Digital Wallet Technology

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Digital wallets are small electronic packages that automatically supply information such as credit card numbers and shipping addresses for use in conducting Internet transactions. Also known more broadly as Internet payment services, they provide a means by which customers may order products and services online without ever entering sensitive information and submitting it via e-mail or the World Wide Web, where it is vulnerable to theft by hackers and other cyber-criminals. Digital wallets thus allow consumers to make online purchases easily and securely, safeguarding the privacy of purchasing habits and financial information alike.

Traditionally, digital wallets were stored on the desktops of personal computers. By the early 2000s new digital wallets were compatible with wireless and other mobile devices, and were more often stored on a central server owned by a digital wallet vendor or Internet service provider (ISP). Among the technologies touted as a cornerstone for the growth of e-commerce, digital wallets had a history of promise interrupted by false starts. They evolved in stages, with a series of incarnations since first emerging in the mid-1990s.

Digital wallet vendors maintain relationships with online merchants in a manner similar to those between credit card companies and brick-and-mortar stores. The digital wallet vendor either charges a commission to the retailer on every purchase involving the vendor's wallet, or merchants pay the vendor a flat fee for accepting the vendor's wallet in their transactions. In turn, businesses and customers mutually agree to use the products, software, and services of a particular digital wallet vendor, which then acts as an intermediary for all transactions between the firm and its customers. In this way, customers needn't transmit credit card numbers for each transaction. Instead, they send the purchase order to the wallet vendor, which simply charges it to the customer's account.


Digital wallets were heralded as one of the technological innovations that would help fulfill the promise of ultimate shopping convenience afforded by e-commerce. While online shoppers needn't wait in long lines or sit in traffic to make their purchases, the long and often convoluted form-filling process required in order to make a purchase online using a credit card number kept e-commerce from achieving the prominence that e-merchants had counted on. In 1999 the research firm Jupiter Communications reported that 27 percent of all customers who began placing an order online actually abandoned the process, primarily due to the amount of time and confusion involved in completing an online order, not to mention the fears involved in transferring credit card information over the Internet. Therefore, digital wallets were positioned to take e-commerce to the next level of penetration by easing the entire process and making individuals comfortable about sending their purchase orders over the Internet.

With digital wallets, customers could forego the process of filling out lengthy order forms each time they made an online purchase. Rather, they could simply activate the wallet to automatically and securely fill out the required information fields, including the customer's name, credit card number and expiration date, and billing and shipping information. When an online shopper is ready to make his or her purchase, he or she simply clicks on the digital wallet, which automatically fills out the entire order form and transmits the information to the online merchant. The wallet is then updated to reflect the most recent purchase.

Thus, digital wallets don't actually store cash as real wallets do. In 1999 Forrester Research reported that, while 100 percent of U.S. Internet retail outlets accepted credit cards, only 14 percent accepted alternative payment methods, such as debit cards. Digital wallets came about to exploit that framework rather than try to usher in completely new forms of Internet-based payment systems (such as digital cash) with which customers may not have been familiar or comfortable. So rather than overhaul the entire payment system, digital wallet vendors worked only to try to make the existing dominant payment method more user-friendly. Primarily, they facilitate what is known as one-click shopping, saving customers from having to repeatedly enter in the same information for each purchase.

Typically, digital wallets also allow customers to store preferences for Web sites and purchases, thereby allowing the merchants that support the wallet to personalize their offerings and notify the customer of special sales and new products. Moreover, when the digital wallet enters the required information in its appropriate fields, it automatically encrypts the data. In this way, customers can rely on an encryption system maintained by a company whose technology they already are familiar with, rather than relying on the security of the encryption systems of many different merchants.


Digital wallets first emerged in the mid-1990s with a great deal of hype, but to a lukewarm public reception. The earliest wallets required customers to download the digital wallet vendor's software and store it on their desktops. This method largely inhibited customers from warming to the technology. Downloads generally were viewed with some skepticism by analysts, since they tend to limit overall distribution. Slow connection speeds exacerbated the problem, since customers tend to grow frustrated and abort downloads if they take an excessively long time to complete. In addition, any time the vendor updated its digital wallet software, customers had to download all over again. Moreover, once the software was downloaded, the digital wallet was stored on the computer's hard drive, requiring the customer to make all purchases from that computer. This lack of flexibility became increasingly problematic as more Internet shoppers roamed from one place to another and used multiple computers for surfing and shopping.

Another impediment to digital wallet penetration was customer awareness. In 1999, according to the research firm, only 58 percent of online purchasers were even familiar with digital wallets, while only one-fourth understood their capabilities. In addition, the sheer glut of digital wallet offerings in the late 1990sissued by merchants, software vendors, credit card firms, banks, and other outfitsled to customer confusion, not to mention frustration stemming from the lack of compatibility between all these wallet packages. With no standardized payment system, customers were reluctant to fill up their hard drives with mutually exclusive digital wallets, nor maintain contracts with various firms.

