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A mobile wallet can be a great way to pay for things as you go through your day without having to carry an actual, potentially cumbersome wallet with you. Instead, an app holds digital versions of your credit, debit, loyalty, and ID cards, allowing you easy access when needed.

But you may wonder which of the mobile wallet options are best, how safe these transactions are, and whether it wouldn’t just be better to slip your debit card in your pocket on most days.

Read on to learn more, including:

•   What is a mobile wallet?

•   How does a mobile wallet work?

•   How do you set up a mobile wallet?

•   What are the pros and cons of a mobile wallet?

What Is a Mobile Wallet?

A mobile wallet is just what it sounds like: It’s a virtual wallet that lives on your mobile device (aka your cell phone). It can store credit cards and charge cards, as well as debit, loyalty, and store card information. This allows you to quickly and easily pay for goods and services with your smartphone, smartwatch, or another mobile device. No more digging through your bag or backpack for your “real” wallet and fishing out the right piece of plastic.

Mobile wallets (sometimes called digital wallets) can go a step further, too. You can also stash insurance cards, ID, coupons, concert tickets, boarding passes, and hotel key card information in them. Some digital wallets also enable you to send money to friends, as well as receive payments.

You may also be able to use your mobile wallet instead of a physical card at some ATMs for contactless withdrawals.

Recommended: What Is a Credit Card?

How Does a Mobile Wallet Work?

Here’s how a mobile wallet works:

•   You install the app and type in your personal and payment information, which is securely stored. (Unique identifying numbers are used for your details vs. your actual card or account information.)

•   When you are ready to make a payment with the mobile wallet, a technology called NFC (near-field communication) kicks in. This allows the two devices (your mobile wallet and the vendor’s reader) to communicate. Typically, you will wave your device over the merchant’s terminal or tap your device against it.

•   As the two devices communicate, your transaction will likely go through. Funds will transfer, and you will usually be pinged with a confirmation.

What Is the Best Mobile Wallet App?

The major mobile wallets are:

•   Apple Pay

•   Google Pay

•   Samsung Pay

These may come already installed on mobile devices. Although they differ in layout, these mobile wallet apps have the same basic function that allows you to pay with a phone tap.

Other ways to make payments on the go include mobile wallets you can download from app stores, including wallets from banks and merchants such as PayPal, Walmart, and Starbucks.

Deciding which mobile wallet is best will largely depend upon your own personal needs, which options are compatible with your device, how you like to manage your money, and what your financial goals are. A couple of points to keep in mind:

•   When choosing a mobile wallet app, be aware that a mobile wallet offered by your credit card company may only be accepted at certain retailers.

•   Merchant wallets will typically only work in that merchant’s store or online. For instance, the Starbucks wallet will only work at Starbucks. Enjoy that latte, but don’t expect to buy new boots at the mall with it.

Setting up and Using a Mobile Wallet

Here’s how to set up most of the major mobile wallet apps; it’s usually quite simple:

•   You launch the app (it may be pre-installed on your device), take a photo of your card or enter its information (such as your credit card number), and follow the step-by-step instructions.

•   This process is then repeated for all other cards entered. Generally, even if you load up several credit cards into your mobile wallet, only one of them will be your default payment option. That card will be the one that is used to process a purchase. If you want to use a different card, you may need to change the default card before you make the transaction.

•   Beyond credit and debit cards, the app may also walk you through configuring peer-to-peer payments like Apple Cash or Google Pay fund exchanges. You may also be able to link your PayPal account.

•   You may be able to import retail-store rewards cards, as well as museum or library memberships cards, event tickets, and airline boarding passes. This may involve scanning a QR code or selecting the “add to wallet” button in an email or a text message from the issuer.

•   When you are ready to pay for purchases using your mobile wallet, you’ll want to make sure the merchant accepts mobile money. These businesses can typically be identified through a contactless payment indicator (usually a sideways Wi-Fi symbol).

•   To pay, open your digital wallet app if necessary, hold the phone near the wireless reader or tap your device against the terminal. This will authorize the payment. Your phone’s screen will typically confirm the transaction.

Are Mobile Wallets Safe?

Overall, mobile wallets are considered to be safe. Here’s why:

•   Unlike cash, which can be stolen, and credit cards, which can be copied, the card information you load into a mobile wallet is encrypted. That means that your actual card or account numbers are never shared with the merchant.

•   In order to make a payment, you typically have to unlock your device and also type the passcode or use your fingerprint or face recognition to unlock the mobile wallet. Or you may be able to unlock an iPhone with a double-click of a button and then authenticate with Touch ID or Face ID.These steps may be simple but they add layers of security.

•   In the case of theft, it’s not possible for anyone to use a mobile device to make a payment without providing the required security credentials.

