Ewallets or Payment Gateways — A Comparison
Online payment, via e-wallet or payment service providers, is very convenient. At least that’s what over 3 billion customers in e-commerce could easily argue. Of course, it is a very different kind of “convenient” than we were used to over decades. Handing the cashier a number of coins from one’s pocket or wallet is no big deal either. Or waving with one’s credit card at a point-of-sale.
The convenience deriving from modern digital payment is one of mobility — and sometimes the lack thereof. We can flexibly pay wherever we are, without the need of carrying around our physical wallets (our smartphones suffice). At the same time, shopping can take place at home. Even if we are bound to our own four walls, we can pay for goods and commodities with just a few clicks.
But payment is just as much a broad term as convenience is. Behind the scenes of your checkout page, in the technical profundities of the software, it makes a huge difference whether the payment happens via an e-wallet balance or a bank or credit card transfer, facilitated by a payment gateway.
Payment Gateways vs. Ewallets? Not Quite!
However, make no mistake and don’t take “Payment gateways or ewallets” literally. The two are not exact opposites: You need PGs to process a transaction no matter what. The real question is: How exactly does using ewallets vs. regular payment providers influence the payment process, especially regarding user experience?
To answer it, we will contrast the common traits, advantages and disadvantages of ewallets and payment gateways. This will help you if you have to decide on a payment flow fitting your business model. Will a payment gateway connecting your checkout flow to external PSPs suffice? Or do you want your customers to have their own ewallets with all the benefits (and pitfalls), that come with them? Let’s see…
Payment Gateways in E-Commerce
In a nutshell, payment gateways are software solutions which facilitate and provide access to payment services. In that role, they can be integrated with multiple payment service providers. During checkout, the customer chooses how to pay. The available payment options are based on the providers integrated by the gateway and sometimes filtered by the e-commerce platform.
Once the checkout process is complete, the payment gateway exchanges the payment information between the customer and the merchant. Doing so, it must follow specific security standards if they are dealing with credit card data (PCI DSS). In addition, it has to comply with other regulations of local financial authorities.
How a payment gateway is connected to an e-commerce platform can vary. It’s possible that a platform redirects customers to external payment pages which are hosted offsite by the payment gateway. Alternatively, it allows interacting with the payment gateway from an own, tightly integrated payment page. On the other hand, you have self-hosted (and self-built) payment gateways.
Advantages of Payment Gateway-only Solutions
Regulations regarding Payment Gateways are not as strict as those for e-wallet systems. While those processing credit cards have to adhere to the Payment Card Industry Data Security Standard (PCI DSS) for example, and those in Europe require a PSD2 PISP authorization, there is one big regulatory hurdle Payment Gateways typically don’t have to take: they don’t have to obtain an emoney license.
As they process monetary transactions, Payment Gateways store and exchange personal data. Such data is easily misused when falling in the wrong hands. However, Payment Gateways have to collect significantly less data than e-wallet systems to function properly. Ultimately, that makes it much easier for Payment Gateway owners to guarantee data safety.
Less Development Effort
Developing and integrating ewallets is a complex endeavour. That’s mainly because, besides payment processing, ewallets also need top-up and withdrawal functionalities, emoney balance management, KYC processes for buyers and so on, let alone the additional UI to allow customers to interact with their ewallets (a customer service area).
Sticking with payment gateways means that you just need to integrate at least one payment service provider. You can update the system later with additional providers, oftentimes with little effort. You don’t need to care much about the buyers’ side, but more about the sellers’ onboarding and management.
Disadvantages of Payment Gateway-only Solutions
Restricted Refunding Options
Without an e-wallet system, you can only refund money back to the user’s original source of payment (credit card, bank account…).
As a merchant or marketplace owner, this means you would release the money back, instead of keeping them in the wallet and motivating the customer to use it on your e-commerce platform. Working around this requires complex efforts, such as giving out the refund money in the shape of vouchers.
Higher Transaction Fees
The sole purpose of payment gateways is to move money. And this typically incurs a transaction fee often consisting of a fixed amount or a percentage of the transaction amount. Depending on volume and ticket size, this sums up quickly. On the other hand, with a wallet-based system, you can save fees e.g. by refunding customers not to their payment source, but their emoney account (see above), so that funds only move between virtual accounts but not in the real world.
No Additional Services
Payment gateway-based payments are fairly straightforward. From “checkout” to “pay-off”, nothing fancy. But sometimes it is the advanced feature set that makes your customers smile, like loyalty points, free of charge P2P payments or gift cards. Ewallet-based systems can handle such features directly, without the need of additional external systems to be implemented.
Ewallets in Payment
What Types of Ewallets Exist?
The most basic definition of e-wallet, often also called a digital wallet or cyberwallet, is that of a virtual equivalent of a physical wallet. As such, an e-wallet acts as a subledger, a container for electronic money and virtual accounts within a virtual account management system. It can also store the user’s payment instrument details in a secure manner.
That basic definition is falling a bit short, however. It does not take the differences between specific types of ewallets into account. Most often, e-wallet poses as a synonym for mobile wallet, which is only a certain form of application of e-wallet technology. Other forms exist and some ewallets even address different areas of application. Let’s compare three basic e-wallet types.
