E-Wallets or Online Payment Gateways – A Comparison

When we compare e-wallets or online payment gateways to card or cash payments, we frequently consider the former to be more convenient. That might be a bit of an exaggeration. Holding your credit card in front of a card reader does not appear to be a lot of work, does it?

No, what truly distinguishes modern digital payment methods is their feature-richness and flexibility. For example, using digital payment methods, you can easily conduct cross-border payments or transfer small amounts of money. Even if you are confined to our four walls (for whatever reason), you can pay for goods and commodities with a few mouse clicks.

However, payment is not the same as payment. Behind the scenes of your checkout page, in the technical depths of the software, whether the payment is made via an e-wallet balance or a digital bank or credit card transfer facilitated by a payment gateway makes a huge difference.

Payment Gateways vs. E-Wallets? 

However, make no mistake: "Payment gateways or e-wallets" should not be taken literally. The two are not diametrically opposed: you always need PGs to complete a transaction. The real question is: How does using e-wallets versus traditional payment providers affect the payment process, particularly in terms of user experience?

To respond, we will compare the common characteristics, benefits, and drawbacks of e-wallets and payment gateways. This will be useful if you need to choose a payment flow that fits your business model. Will a payment gateway that connects your checkout flow to third-party PSPs suffice? Or do you want your customers to have their own e-wallets, with all of the benefits (and drawbacks) that entails? Let's see...

Payment Gateway-Only Solutions

Payment gateways, in a nutshell, are software solutions that facilitate and provide access to payment services. They can be integrated with multiple payment service providers in that capacity.

During the checkout process, the customer selects how to pay. Following the completion of the checkout process, the payment gateway exchanges payment information between the customer and the merchant. In order to do so, it must adhere to specific security standards as well as local financial authorities' regulations.

The manner in which a payment gateway is linked to an e-commerce platform varies. Customers may be redirected by a platform to external payment pages hosted offsite by the payment gateway. It also allows you to interact with the payment gateway from your own, tightly integrated payment page. Self-hosted (and self-built) payment gateways, on the other hand.

Advantages of Payment Gateway-only Solutions

Less Regulation

Payment Gateway regulations are less stringent than those for e-wallet systems. While those who process credit cards must follow the Payment Card Industry Data Security Standard (PCI DSS), Payment Gateways typically do not: they are not required to obtain an e-money license.

Tighter Security

Payment Gateways store and exchange personal data as they process monetary transactions. When such information falls into the wrong hands, it is easily abused. Payment Gateways, on the other hand, must collect far less data than e-wallet systems in order to function properly. Finally, this makes it much easier for Payment Gateway owners to ensure data security.

Less Development Effort

Creating and integrating e-wallets is a difficult task. This is primarily due to the fact that, in addition to payment processing, e-wallets require top-up and withdrawal functionality, e-money balance management, KYC processes for buyers, and so on, not to mention the additional UI that allows customers to interact with their e-wallets (a customer service area).

If you stick with the best online payment gateways, you only need to integrate at least one payment service provider. You can later add more providers to the system, often with little effort. You don't need to be concerned with the buyers' side, but rather with the sellers' onboarding and management.

Disadvantages of Payment Gateway-only Solutions

Restricted Refunding Options

You can only refund money to the user's original source of payment (credit card, bank account...) if you don't have an e-wallet system.

This means that as a merchant or marketplace owner, you would return the money rather than keeping it in the wallet and encouraging the customer to use it on your e-commerce platform. Working around this necessitates complex efforts, such as issuing refund money in the form of vouchers.

Higher Transaction Fees

Payment gateways exist solely to move money. And this usually results in a transaction fee, which is either a fixed amount or a percentage of the transaction amount. This quickly adds up depending on the volume and ticket size. On the other hand, with a wallet-based system, you can save fees by, for example, refunding customers to their e-money account rather than their payment source, so that funds only move between virtual accounts and not in the real world.

No Additional Services

Payments made through a payment gateway are relatively simple. Nothing fancy from "checkout" to "pay-off." However, it is sometimes the advanced feature set that makes your customers happy, such as loyalty points, free P2P payments, or gift cards. Such features can be handled directly by e-wallet-based systems, eliminating the need for additional external systems to be implemented.

Payment with E-Wallets

The simplest definition of an e-wallet, also known as a digital wallet or cyber wallet, is a virtual equivalent of a physical wallet. As a result, an e-wallet functions as a sub-ledger, or a container for electronic money and virtual accounts within a virtual account management system. It can also securely store the user's payment instrument information.

While we will stick to this basic definition, we recognize that it falls a little short. It neither addresses the complexities of e-wallets nor takes into account the various types of e-wallets.

Advantages of E-Wallets

Access to Diverse, International Markets

E-wallets are essentially a form of payment. As a result, assisting them attracts new customer groups who prefer this method. This may expose your services to new demographics. If your company wants to expand into developing or emerging markets, e-wallet-based payment systems can help. Mobile and electronic wallet technology is widely used, particularly in rural areas and among unbanked demographics. These wallets can be topped up in stores or with prepaid cards, allowing users to transfer and accept funds without having a bank account.