These safeguards actually make mobile wallets more secure than carrying physical credit cards and cash, which can easily be compromised.

Recommended: Guide to Choosing a Credit Card

Pros and Cons of Using Mobile Wallets

Is a mobile wallet right for you? Here are some key pros and cons you may want to consider.

Mobile Wallet Pros

Here are some of the upsides of using a mobile wallet.

They’re convenient. If you’re out and about without your wallet or bag, you can still make purchases, as well as use your coupons and rewards cards. You may also be able to get cash at an ATM or check a book out of the library, all from your mobile device. What’s more, they’re often allow for a contactless payment, meaning they can be extra quick and easy.

They’re secure. Mobile wallets provide a layer of security you don’t get with cash or using a debit or credit card. Your payment information is saved in one protected, central location. Card numbers are never stored in the app itself but are instead assigned a unique virtual number. This protects your money even if your smartphone is lost or stolen.

They can help you track your spending. A mobile wallet can help you track and better manage your spending. All of your transaction information is stored in the app so it’s easy to see how much you’re spending and where each week. You might even wind up using a credit card more responsibly.

Mobile Wallet Cons

There are also some downsides to mobile wallets to be aware of.

They’re not accepted everywhere. There are still some industries where cash is the only currency accepted. Even in businesses that do take credit, not all of them accept mobile wallets. To accept a mobile wallet, businesses need to have payment readers that take NFC payments, and not all of them have these terminals. This can cause a problem if a mobile wallet is all you have on hand.

Your phone could die. Cell phones often run out of battery life, and if you’re without a charger, that handy mobile wallet will no longer exist. That can put a crimp in your shopping plans or become a major problem if you have important documents such as train passes or concert tickets stored in your mobile wallet.

You may end up overspending. The use of mobile wallets can be similar to that of using a credit card. Because cash isn’t physically leaving your hands, spending can feel less real, which can be a cause of overspending. If you have spending issues, a mobile wallet can make it easy to spend mindlessly and swipe or tap too often.

The Takeaway

A mobile wallet is a digital way to store credit, debit, ID, and gift cards so that purchases can be made using a mobile smart device rather than a physical card.

Mobile wallets can help simplify your financial life. They allow users to make in-store payments without having to carry cash or physical credit cards. They’re easy to use and have hefty safeguards.

However, they aren’t universally accepted. It’s worth your while to determine whether the retailers you frequent accept them to help determine if a mobile wallet is a good option for you.

Looking for more convenient ways to manage your money? With a SoFi Checking and Savings bank account, you can spend and save in one convenient place, earn a competitive annual percentage yield (APY), and pay no account fees. You can also track your weekly spending, pay bills, and send money to friends right from your smartphone using the SoFi app.

4 Tips for Using Your Mobile Wallet

To keep your mobile wallet safe and smooth transactions, keep these tips in mind:

1. Do your research before downloading payment apps. Look for reliable brands/companies, many positive reviews, and a significant number of downloads. Avoid untested apps; they could be a kind of scam and contain spyware or malware.
2. Know how to remotely lock and locate your phone in case it gets lost or stolen. Check your phone’s device manager capabilities before you find yourself in an emergency situation.
3. Always have appropriate locking technology. Carrying around a phone that doesn’t lock means you could be risking loss.
4. Review your credit and debit card statements. Make sure those purchases are yours. While mobile wallets are secure, problems can occasionally arise, and you want to be alert.

FAQ

How many places support mobile wallets?

While there isn’t a precise tally of how many retailers and other businesses support mobile wallets, a recent study found that there are 1.35 billion registered mobile money accounts globally, indicating significant adoption of and acceptance of this technology.

Do mobile wallets support all debit/credit cards?

Each mobile wallet will have its own policies, but most credit cards from major banks are supported by, say, Google Pay. Small business credit cards may also be added, and possibly some debit cards, especially those from established banks. You may find, though, that prepaid cards are not supported.

Will mobile payments replace cash?

According to a 2022 study by GSMA, the global mobile money industry saw a 31% increase in processing transactions, up to $1 trillion in value. While this might indicate that mobile payments are on track to replace cash completely, that may not happen soon or perhaps even ever: Some sources say cash still accounts for 85% of all consumer payments around the world.

Photo credit: iStock/hiphotos35

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Investing can be complex and intimidating, so many people may seek an advisor to help them with their finances. In the past, that meant going to a financial advisor to get a tailored financial and investment plan, usually at a high cost. But in recent years, consumers have gravitated toward robo-advisors – which provide algorithm-generated investment advice to help individuals manage their money – due to their low fees and convenience.

