How digital wallets and payment gateways differ from each other?

digital wallet

Payment Gateways is an E-commerce application service. It authorizes the online payments for e-businesses and online retailers. It is like a cashier in a retail outlet,  facilitating the transfer of information between a payment portal and the Front End Processor or the bank.

On the other hand, Digital Wallet is an electronic device that allows a consumer to ‘store’ money in itself and while doing an online transaction, the consumer can directly pay through the wallet. Both online and offline transactions can be completed with the help of digital wallets.

Technology

A “digital wallet” is a compound technology, comprising of three major parts:

  • System- The electronic infrastructure
  • Application- The software that operates on the front-end
  • Device- The individual portion

The digital wallet comprises of the software and the information components. The software includes the electronic infrastructure and the application parts is responsible for the security and encryption of personal information and transactions. The information component consists of a database entered by the user. This database includes the user’s shipping address, billing address, payment methods (including credit card numbers, expiry dates, and security numbers, etc. Digital wallets rely on digital certificates for processing of transactions. Digital certificates verify the user’s as well as the recipient’s identity and provide a way to encode a reply to the receiver.

Payment Gateways includes components like Net Banking or external PSPs (Payment Service Providers). Net Banking does not require a physical card for transactions. A payment gateway allows the users to select their banks then authenticate oneself and approve the payment. The second method involves external PSPs such as CCAvenue and EBS, facilitating connection protected encryption for payment via Secure Socket Layer (SSL).

Types

Digital wallets are stored and maintained on the users’ devices and are compatible with most e-commerce platforms. Recently, the thin, server-side digital wallets are gaining popularity. Here, the provider creates an online database for the user and maintains it on the servers. The server-side digital wallets provide added security, efficiency, and utility it provides to the end-user, improving their overall purchase-satisfaction.

Payment Gateways are of two types: External and Direct gateways. External gateways or the redirected gateways take the customers to the third-party website where the transaction is processed, after completion of the transaction customers may be redirected to the main site. Direct gateways or the transparent gateway do the processing within the e-com portal, therefore, it is the preferred choice of merchants as it gives “integrated to system” outlook.

Set up Procedures

A digital wallet requires minimal setup and is easier to use. The users just need to install the software and enter all the required information.

Payment Gateways are used on the front-end, i.e. for the client user. The client selects a payment gateway and passes his credentials via SSL (Secure Socket Layer) encryption. These are sent to the issuing bank (the clients’ bank) which directly provides a response l to the payment gateway. The issuer (bank or card company) send a code to the client to authenticate the transactions done.

On the merchant’s end, the above process is followed but this time to “Clear” the authorization by consummating the transaction. This “Clearing ” is done once the merchant has fulfilled the transaction (e.g.: shipped the order). The merchant submits approved authorizations to their acquiring bank for settlement via its processor.

There is also the procedure of integrating the gateway into the merchant’s system through a “merchant account” with the payment service provider. After which merchant’s details are submitted or verification. After the document verification, the gateway can be integrated into the website.

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