However, keep in mind that electronic wallets are typically subject to regulations. And those regulations may differ from one country to the next.

Instant Payment

This benefit is especially valuable for merchants. Electronic wallets facilitate payments by allowing for the simple exchange of data and e-money.

If the wallet contains enough e-money balance, this usually results in instant payment transactions for customers. It's a little more complicated for merchants: they receive their funds immediately and will see that the e-money is booked to their account. However, the actual monetary settlement may take some time. Nonetheless, many merchants value the increased financial planning certainty that e-wallet-based payments provide.

Secure Payment Instruments Storage

Users anticipate that payments will be processed securely. Indeed, it is this requirement that drove the development of e-wallet technology in the first place. When PayPal, one of the first e-wallets, was introduced in 1998, it provided a counterpunch to the flood of shady e-commerce merchants on the fledgling internet, all of whom wanted to obtain customers' credit card information. PayPal provided a more secure method of payment because the payment instrument data remained with the wallet provider.

This still adds to the allure of e-wallets today. Digital Wallet software securely stores user information, preventing merchants from seeing what is not intended for their eyes. At the same time, it is more user-friendly. Instead of entering payment information for each new platform where they shop, users can rely on e-wallets to use the stored payment instruments automatically. This improves the user experience and prevents cart abandonment mid-purchase.

Loyalty Programs and Vouchers

Whereas payment gateways and PSPs are merely transaction facilitators, digital wallet systems can truly shine in terms of added features. Digital wallets, for example, can store not only e-money but also loyalty points and other incentive tokens.

They can also process gift cards and discount vouchers directly. You can also allow users to transfer e-money within the system, allowing you to build P2P lending or trading features. That's just the tip of the iceberg. Consider what you could do with tokenized assets and cryptocurrencies in your e-wallet system.

Flexible Fee Configuration  

E-wallets are low on extra costs. To begin, as the platform owner, you are not required to pay fees for internal e-money transactions. This is due to the fact that such transactions take place entirely within the closed online wallet system. There is no money moving between banks, and no PSPs are involved.

At the same time, you have the option of collecting fees from merchants on your platform or charging for P2P transactions.

Microtransaction Support

E-wallets can easily handle microtransactions, such as fractions of the smallest monetary unit if the accounting module is built appropriately (e.g. 0.1 cent). The benefit mentioned in the previous paragraph also plays a role in this: Microtransactions are typically prohibitively expensive in online payment gateways due to transaction fees and processing costs.

Varied Pay-In and Payout Options

Platform owners can configure their e-wallets to support a variety of deposit and withdrawal methods, ranging from standard credit card or bank transfer top-ups to regionally available alternative payment options. Furthermore, e-wallets can be configured to work in cross-border settings with multiple currencies. Consider remittances, in which someone deposits money in one currency and their family abroad uses or withdraws it in another.

In-Wallet Refunds

In the event of a refund, the funds may be returned to the e-wallet rather than the original source of payment. This helps merchants and platform providers keep users on the platform. The funds remain in your e-commerce system. Customers are more likely to spend their money there again as a result of this.

Data Analytics

Payments made through e-wallets generate data. Customer data is the most obvious, but an e-wallet also stores payment history data. All of those data sets are valuable points of reference for the analysis. This enables platform owners to draw conclusions about how their services are used by users, allowing them to purposefully improve the user experience in future updates. In e-wallets, both the e-commerce platform and the e-wallet provider own the customer data, making it simple to compile specific reports for merchants, while only disclosing what is permitted by data-protection laws.

Disadvantages of E-wallets

Stricter Regulations

Payment gateways are subject to fewer regulatory requirements than e-wallets that hold and process fiat currencies. E-wallet systems, for example, may not be launched unless the platform owner obtains an e-money license. Users must go through KYC/AMT/CFT procedures, and limits will be imposed based on their verification status.

Higher Security Efforts

Because e-wallets store sensitive customer information directly, as opposed to external PSPs, data security is even more critical. There are numerous important factors to consider in this case: Encryption and payment instrument tokenization are just the beginning. E-wallet providers must also adhere to regulatory rule sets such as PCI DSS. They must provide their customers with strong customer authentication. Finally, any system is only as secure as its code; ensure that it is developed by a software team with extensive secure coding and security awareness training.

E-Wallets or Payment Gateways? Combine the Two!

Payment gateways and e-wallets have very different strengths and weaknesses, as we've seen. But it's not like you have to choose between the two. It is advantageous for the owners of an online marketplace or a service platform to have their own payment system, including a custom-made payment gateway.

You can, however, design your online payment system to use e-wallets. This way, you can provide your customers with more features than just payment processing (like loyalty points for example). You could also distinguish between guest accounts (for simple payment processing) and fully registered customers. The latter have a wallet account and, as a result, additional functionalities at their disposal.