However, even with the help of a robo-advisor, you need to understand and track the returns on your investments. In this guide, we will explain what robo-advisors are, how they work, and what you need to know about monitoring and evaluating the performance of your portfolio. By understanding the basics of robo-advisors and their returns, you can make more informed decisions about your investments and achieve your financial goals.

What Is a Robo-Advisor and How Does It Work?

A robo-advisor is an automated, algorithm-based service that provides investors with financial advice. The service typically involves a questionnaire that customers complete to assess their risk tolerance and investment goals. It is then used to determine an investment strategy and portfolio of exchange-traded funds (ETFs) or other low-cost investments.

Robo-advisor algorithms typically use modern portfolio theory (MPT) and other quantitative techniques to create a diversified portfolio tailored to the investor’s needs. The algorithms used by robo-advisors are constantly updated to reflect changes in the market and make adjustments as needed to maintain the desired asset allocation.

Robo-advisors also offer tools to help investors make decisions about their finances. These can include portfolio analysis tools, risk tolerance assessment tools, and educational resources. Investors can use these tools to monitor their portfolios and make informed decisions.

Robo-advisors typically charge a fee for their services, usually a percentage of the total portfolio value. However, the fees are generally much lower than those traditional financial advisors charge.

The goal of robo-advisors is to provide a low-cost and convenient investing option to a wide range of customers, including those who may not have the resources or desire to work with a human, financial advisor.

Recommended: What Is Automated Investing?

Evaluating Robo-Advisor Performance

Evaluating the performance of a robo-advisor is critical for investors interested in using them to build wealth. By looking at the past performance of robo-advisors, investors can get an idea of the sophistication of the computer algorithm that generates the portfolio allocations. Such proprietary algorithms can be based on investment theories developed by Nobel Prize-winning economists.

An investor should evaluate robo-advisor performance by considering its overall returns and several other key metrics. By assessing the following metrics, investors can better understand the robo-advisor’s performance and how it aligns with their investment goals:

•   Returns: Compare the rate of returns of a robo-advisor’s portfolios to those of relevant benchmarks. For instance, investors can look at the returns of their robo-advisor portfolio versus the S&P 500 Index returns. If the robo-advisor performs better than the S&P 500, it may indicate a well-run robo-advisor. However, remember that past performance is not always indicative of future results, but it can provide a general idea of how the robo-advisor’s investments have performed over time.

•   Diversification: Evaluate the diversification of the robo-advisor’s portfolios within and across different asset classes. Portfolio diversification can help manage risk by spreading investments across different types of securities.

•   Rebalancing: Investigate how often and how the robo-advisor’s portfolios are rebalanced and how frequently the underlying investments are reviewed.

•   Customer Service: Check if the robo-advisor provides access to a human advisor or customer support, as this can be an important factor if you need help or have questions.

What Is the Average Robo-Advisor Return?

The average return for a robo-advisor portfolio can vary depending on several factors, such as the portfolio’s specific investments, the robo-advisor’s investment strategy, and the overall market conditions.

In general, robo-advisors tend to invest heavily in low-cost index funds and ETFs, which often track the broader market. Therefore, a robo-advisor portfolio’s returns may be similar to a mix of comparable index funds minus any management fees charged by the robo-advisor.

Recommended: ETFs vs Index Funds: Differences and Similarities, Explained

Nonetheless, returns can vary widely depending on the robo-advisor and the portfolio. For example, as of September 30, 2022, the 5-year average annual return for robo-advisors with portfolios comprising 60% stocks and 40% ranged from 2.31% to 4.44%, according to The Robo Report by Condor Capital.

Robo-Advisor Returns

Below are the returns of some robo-advisors compiled by Condor Capital’s The Robo Report. The returns shown in the table are of portfolios with a 60% stock and 40% bond asset allocation, after fees, as of September 30, 2022. All returns for periods longer than one year are annualized.

Understanding Robo-Advisor Fees

Understanding the investment fees associated with robo-advisors and how they compare to other investment options is critical for investors. Fees often eat into a portfolio’s returns, making it harder for investors to build wealth. Analyzing robo-advisor expenses will help investors to determine if the robo-advisor is a cost-effective solution for their investment needs.

Investors can better understand robo-advisor fees by analyzing the following:

•   Management Fees: This is the fee charged by the robo-advisor for managing the investor’s portfolio. It is typically a percentage of a portfolio’s assets under management and many robo-advisors charge less than 0.50%. Some robo-advisors offer management fee-free options to their clients.

•   Expense Ratios: An expense ratio is the fee charged by the underlying funds in the portfolio, such as ETFs. It is expressed as a percentage of the assets, ranging from 0.05% to 0.50% or more. Some robo-advisors include low-cost ETFs with expense ratios under 0.10%.

