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What Are E-Wallets And How To Use Them - Outside View by PersonalFN

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What Are E-Wallets And How To Use Them
Feb 12, 2016

Festival time ushers in the joy of giving. You celebrate with your family and friends and buy them thoughtful presents and in return your dear ones surprise you by showering you with gifts. The feeling of receiving a pleasant surprise can't be explained, it must be experienced. But, there are some inconveniences. Whenever you go out, you have to carry your barbell of a wallet with you. Isn't a wallet as heavy as an exercise barbell? We dump almost everything in it-coins, cash, slips/bills/notes, debit cards (yes, at least 2-3), at least 2 credit cards, Identity Cards, shopping cards, gift cards, driving license and what not. If you are using a smart phone; you wouldn't need to carry so many things with you.

Digital wallets -The Alternative to physical wallets

You carry hard cash because you never know when a paper-money transaction will be necessary. You carry coins because change is hard to come by these days. You have a number of cards; of which some allow you to avail special discount with a particular retailer, while the rest are debit and credit cards. Putting these together, you may increase your purchasing limit. But there's a threat of losing all these belongings, if you lose your wallet. So, if you use a smartphone, a laptop, or a desktop, you should opt for digital wallet.

What is the concept of a digital wallet / e-wallet?

Like you park money in your bank account; you can park money with a company that provides you with an e-wallet. In India, you would mainly find three types of e-wallets.

Open e-wallets: These wallets let you perform a whole host of transactions. Players, such as M-Pesa, have tie-ups with banks that allow full range of services including merchant payments, money transfers, and money withdrawals. The procedure to open an account with companies providing an open e-wallet is simple. You have to register with them, load money from your regular savings bank account to your e-wallet, and start transacting. Companies providing you with open e-wallets allow you to withdraw money from their designated agents, besides from bank ATMs. The local grocery shop owner could also be their agent. Only point to remember is such accounts are for smaller amounts / petty money use.

Semi closed e-wallets: Such types of e-wallets are less flexible. Once you load money into it, you are obligated to spend it. Maybe at the merchant outlet tied up with a company providing you with the e-wallet or with the company itself, if it has an e-commerce platform. In this case, you can't withdraw money once it has been transferred. There aren't any other services offered either. 'Mobikwik' and 'PayUMoney' are a few popular names in this category. Although 'paytm' offers semi-closed e-wallets, it allows you to transfer money back to your account while charging you 4.0% fees. In semi closed e-wallets, the money is handled by the company providing you with this service but it has to deposit money in a separate escrow account.

Closed e-wallets: Closed e-wallets allow you to make e-transactions only with a company providing it. For example, e-wallet of 'make my trip' or 'flipkart' can be used only to shop with them. These types of e-wallets have rigid conditions and inflexible terms. No RBI permission is required to launch such e-wallets. In the case of closed e-wallets, money lying in the e-wallet-holders' accounts are shown as a liability on the books of the company.

Things to remember if you are planning to create an e-wallet:

  • Remember the purpose of an e-wallet is to provide you with conveniences while transacting. This means you don't earn any interest on the balance lying in your wallet
  • You get attractive cash back offers as well as other lucrative deals on joining. Cash backs are added to your e-wallet but can only be redeemed by purchasing goods and can't be cashed in
  • RBI regulates semi closed and open e-wallets actively, hence they can be considered relatively safe.

Three criteria for selecting a suitable wallet:

  • See the merchant network strength of the company offering an e-wallet as acceptance is the key
  • Opt for a company that doesn't charge you any fee on joining
  • If you shop online more often than shopping in stores; go with a company that gives you attractive deals on a wider range of products.

In the end...

The ease of doing transactions improves your shopping experience and savings, making e-wallets an attractive alternative. That being said, every wealthy person knows that rationalising expenses is equally important. So, let's also keep in mind our long term financial goals. Earning high returns on your investments is not the only way to wealth creation and financial freedom. Every Rupee saved is a Rupee earned.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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