Digital wallets present a classic chicken-and-egg problem.

Neither merchants nor consumers want to dive in head first: Consumers are hesitant to give up their physical cards for a number of reasons including security and ease-of-use. And merchants aren't willing to switch to digital wallets if consumers aren't, leading to a lack of infrastructure, which then circles back to give consumers another major reason not to switch.

But for merchants, mobile wallets are an extremely efficient and cost-effective payment technology and, perhaps more importantly, open up an invaluable channel for consumer engagement. For consumers, mobile wallets can offer a seamless, hyper-personalized shopping experience.

So how can digital wallet providers get both parties excited about this new technology? The key is to integrate loyalty.

And here’s how:

Incorporate loyalty tracking and transactions into digital wallets right out of the gate.Initially incorporating loyalty into digital wallets gives customers a real incentive to transition to the new form of payment as they see even more incremental value from the switch.

And as more and more consumers jump on to the digital wallet bandwagon, merchants will be able to justify the cost and time of the point of sale investment. In addition, digital wallets must have the ability to include all of a shopper's loyalty programs. Merhants can't just pick one or two popular loyalty programs to hitch their wagon to.

Offer shoppers incentives to switch to digital wallets.Since such a small percentage of consumers currently use digital wallets, offer higher rewards and points for those consumers who use their digital wallets.

This might include rewarding points/miles for registering a digital wallet, every digital wallet transaction or every dollar spent, or even exclusive offers and events. Also consider rewarding early adopters who refer friends or family members to use a digital wallet. This extra nudge of exclusive offers can be just what you need to bring digital wallets to the mainstream. And because all of the user's loyalty info is loaded, these incentives are guaranteed to be meaningful.

Position digital wallets as a new customer engagement tool for merchants. A major reason why merchants are reluctant to adapt to digital wallets, in addition to slow consumer adoption, is the cost and time it takes to upgrade their point of sale hardware to accept these transactions. And because digital wallets have yet to take off with consumers, spending valuable resources on integrating a digital wallet is a risk.

To get merchants on board, digital wallet providers must prove to be an invaluable new resource for customer engagement. With digital wallets, merchants have a direct access to their shoppers’ transaction data, and they can use that data to specifically engage with each individual shopper according to their transaction history. And what’s more engaging to customers than hyper-personalized loyalty offers and rewards?

Overall, digital wallets have the potential to be looked at as more than just a new tool for payments. Instead, there are countless opportunities for digital wallets to be used as both a marketing tool and a new and exciting way to increase customer engagement and loyalty.

Written by: Christopher Barnard , president and co-founder of Points.