•   Account Minimums: Some robo-advisors may have minimum account balance requirements. A minimum account balance means investors must deposit a certain amount to open an account, which can be a headwind to opening an account if the investor starts with a small amount of capital.

•   Commissions: Some robo-advisors charge a commission when buying or selling securities, while others do not.

•   Other Fees: Some robo-advisors may charge additional fees for services such as tax-loss harvesting or closing an account.

Pros and Cons of Robo-Advisors

Robo-advisors are often appealing to many investors because of their hands of nature. However, as with any financial product or service, there are pros and cons to using a robo-advisor.

The pros of using robo-advisors include the following:

•   Low cost: Robo-advisors typically have much lower fees than traditional financial advisors, making them an attractive option for people who want to invest but avoid paying high fees. Some robo-advisors charge as little as 0.25% of assets under management, while traditional financial advisors may charge 1% or more. This can make a significant difference over time, especially for people with smaller portfolios.

•   Convenience: Robo-advisors are available 24/7 and can be accessed from anywhere with an internet connection, which makes it easy for people to manage their investments. This convenience can be especially beneficial for people with limited time to manage their investments.

•   Diversification: Robo-advisors use algorithms to create diversified portfolios with a mix of different index funds and ETFs in various asset classes, which can help investors reduce risk and improve returns.

The cons of using robo-advisors include the following:

•   Limited personalization: Robo-advisors use algorithms to create portfolios, which may not take into account an individual’s unique financial situation or goals. A lack of personalization can be a problem for people with complex financial situations or who have specific investment goals that a robo-advisor may be unable to accommodate.

•   Insufficient access to human advice: Investors may prefer to speak with a human advisor for financial advice and guidance. While some robo-advisors provide access to a financial advisor to help investors, it may not meet the needs of some users.

•   Fewer investment options: Some robo-advisors may have limited investment options compared to traditional financial advisors or a self-directed brokerage account. For instance, robo-advisors tend to invest in ETFs rather than individual stocks. If an investor wants to put money into a specific stock or asset, they may want to open a self-directed brokerage account in addition to a robo-advisor portfolio.

Can Consumers Lose Money With Robo-Advisors?

Consumers can lose their money with robo-advisors. As with all investments, there’s a risk of investors suffering losses.

There are some precautions that investors can consider when weighing different robo-advisors. The industry is still growing, and computer-generated financial advice may not meet all their needs. In addition, face-to-face meetings can help consumers better understand their financial profile and investment risks.

Also, if a robo-advisor shuts down, consumers may be forced to sell or accept a possibly unrelated replacement service.

Why Do People Use Robo-Advisors?

People use robo-advisors because they are often cheaper than traditional financial advisors, provide a more objective approach to financial decision-making, and offer greater convenience when managing investments.

For example, robo-advisors will automatically rebalance the portfolio according to the market conditions, investors’ risk tolerance, and investment goals. This ease of rebalancing can help investors maintain their desired risk level and ensure that their portfolio stays aligned with their investment goals.

Additionally, some robo-advisors use automated tax-loss harvesting to help investors minimize their tax liability. Tax-loss harvesting is a technique that involves selling investments that have lost value to offset capital gains from other investments, which can help reduce the amount of taxes you owe.

Investing With SoFi

Robo-advisors are a relatively new type of investment service that uses algorithms and technology to create and manage portfolios for investors. In recent years, robo-advisors have become increasingly popular as more and more people look for low-cost, convenient ways to invest their money. This has lowered the barrier to entry for many individuals, including younger people, to start investing.

If you’re interested in using a robo-advisor to help you build your portfolio, SoFi can help. With SoFi Invest® automated investing, we recommend a portfolio of exchange-traded funds (ETFs) for you based on your goals and risk tolerance. We’ll rebalance your investments quarterly, so your money is always invested how you want it to be. And SoFi doesn’t charge a management fee.

FAQ

Do robo-advisors work?

Robo-advisors can be effective tools to help people manage their money and achieve their financial goals. Robo-advisors are generally cheaper and more convenient than traditional human financial advisors. However, it is important to research each robo-advisor to ensure it is the best fit for your needs.

What are the differences between a robo-advisor and a financial advisor?

Robo-advisors are usually less expensive than financial advisors. Robo-advisors typically have low fees and minimum deposit requirements, while financial advisors often require a minimum deposit and charge a percentage of the assets they manage. Another difference is that robo-advisors provide automated and algorithm-based advice, while financial advisors provide personalized advice and guidance tailored to individual needs and goals.

Are robo-advisors good for retirees?

Robo-advisors can be a good option for some retirees because they can provide a low-cost, automated way to manage investments. However, if a retiree wants more personalized advice or help with tax and estate planning, there may be better options than a robo-advisor.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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