Last editedJan 20222 min read
If you’re a merchant wishing to offer customers the widest possible range of payment options then, as well as offering debit and credit card payments, direct debits and bank transfers, you need to be able to work with digital wallets. The rising popularity of digital wallets means that offering this option will attract customers who might otherwise choose to shop elsewhere, while providing the widest possible range of payment choices in general is a vital part of appealing to as many people as you can.
How digital wallets work
A digital wallet, in simple terms, is an electronic system which enables customers to pay for purchases without having to present or use a physical debit or credit card. Instead, the customer will load the details of their card onto the app which the digital wallet they’ve chosen uses and then use the digital wallet in one of two ways:
By tapping a smartphone or smartwatch onto the terminal which the merchant is using
By utilising stored payment methods when making a purchase online.
A staged digital wallet or a pass-through digital wallet
There are two types of digital wallets – staged digital wallets and pass-through digital wallets. The differences between the two different types of wallet are as follows:
A pass-through digital wallet is one in which the card payment information is utilised directly. It will be passed on to the issuer and the card network, often with a physical device such as a smartphone taking the place of a physical debit or credit card. Although the card itself isn’t used in the transaction, the information from the card will still be provided. Examples of pass-through digital wallets in widespread use include Apple Pay, Chase Pay, Android Pay and Samsung Pay.
A staged digital wallet is one which makes use of multiple stages in order to complete the transaction being made. These stages can be divided into a funding stage and a payment stage, and working through these stages means that the digital wallet doesn’t pass card details to the card brand or issuer. When a staged digital wallet is used, the first stage involves the wallet acquiring funds from the purchaser. The second stage is then the payment stage, in which the wallet operator passes the money on to the business. The staged digital wallet plays the role of ‘middle man’ between the purchaser and the merchant. When a staged digital wallet is used, the card issuer and network aren’t aware of useful data such as what type of card has been used. Examples of staged digital wallets in widespread use include PayPal, Google Wallet and Square Cash.
Charges from staged digital wallet operators
One of the key differences which merchants have to understand when considering the use of staged or pass-through digital wallets is that the charges for staged digital wallets are higher than those for pass-through digital wallets. The reason given for companies such as Mastercard for charging more for staged digital wallet transactions is that wallets such as PayPal and Google Wallet pass along much less of the kind of data which companies are always keen to gather and analyse. Merchants will have to balance the extra fees charged for a staged digital wallet against the popularity of digital wallets in general when deciding whether to offer this payment option, with the general advice being, as ever, to offer as many payment options as possible.