Check out the check-outs in China: chances are that in urban areas you’ll see more than half of customers paying by smartphone. They scan a barcode displayed by the vendor, tap an app called a ‘virtual wallet’ to authorise the transaction, and voilà – the money is transferred. Phone-payment is so common that many users – especially younger ones – no longer carry a physical wallet. Even buskers and street vendors accept phone-money. The trend has gone so far, reports the South China Market Post, that a few months ago the People’s Bank of China reminded retailers that they still must also accept cash! In North America and Europe, pay-by-phone is less popular, but it does exist and is growing. Apps from Apple, Google and Samsung – three of the largest western players – are nearly doubling their customers from year to year.

What is digipay?

Definitions vary, but probably the closest to a consensus includes credit cards, debit cards and virtual wallets. (So, non-digital-payment encompasses cash, cheques and bank transfers.) Most everyone knows the first two, which have been around for almost a century and half-century, respectively. Less known are virtual wallets that exist in phones or computers, although they now have existed for about two decades. The biggest players are Alipay and WeChat, with an almost-duopoly in China. In the West there are services from Amazon, Apple and Google, not to mention PayPal, Facebook and at least 5-10 others. Most of these are not banks, but banks also are offering pay-by-phone: one of the best-known services is Zelle, offered and owned by a consortium of US financials. 

Are virtual wallets really different from a credit/debit card?

When buying in-person from a conventional retailer, not so much: a phone is used instead of a card. When buying online or from an unconventional retailer, however, virtual wallets can be more convenient. The buyer need only tap fewer buttons, and sellers find the hurdles to registering with virtual wallets lower than those of credit or debit cards. Where virtual wallets really differ from credit/debit cards is in person-to-person payment. Here they are quite like cash. If the payer and payee are both registered to the same wallet, just a phone number or an email address are enough to allow a transfer. You can split the bill for dinner or send money to a relative – with just a few taps.

Are they safe?

Of course providers insist virtual wallets are secure, and they proudly point to encryption and other technical barriers against abuse. Then again, in October The Asia Times reported that some Chinese Alipay users were hit with bogus transactions for thousands of yuan (1,000 yuan = USD 148). Alipay acknowledged the crime but blamed it on an alleged loophole in Apple’s iPhone security. Whatever, it’s probably safe to say that virtual wallets – like any payment method – will never be entirely safe. Moreover, most of them are not regulated as are debit and credit cards. With these, a false charge can almost always be challenged and reversed. With virtual wallets, this backstop generally is not there. For instance, “PayPal offers none of the protection that real banks offer,” notes website HowStuffWorks, “and it isn’t required to maintain any of the security, customer service or dispute resolution services that banks provide.”

Whatever, virtual wallets are booming

By 2021, research firm eMarketer estimates, nearly all of China’s then 1 billion smartphone users will have virtual wallets. This, from a standing start in 2005 when Alipay launched. Forecasts elsewhere are more modest but nonetheless significant: eMarketer reckons one-quarter of North Americans and 15 per cent of Europeans will use virtual wallets by 2021. This is driven by several factors, says a recent report by Bank Julius Baer. Online commerce is booming, and it naturally invites online payment; regulation is encouraging virtual wallets, especially from non-banks; and business-to-business payments are ripe to move from bank drafts and cheques directly to virtual wallets. Today, says Baer, 95 per cent of B2B payments are still made by cash, cheque or bank transfer.

And what about cash?

Over the coming decade, Baer estimates, digital payments will triple in annual value. Meanwhile, non-digital-payments will shrink, but not dry up completely, despite sporadic proclamations of an imminent ‘cash-free society’. For one, cash is cheap. Sellers (or payees) pay for the privilege of digimoney: for debit cards about 1 per cent of each transaction; for credit cards and virtual wallets typically 3 per cent (except in China, where fees can be under 1 per cent). Also, cash is anonymous, which is appealing not only to criminals. Some people just don’t want every payment to be recorded: they like their privacy. Finally, especially for smaller sums, cash is undeniably convenient. It’s no coincidence that paper money has been around for 700 years and counting.