit to the customer’s wallet and the relevant credit to the merchant’s.

If a merchant wants to transfer these funds from their digital wallet to their bank account, the process would be almost identical to a standard bank transfer (detailed earlier in this guide), with the digital wallet provider transferring the requested amount to the merchant’s nominated bank account.

Digital wallet use cases

Digital wallets are primarily of use to brick-and-mortar businesses, although they can be used online too, as they offer a high level of convenience to in-store shoppers. As such, this is where the benefits of digital wallets are to be found for merchants - making it easy for consumers to make purchases in person.

Accepting digital wallet payments allows merchants to make sales even when a customer has neither cash nor a credit or debit card to hand. Payments can be made via digital wallet apps on smartphones, reducing the number of items that shoppers need to carry around.

Digital wallets also make it easier for merchants to offer loyalty bonuses and discounts to customers.

The disadvantages of digital wallets are that not all outlets accept payments of this type, plus there are still security issues to be solved. On a more practical level, the reliance on smartphones as a conduit for digital wallets does raise the question of what happens when a phone runs out of battery.

GoCardless and digital wallets

GoCardless specialises in account-to-account bank payments and does not offer digital wallet payments. While digital wallets do solve some issues for some merchants, for many, they add to existing payment issues, such as lack of visibility of payment status, and they generate a significant level of manual admin.

Bank payment solutions, such as Direct Debit, offer many merchants advantages over digital wallets and other types of payment collection methods. Merchants that currently collect payments using digital wallets, credit or debit cards, or manual invoicing can save time on admin and money on transaction fees while at the same time increasing the success rate of payment collection with automated bank payments.

Advantages of bank payments

Bank payments are direct account-to-account transfers which, at most, only require the involvement of the two banks involved in the transfer. 

Cost

With a maximum of only two parties involved, bank payments are more cost-effective than digital wallets or cards as far as fees are concerned.

Merchants who take a high volume of payments should consider the costs of accepting certain types of payments. With digital wallets and cards, different issuers and providers charge different rates, so it can be difficult to predict exactly what your costs might be.

GoCardless, by contrast, offers transparent and cost-effective pricing.

Payment visibility

Digital wallets do not offer merchants much in the way of visibility on upcoming payments. Typically, with digital wallets and cards, merchants will only know there is a problem with a payment when it doesn't appear in their bank account.

They then have to start the process of tracking down and trying to recover the payment.

With GoCardless, the user-friendly merchant dashboard provides visibility into upcoming payments and their status. If a customer cancels their payment, you will receive a notification.

Having visibility on payments allows merchants to take action to head off any potential issues and provides more certainty on cash flow and projections.

Payment automation

GoCardless merchants are able to automate large parts of their payment collection process via the merchant dashboard and over 200 software integrations with top accounting software packages, such as Xero and QuickBooks.

Automating payment collection eliminates late payments, as GoCardless always collects on the due dates set by you - even for invoice payments

Ending late payments means no more manual late payment admin, plus GoCardless is also able to automate bank reconciliation, all of which saves your finance team significant amounts of time.

Case study: saving time and money on payment collection

Lifestyle Fitness is a community gym promoting fitness and healthy lifestyles. With a 40-year-old legacy payment process, the business needed to pull its payment system into the 21st century.

Owner Chris McQuillan knew this would take several months and impact many areas of the business, so technical support during onboarding was important. 

“The quality of the support we got from GoCardless was brilliant. Whenever a question arose about the integration, we were never stuck because we got the answers back very, very quickly.”

Now that almost every payment is processed through GoCardless, the company has realised dramatic improvements in financial reporting.

“Between 99% and 100% of our payments go through GoCardless today, which has saved us a huge amount of time and money. Our monthly accounts used to take three weeks to put together – now it’s about five days.”

This visibility on customer payments has also boosted team morale, explained Chris: 

“Positive feedback is constantly rolling in now that the team can respond immediately and accurately to customers’ payments queries. Customers are happier, so staff are happier, and since launching GoCardless, we haven’t had one negative piece of customer feedback about payments.”

Interested in collecting payments by Direct Debit?

Find out if online Direct Debit is right for your business

Read the guide

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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Interested in automating the way you get paid? GoCardless can help
Interested in automating the way you get paid? GoCardless can help

Interested in automating the way you get paid? GoCardless can help

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