From Plastic to Practicality: The Rise of Digital Wallets

From Angry Birds to Instagram to Google Maps, it is fair to say that mobile technology is becoming increasingly essential in our daily lives. We use our cell phone not only to make calls or text friends, but also for private dealings such as managing our bank accounts, emailing our employers and even trading stocks. The name of the game seems to be convenience. Never has it been easier to check email, view bank statements, or buy useless junk online. Just scan a finger and gain access to heaps of personal information. The latest fad is digital wallet services such as Apple Pay, but with so much of our personal information already stored on our phone, where do we draw the line?

It has been over a year since Apple released Apple Pay in October of 2014, and it is off to a slow start. According to the research body Aite Group, only one percent of all retail transactions performed in the United States are through Apple Pay. Furthermore, only 13% of the 1500 people surveyed by Pymnts.com and InfoScout even said they had tried the service. Yet, even with Apple Pay’s subpar results thus far, expect to see digital wallets come into fashion within the next few years.

What is Apple Pay? In one sentence Apple Pay is a digital wallet that is more convenient and secure than traditional plastic credit cards. Apple Pay utilizes a technology called near-field communication (NFC), which allows it to send secure credit card data directly to enabled readers over lengths of around four to five inches. As a result, Apple Pay allows you to pay by holding your phone close to a reader and scanning your fingerprint. In addition to Apple Pay, Samsung and Google have recently released their own digital wallets: Samsung Pay and Android Pay respectively. Just as their names would suggest, they are very similar to Apple Pay.

A significant part of the reason that Apple Pay is off to a slow start is that the infrastructure of mobile payments was not in place at the time of release. According to Strawhecker Group, a payments consultant company that specializes in advisory services, only 27 percent of U.S. retail stores have the upgraded checkout terminals with the NFC technology that Apple Pay needs to work. In addition, those who have tried using any of the three mobile payment systems often report that employees are generally unaware of how to react to mobile payments.

Recently, however, a significant amount of progress has been made to make Apple Pay more accessible. Apple has partnered with PayAnywhere, a company that sells Apple Pay compatible card readers. The newest readers, as a result of the partnership, will retail for a meager $40, and as an added bonus will have no transaction fee for the first $5000 of transactions. As a result of the declining prices of NFC enabled card readers, small businesses in particular are quickly upgrading their terminals with these cheap card readers. Furthermore, Apple CEO Tim Cook stated at Apple’s quarterly conference call that they are “on track for Apple Pay acceptance at over 1.5 million U.S. locations by the end of 2015” and that Apple Pay is adding 80,000 small and midsize businesses every month. Moreover, over the year that Apple Pay has been available for the public, Apple has used its influence extremely well in the world market to convince banks to accept Apple Pay. Apple Pay now works with over 500 banks around the world, and more are constantly being added. Finally, Apple has said that it will be adding the ability to register loyalty cards (yes, Starbucks included) with Apple Pay, an important feature that makes using Apple Pay even more convenient.

In addition to businesses, Apple Pay is also targeting colleges and universities. Cook announced that 700 U.S. colleges and universities will accept Apple Pay in the coming school year. The first of them is the University of Oklahoma, which on September 1st became the first college to fully accept Apple Pay across its campus. The students are able to use Apple Pay at over 400 locations around campus, including bookstores and restaurants.

The most valuable feature of the digital wallets, however, is not convenience, but rather security. Many consumers who are unaware of the method in which Apple Pay works, often assume that Apple Pay is less secure most likely because it has not been in use as long as plastic credit cards. This is absolutely incorrect as digital wallets are considerably more secure than plastic credit cards.

Apple Pay, along with Samsung and Android Pay all use the same form of security. All three require you to enter a password or fingerprint to access the wallet and pay for goods. Moreover, the full credit card number is not displayed so even if you lose your phone, thieves will not be able to steal your credit card information. Comparing just those facts to the old, brown leather wallet you probably have in your back pocket right now, digital wallets offer substantially more security. The important difference, however, is in the way that digital wallets send credit card information.

After paying with a card, the digital wallets send a 16-digit token to your phone that acts as a temporary dummy credit card number so that if a hack occurs the hackers will only get a useless dummy number, and not the actual credit card information. With hackers becoming increasingly organized and adept at stealing credit cards – remember that giant Target hack in the winter of 2013 in which 40 million credit card numbers were stolen? – digital wallets provide a much needed extra layer of security. In the words of Catherine Pearce, a security consultant for the mobile and cloud security provider Neohapsis, “Mobile payments have the capability to be far more secure than mag-stripe or even chip and pin credit cards, while being more convenient.”

Digital wallets offer better security, more convenience and are almost frighteningly easy to use. So is there a reason not to start using them? The answer is a resounding no.

The number of NFC compatible readers is nearing the threshold at which point consumers will demand that they are in use universally, and business are scrambling to upgrade their terminals to match their competitors. Moreover, digital wallets like Apple Pay are beginning to seamlessly integrate loyalty cards into the payment process and they have potential to do much more. Digital wallets could in the future have applications that help track spending and possibly even have options to set transaction limits on certain cards. Now, nearly all new smartphones either come with a preinstalled digital wallet, or one that can be easily downloaded. There is no doubt that the age of digital wallets is coming. The best thing for you to do is register your card and join the future.