Almost all of us have heard about digital wallets because the majority of people have or are using this handy digital payment method for shopping at both brick-and-mortar outlets as well as online shopping.
Now, what a few of us may not have heard about are online payment gateways since they work behind the scenes making all kinds of digital payments possible. Digital wallets and an online payment gateway are entirely different things and are in no way interrelated or even remotely associated with each other.
In this article, we will look at both digital wallets and payment gateways in general, to understand how they differ and what is their primary function.
What is a Digital Wallet?
A digital wallet can be described as a digital equivalent of the physical wallet in your back pocket, only thing is that it’s way better. A person stores a certain amount of money in a digital wallet known as a top-up that can be used to purchase goods and services across online and offline stores.
The primary function of a digital wallet is to enable the account holder to carry out a variety of transactions, and it also gives access to a host of feature-rich add-ons such as the ability to recharge one’s mobile, DTH connection, pay utility bills, and much more.
What is an Online Payment Gateway?
An online payment gateway is a system that allows various parties to securely communicate sensitive financial information to make digital payments possible. Whenever a person initiates a digital transaction, the gateway acts as a bridge between the merchant, customer, and the bank/card network to approve or decline a transaction. The system works across all forms of digital payment options such as credit/debit cards, UPI, digital wallets, prepaid cards, net banking, etc. Without an online payment gateway in place, these kinds of transactions can’t take place between parties.
As you can see, while an online payment gateway is a system that allows for digital transactions to take place; a digital wallet is merely a tool that is part of the vast network of digital payment options currently available.
Now that we have looked at what they are, let’s look at how each one functions!
How does a Digital Wallet Work?
Whenever someone uses their digital wallet to pay for goods and services, it shares a random string of numbers instead of the actual credit/debit card number that keeps the sensitive financial information of the user safe from prying eyes.
There are three ways a digital wallet makes transactions possible.
- Near Field Communication: Also known as NFC, this technology allows two different devices to communicate with each other when placed within proximity. However, it’s not to be confused with Bluetooth since the range of NFC is much shorter and devices need to be inches away from each other for communication to take place.
- Magnetic Secure Transmission: Samsung Pay uses this method wherein a magnetic signal is generated imitating the same method that’s used when a card is swiped on a pos machine. This MST signal is transmitted to the card reader to make the payments happen.
- QR codes: These are Square shaped barcodes with information stored within its pixels that the digital wallet can scan to pay for goods and services. This is by far the most common and preferred payment checkout method by both buyers and sellers alike.
How Does an Online Payment Gateway Work?
An online payment gateway functions in a more complex manner since it has to handle multiple transactions at the same time originating from multiple payment sources.
- The customer selects a product or service and initiates a transaction by hitting the ‘Buy Now’ button or any other equivalent on the website.
- The customer is redirected to the payment gateway where their financial information is logged
- The payment gateway redirects the customer to a secure page for authorization
- Once approved, the customer’s bank initiates a check and verifies the account to figure out the funds available
- The status of the transaction whether approved/disapproved is shared by the bank to the payment gateway which is relayed to the customer
- On successful verification, the bank shares the information with the payment gateway and settles the payment
- The payment is then settled with the merchant completing the transaction
Benefits of Using Digital Wallets
- Users don’t need to re-enter their payment information every time they want to make a payment as the wallet automatically enters all payment-related information making payments happen much faster.
- Digital Wallets are capable of auto-filling information whenever it detects an online form requesting such information.
- Digital Wallets offer a host of value-added services apart from allowing users to make seamless online transactions.
Benefits of an Online Payment Gateway
- Online Payment Gateways help business owners handle their daily operations and accounts efficiently by sorting all financial information into easily readable data that can be traced back to the source of payment for both incoming and outgoing payments.
- Allows for recurring payments are hugely beneficial for subscription-based business models.
- Can handle multiple financial transactions across various digital payment options with next to no downtime
Both digital wallets, and enterprise payment services like an online payment gateway function very differently from each other. With one being more consumer-centric than the other, they are vital tools to conduct business in this modern-day and age!