Why ACH Makes Sense for Digital Wallets
There’s no denying that digital wallets are currently one of the hottest payment trends, and the Millennials are making them even hotter. Even though just 32 percent of mobile users have used a digital wallet, a whooping 78 percent of consumers are aware of mobile wallets. As digital wallets become more secure and faster we can expect widespread adaptation of the mobile wallet in the very near future.
If you’re still on fence regarding digital wallets, here is a closer look at how they work, their benefits, and why the automated clearing house network (ACH) will improve digital wallets:
What are digital wallets and do they work?
Entrepreneur has a perfect definition of digital wallets:
“A digital wallet is an app that works as a secure digital container to store the information consumers carry around in their wallets or purses, such as credit and debit cards, ID, driver’s license, coupons, receipts, concert tickets and even airline boarding passes.”
Digital mobile wallets typically take the form of a smartphone app. Whenever a communication channel, such as NFC, WEBLINKS, QR-code, SMS, or Social Media, accesses the wallet it provides the requested information and completes a transaction.
For example, if you were at the grocery store the stored credit card information in a mobile payment system would have near-field communication (NFC) chips to make the wireless payments. Just tap your phone to a compatible check-out register to pay for your groceries instantly and a unique tokenized code is sent from your smartphone to the point-of-sale terminal to complete the transaction — without ever sharing your physical credit card.
Another example would be the popular Starbucks mobile wallet app for iOS and Android. Just simply preload a digital card with money, find your nearest Starbucks, and make your purchases. When you arrive, you just have to pick up your Morning Cup of Joe.
Depending where you reside in the world, digital wallets can be categorized into three kinds:
- Closed Wallet: This is a wallet that has been issued by a company to a consumer for purchasing goods and services exclusively from that company. The Starbucks mobile wallet previously mentioned is an example of this type of wallet.
- Semi-Closed Wallet: This kind of wallet can only be used to buy goods and services at select merchants. They have a specific contract with the issuer to accept the payment instruments. India’s Paytm and MobiKwik are two examples of a semi-closed wallet.
- Open Wallet: These can be used to make purchases at POS terminals, transfer funds, and withdraw cash from ATMs. If your card has been issued by MasterCard, Visa, or any other bank, then you can be certain that it’s an open wallet.
Mobile Wallet vs. Digital Wallet
Although the terms “mobile” and “digital” are used interchangeably, especially in the payments space, there is a slight difference between the two.
Mobile wallets are simply payment apps, such as Apple Pay, Android Pay, and Samsung Pay, that you download onto your smartphone or wearable. You then store your payment information and make purchases by using near-field communications (NFC) readers at the point of sale terminals.
Digital wallets, such as PayPal, Due, and Dwolla, are similar to mobile wallets in that they store your financial and credit card information, but they aren’t not inherently designed for use on mobile devices unless they offer a mobile app.
Despite this minor difference both mobile and digital wallets store a consumer’s payment and shipping information in order to streamline purchase payments, use tokenization and to enhance security. They are becoming more widely accepted by both consumers and merchants.
The benefits of digital wallets
The most obvious benefit of mobile and digital wallets is that they’re convenient. Just simply hold your phone up to a card reader at the checkout, enter a PIN or use your fingerprint, and the transaction is complete. Not only does this speed-up the checkout process, it also means that you never have to worry about leaving your credit card, airline ticket, a coupon, or concert ticket at home again. As long as you have your phone, you have everything you need with you 24/7.
Despite the misconceptions, digital and mobile wallets are also secure. For example, it’s a lot easier for someone to steal your identify or financial information if you left your wallet at a restaurant. All that information is right there in front of them. If it’s stored digitally, however, they would have a much more challenging time accessing that information since your phone is locked.
Additionally, a majority of mobile and digital wallets rely on preventive safety measures like encryption, biometrics, and, two factor authentication. Apple Pay, for example, uses fingerprint identity called Touch ID and tokenization to encrypt payment information for each transaction.
But, that’s just the beginning. Mobile Wallet is also better for the environment since it reduces paper wasted, provides real-time analysis so that you can manage your costs and budget, and sends and receives money with just one-click.
For business owners, the mobile wallet can increase conversions, improve cash flow, track inventory, and offer loyalty rewards to customers on the spot.
Why ACH should be built within digital wallets
Even though payments can now take place with just one-click, and have become increasingly fast, it still takes several days for some transactions to clear. The reason? The transaction has to through the Automated Clearing House network, or ACH.
As a NerdWallet article explains, whenever you make a purchase, either online or with your mobile device, from your checking account “your bank processes your draft request and sends it to the ACH network with a batch of others.” After that, “the draft goes into one of two systems – one run by the Federal Reserve or the other, operated by The Clearing House (TCH), which is owned by commercial banks.” Finally, the ACH network “sorts the transaction and makes the money available to the recipient, and the payment is complete.”
Despite the fact that the system is automated — it’s over 40 years old. It’s antiquated. Unbelievably this system still keeps a banker’s schedule — no holidays, weekends or evenings.
Thankfully, NACHA, a nonprofit group that set the rules for TCH operations, adapted a new rule that will enable the same-day processing of virtually any ACH payment. In fact, the first phase of these new rules just launched in September 2016.
However, some companies like Dwolla, have already been ahead of the curve by offering a simple API for ACH transfers. This allows customers to receive same-day funds, automate payments, improve cash flow, and save money since Same Day Transfers cost less than card payments.
If more companies and financial institutions work on their own new-and-improved ACH payment systems, then this will make mobile and digital wallets only faster, stronger and safer.
For starters, the ACH network guarantees payments by offering incentives like extending credit and offering rewards. Furthermore, when a network or bank is able to access the ACH, digital wallet providers can avoid having to pay pricey interchange rates, which has resulted in ACH transactions generally being able to provide the lowest fees of any payment system.
Also, same-day ACH, according to NACHA survey of 1,500 payroll professionals nationwide, “would better support direct deposit functions (for hourly workers, temporary staff, and termination pay needs), contingency plans for missed deadlines, payroll error corrections, tax withholdings remittances, and remittances of garnishments.”
Finally, a same-day ACH would also help maintain compliance by using real-time data to update compliance manuals and PCI-compliant security standards, regtech, along with improving anti-money laundering and know-your-customer (KYC) programs and preventing fraud and in-house violations.