What You Need to Know About Digital Wallets The basics of digital wallets, and how will they impact your business.

Q: What is a digital wallet, and how will it impact my business?

A: A digital wallet is an app that works as a secure digital container to store the information consumers carry around in their wallets or purses, such as credit and debit cards, ID, driver's license, coupons, receipts, concert tickets and even airline boarding passes. When accessed by a POS terminal or other device, the digital wallet serves up the requested information and completes a transaction.

Digital wallets usually take the form of a smartphone app. They're always on hand, connected to the internet and make it easy for coupons, deals and more to show up on the user's device--sometimes based solely on current location.

Is it time for more small businesses to start accepting payments via digital wallet? "Yes, but thoughtfully," says Aditya Khurjekar, a mobile-commerce expert who co-founded Money2020, a conference on emerging payments and financial services.

He points out that the question of whether to work with digital wallets is akin to the decision businesses had to make 40 years ago about whether to accept credit cards. Because consumers wanted the convenience of cards, businesses had to determine if they wanted to pay the associated costs and, if so, which cards they would accept.

Similarly, businesses today need to determine which digital wallet vendor is best for their bottom line. Khurjekar recommends starting with the payments and financial service providers with whom you already have relationships. But keep in mind that consumers will be the ultimate judge of which digital wallet providers win in the long term and which fall out of favor. (Remember Diners Club?)

Part of your decision will hinge on your customers' preferences, especially in terms of security. The best way to find out is to ask them: "Are you comfortable with your payment information being stored on your phone (like it is on your credit or debit card)? Or would you rather use a system that stores your data in a cloud-based secure server, where your smartphone is just a conduit to access the account?"

Secure wallets like the one offered by Isis, for instance, store payment information directly on the smartphone, unlike cloud-based wallets from PayPal and Square.

Khurjekar admits that whichever digital wallet solution you pick has a real possibility of leaving some customers on the outside looking in. Right now the burgeoning scene is like the Wild West. But going back to the example of the nascent credit card industry, he expects that consumers will likely encounter rebranding of their digital wallets as the first wave of providers merge, get acquired or fall by the wayside.