Several online retailers, including, created their own versions of digital wallets for use only on their sites to encourage repeat purchases. After the first purchase, when a customer fills out an entire order form, he or she only needs to click a button to repeat the entire order-filling process automatically. However, only a small number of very large firms had the clout to make such an investment worthwhile. To benefit from digital wallets, most companies needed a larger framework of mutually shared technology. Furthermore, only the very largest, most leveraged companies could afford to contract with a variety of vendors at the same time, putting them at a great competitive advantage but also limiting the overall penetration of digital wallets.

In 2000, Forrester Research released the results of a survey of online merchants. The merchants were asked why digital wallets had failed to attain prominence. Sixty-two percent of U.S. e-merchants felt there simply was too little customer demand, while 54 percent reported that digital wallets weren't a priority. Twenty-seven percent thought the market was too immature, another 27 percent couldn't see any benefits in adopting the technology, and 19 percent thought that digital wallets would result in the loss of customer relationships.

One of the biggest drawbacks, however, was compatibility. Since customers may have maintained digit wallet accounts with vendors other than the one a particular company may have used, the layers of software downloads necessitated to use digital wallets with all the different businesses made the process more cumbersome than the lightning-fast world of e-commerce had promised. Thus, by the end of the 1990s digital wallets were fairly antiquated and used mainly in very tightly confined networks.

To amend this problem, several interested partiesincluding MasterCard, Visa, American Express, IBM, Microsoft, Trintech, and CyberCashteamed up in the late 1990s to begin working toward the establishment of a digital wallet standard. The Electronic Commerce Modeling Language (ECML) was conceived as a mechanism to clearly define a format for online order forms that could incorporate digital wallet technology from any vendor. To adopt ECML, merchants need only reorganize their existing online order forms so that the fields correspond to those set forth in the ECML standard. No licensing or usage fees apply, and ECML requires no additional software or hardware, according to Catalog Age. The first digital wallet to comply with ECML was IBM's Consumer Wallet 2.1, which was that company's second shot at digital wallet technology. Meanwhile, ECML standardized the format in which the various fields were stored in digital wallets.

Digital wallet vendors increasingly aligned with credit card issuers, whose massive marketing clout was expected to further the wallets' cause. The popular American Express Blue credit card was packaged with American Express's own digital wallet to facilitate use of Blue on the Internet. Meanwhile, Visa and MasterCard spent 1999 and 2000 in vigorous competition to align with wireless software and hardware vendors with an eye toward capitalizing on the expected boom in digital wallet use. Some of these systems involved "fat" wallet technology, in which the wallets were embedded in handheld devices or on a smart card, while others simply utilized a server-side system over a wireless medium.

By the early 2000s, digital wallets were undergoing a mild renaissance. The models developed at that time abandoned software downloads altogether, opting instead for digital wallet systems that worked directly with ISPs and other telecommunications firms. In other words they involved server-side (or "thin"), rather than client-side ("fat"), technology. This eliminated the need to download any software or to conduct transactions from a certain computer. When a customer places an order with such a system, his or her identity is secured in the eyes of the merchant by attaching a digital certificate to the order message. In this way, merchants supporting digital wallets were afforded some protection from online fraud while also allowing for greater convenience and flexibility.

Moreover, the details of purchases weren't generally shared directly with the ISP or other intermediaryonly the connection to use the digital wallet was routed through these agents. In this way, consumer fears of privacy invasion were somewhat eased, as the information was shared only with a company with whom they already entrusted the data. Meanwhile, in an effort to hang on to market share in an increasingly competitive market, ISPs often pitched their Internet payment services options to their customers as an added value of their offerings.


Despite the improvements and the heating competition, digital wallet technology still was largely a novelty by the early 2000s, and it remained to be seen how well vendors could turn such systems into a widespread force in the e-commerce world. Vendors were very conscious of their market's less-than-glorious history. Digital wallets were more often referred to as Internet or Web-based Payment Systems by the early 2000s, in large part to disassociate the products from their rather unsuccessful predecessors in the mid-and late 1990s. One challenge was to adapt Internet Payment Systems to tap into the vibrant business-to-business market. By the early 2000s, most digital wallet systems were designed for the business-to-consumer market.

Customer awareness, or lack thereof, was an irritatingly persistent problem. According to, in 2001 only 38 percent of online shoppers understood how digital wallets worked, 25 percent knew about digital wallets but were unfamiliar with how they worked, and 37 percent of online buyers had never heard of digital wallets at all. Meanwhile, only 22 percent of online shoppers had actually used a digital wallet at least once, and a humbling five percent used them frequently. This last figure, in fact, was equal to the percentage of customers who had used digital wallets at least once and swore they would never use one again. Such results clearly were a concern to vendors and merchants alike.

Still, analysts expected digital wallets to begin taking a firmer hold of the e-commerce market in coming years. In anticipation of more widespread acceptance and use of digital wallets, developers were expanding the capabilities of the technology, allowing customers to use the systems as a mechanism for comparison shopping, product searches, and to check merchant ratings, among other value-added services. With penetration disappointingly slow through the early 2000s, digital-wallet vendors increasingly sought to add such capabilities in order to turn digital wallets into more valuable and holistic e-commerce facilitators.


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SEE ALSO: Digital Cash; Digital Certificate; Digital Certificate Authority; Electronic Payment; Internet Payment Provider; Micro-payments