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How Digital Wallets Work


Why Be Wallet Wary?
Companies that make secure chips take your privacy and security so seriously that their business model depends on it. A chip like this is definitely safer than cash.
Companies that make secure chips take your privacy and security so seriously that their business model depends on it. A chip like this is definitely safer than cash.
Courtesy NXP

When it comes to unveiling digital wallets to consumers, two hot-button words always appear: security and privacy. It's easy for people to imagine all of the ways criminals could abuse digital wallets. Those digitally masked bad guys could hack into your account, spend away your life savings and run up your credit card balances. Or maybe they'd steal your identity.

Concerns are heightened when you consider the complexity of a digital-wallet transaction, especially compared to the simplicity of cash or straight credit. In the case of a smartphone, your data passes through not only the smartphone's hardware and operating system but then also through a specific payment app, and finally, the source of the payment, such as your bank or PayPal account.

The more parties involved, the greater the chances that one of them could experience a security lapse on any given day.

In spite of those potential problems, some experts say that the digital wallet concept is still superior to older payment methods. Lost a wad of cash? You're not getting it back. Stolen credit card? That thief ran up your tab at stores all over the place before you even realized it was missing.

Digital wallets, however, have redundant integrated protections. For both online and offline purchases, your digital wallet relies on digital certificates. Digital certificates are simply attachments to electronic correspondence that verify your identity (as well as that of the recipient) and provide a way for a receiver to encode a reply.

What's more, smartphones with NFC have encrypted chips specifically designed for managing financial security. This so-called secure element does nothing but house the data needed to initiate and complete a transaction. Even with your phone and your PIN, a hacker can't get at the data on that rigorously guarded chip.

It's worth noting that NFC doesn't require battery power to function. NFC chips need so little energy that they operate by borrowing power from the magnetic field of NFC terminals. So if your phone's battery is completely dead, you may still be able to buy groceries and pay for a cab to get home.

Maybe now you're convinced that digital wallets are worth a look? Be forewarned, though: The digital wallet wars are just heating up, and it's getting messy for companies and consumers alike.


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