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How Digital Wallets Work

Digital Wallet Wizardry
The O2 Wallet app, available in the UK, is a popular example of a server-side digital wallet service.
The O2 Wallet app, available in the UK, is a popular example of a server-side digital wallet service.
Tim Whitby/Entertainment/Getty Images

We can lump the types of digital wallets into two broad categories:client-sideand server-side. Within both categories are wallets that function only with specific vendors (either online or offline) and others that will work with just about any merchant.

Client-side wallets generally refer to those maintained by you, the end user. You download and install a program and then enter all of your pertinent payment and shipping information, all of which is stored on your own personal computer. Then, when you decide to check out at a compatible Web site, your wallet's software completes most of the basic information so you don't have to. Suddenly, your impulsive online shopping sprees get much faster and much, much more expensive.

Contrast that with server-side wallets; for example, Visa's digital wallet. Instead of storing data to your own hard drive, all of your wallet data is stored and maintained by Visa on the company's secure computers.

Visit a retail site, and your checkout process is extremely quick. Just type your personal e-mail address and password, and the order is complete. The store receives payment from whichever credit card account you choose, and you're spared the frustration of typing that information. You're also shielded from any security risks associated with revealing your card number online.

A account, like most other digital wallets, works with more than just your Visa card. It actually lets you store data for your other cards and bank accounts, too, such as MasterCard, Discovery and more. Additionally, retains shipping information.

In a server-side wallet, the company supporting the digital wallet (Visa) maintains your e-wallet account on their servers. You don't have any physical plastic cards to lose, nor can anyone steal them, which is a benefit to both you and the retailer, which would otherwise expect to deal with a significant amount of credit card fraud.

Merchants generally prefer server-side wallets because they have a greater degree of standardization. Client-side software, on the other hand, varies depending on the developer, and differences can result in frustrations for both buyers and sellers, which is why server-side wallets are gaining more steam.

Paying at home is one thing; paying on the go is quite another. On the next page, you'll see how digital wallets have gone mobile and how they put substantial financial firepower in your hands.