Digital Wallets / Online Wallets
Ewallets, also called digital wallets or online wallets, are typically web applications, useable on any device that’s able to connect to the internet. Accordingly, wallets are part of a central web platform through which users access them, run by the wallet provider. For the purposes of this article, we concentrate on web-based ewallets that require payments to top up or withdraw from the emoney balance and to facilitate e-commerce purchases. Such wallets form the core of e-wallet-based payment systems. They can be custom-tailored effectively, according to a platform’s preferences, using a flexible software foundation for e-wallet development.
Of course, digital wallets can manage more assets than just fiat currency. They can handle other stored values, sometimes within closed systems (for example, monetization systems with special currencies for video games). Another use case would be crypto wallets.
This specific form of an e-wallet is used for storing public keys and private keys of cryptocurrencies. The keys act as certificates of ownership for those cryptocurrencies, which are stored on the blockchain. To provide additional safety, most crypto wallets operate offline, on computers, USB sticks or external hard drives. Using the stored keys, however, users can access the crypto assets they own on the blockchain. They can also use a cryptocurrency exchange to trade them with other users. Certain e-wallet-based online payment systems are also capable of processing payment with cryptocurrencies and regular emoney, if the e-commerce platform in question accepts this.
Now, this is when things get complicated, as the term “mobile wallet” is often used to refer to very different wallet applications. Some use the term “digital wallet” and “mobile wallet” synonymously. This is not wrong as mobile wallets indeed enable digital payment, but it falls short.
On the one hand you have mobile wallet solutions like Apple Pay. Those act as surrogates for credit and debit cards, which are stored on the mobile device. The cards exist in reality, physically. Yet the user can simply pay with their virtual counterparts using their mobile device at a point-of-sale terminal via near-field communication. Some such wallets interact with the secure element of the mobile phone’s SIM card. This means they can even be used without an internet connection at a compatible PoS.
On the other hand, there are mobile ewallets which act in themselves as a storage of emoney or grant their users access to emoney they stored in there previously (take PayTM from India, for example). This allows them to pay in physical shop environments via app. Some such ewallets even have to be topped up, either online or via bank transfer.
Advantages of Payment with Ewallets
(For the purposes of our comparison of e-wallet and payment gateway payments, we focus on the first definition of e-wallet respectively digital wallet. That means we exclude crypto and mobile point-of-sale transactions for the time being.)
Where payment gateways and PSPs are nothing more than simple transaction facilitators, digital wallets systems can really shine in terms of additional features. For example, digital wallets can not only contain emoney, but also loyalty points and other incentive tokens. They can directly process gift and discount vouchers, too. Furthermore, you can permit users to transfer emoney within the system, constructing P2P lending or trading features. And that’s only the tip of the iceberg. Imagine what you could do when you introduce tokenized assets and cryptocurrencies into your e-wallet system.
No Fees For Internal Transactions
Ewallets go easy on additional expenses. As the platform owner, you don’t have to pay for internal emoney transactions. That’s because such transactions run entirely within the closed online wallet system. No money moves between banks and no PSPs are involved there.
Flexible Transaction Amounts and Limits
While regulations for transactions are always in place, ewallets generally possess greater flexibility here. One definite plus is that they can handle microtransactions, like fractions of the smallest monetary unit (e.g. 0.1 cent), which are difficult to do with payment gateways. Of course, limits on the transaction amount, determined by local regulations and the customer’s KYC level, should apply in any case.
In case of refunds, the money can go directly back to the e-wallet. For merchants and platform providers, this helps to keep users on the platform. The money stays within your e-commerce system. This motivates customers to spend it there again.
Ewallet payments produce data. Customer data is the most obvious, but also transactional data and payment history data. All those data sets are worthwhile reference points for analysis. This allows platform owners to make conclusions on how users use their services, helping to purposefully improve it in future updates. In ewallets, both the ecommerce platform as well as the ewallet provider own the customer data, so it’s easier to give merchants access to it.
Disadvantages of Ewallet Payments
Ewallets holding and processing FIAT currencies are subject to a greater number of regulatory requirements than payment gateways. For example, e-wallet systems may not launch without the platform owner having obtained an emoney licence, users need to go through KYC/AMT/CFT procedures and limits have to come into effect according to their verification status.
Higher Security Efforts
As more sensitive information is stored directly within the customer’s wallets, it’s even more important to ensure data protection than it is with external PSPs. Important factors here are encryption, payment instrument tokenization and robust and secure code, put down by a software team with profound secure coding and security awareness training.
Ewallets or Payment Gateways? Combine the Two!
Even though payment gateways and ewallets present very different strengths and weaknesses, it’s not like you have to fully commit to one or the other. For owners of an online marketplace or a service platform, it’s beneficial to have their own payment system, including a custom-made payment gateway.
However, you can design your online payment system to be e-wallet-based. This way, you can offer your customers more features than simple payment processing (like loyalty points for example). Also, you could differentiate between guest accounts (for pure payment processing) and fully registered customers, who have a wallet account and thus extra functionalities at their disposal.
For a detailed example of what a payment system with e-wallet support can look like, have a look at our Delivery Hero case study.
Conclusion: One or Double?
Emoney wallets and payment gateways are no mutual exclusives. To combine both systems, you need to meet regulatory requirements: Having an emoney licence is just one of them. On the technical side, it surely can get very complex.
But we can help. Use CoreWallet, our scalable software foundation to build your own e-wallet-based payment solution. We get your business ready for the age of digital payment.
No ifs, no buts, no ors.
Originally published at https://trimplement.com on July 24, 2020.