What Are Digital Wallets?

Digital wallets, also called electronic wallets or e-wallets, are apps that allow you to store debit, credit, and gift card details on your device so you can easily make payments. They can keep this information securely on smartphones, laptops, tablets, and even wearables. In this way, digital wallets can enable secure, efficient, and fast transactions in person and online.

What Is a Digital Wallet?

A digital wallet is typically a safe and convenient way to store your payment information electronically on a device. Here are some important points to know:

•   While “digital wallet” is often used interchangeably with the term “mobile wallet,” a mobile wallet is actually a form of a digital wallet — on a mobile phone. You can also use digital wallets on a desktop computer, a tablet, and even internet-connected devices such as a smartwatch or a smart fridge.

•   If you’re shopping at a store that accepts digital wallets, you can pay using your smartphone, without the need for physical credit cards, debit cards that draw from your checking account, or cash. You can also keep payment information online on sites such as Amazon or Walmart and quickly pay using your stored information the next time you shop.

•   Some digital wallets also enable peer-to-peer transfers (P2P transfers). You can send money to friends and family, as well as receive money from them. Some popular P2P services are Venmo and PayPal.

Digital wallets can store more than just your payment information. Consumers often use digital wallets to store:

•   Airline tickets

•   Events tickets

•   Loyalty cards

•   Gift cards

•   Membership cards

•   Coupons

•   Hotel reservations

•   Digital car keys

•   Driver’s licenses or state IDs

•   Health information

How Do Digital Wallets Work?

To use a digital wallet, you’ll need to follow a couple of relatively simple steps:

•   First, download an app to your phone or access a digital wallet online. You then enter any payment information you’d like to link to the digital wallet so you can spend and/or send money.

•   When shopping in person with a digital wallet, your mobile device will interact with a point-of-sale reader or terminal, using technologies such as QR codes, near field communication (NFC), and magnetic secure transmission (MSC).

•   You’ll have to hold your device close to the terminal, where indicated. During this contactless payment, the merchant receives your encrypted payment information to process the transaction.

•   You can also use digital wallets to send money to peers. For this to work, you usually need to know their account name. You can often “friend” them or connect with them before sending funds, which can help make sure the money goes to the right person.

What Are the Different Types of Digital Wallets?

There are a few different types of digital wallets. Understanding the options can influence which one you choose in terms of how and when you can use them.

Closed Wallet

Retailers and restaurant chains can develop their own digital wallets, which allow you to store payment information, loyalty cards, and rewards program information for that specific merchant.

For example, Target, Walmart, Amazon, and Starbucks all have their own proprietary digital wallets. These facilitate the checkout experience online and in store. Such wallets also make it easier to track refunds and returns.

Semi-Closed Wallet

A semi-closed wallet enables users to make payments at select merchants and retailers. To be compatible with such wallets, merchants must sign an agreement with the wallet issuer.

Open Wallet

Open wallets are the most common because they’re the most widely accepted. Think Apple Wallet, Google Wallet, Venmo, and PayPal. Consumers can use these wallets at a wide range of merchants and even withdraw money at banks and ATMs, as well as transfer money between bank accounts.

Different Types of Mobile Wallets

Other types of online digital wallets include Internet of Things (IoT) wallets. IoT wallets allow you to make payments from wearables such as smart watches and even smart appliances.

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Digital Wallet Examples

Here are some examples of the digital wallets you might use in your day-to-day financial transactions:

•   Apple Wallet

•   Google Wallet

•   Samsung Wallet

•   PayPal

•   Venmo

•   Cash App

•   Zelle

•   Amazon Pay

•   Walmart Pay

Pros and Cons of Digital Wallets

Are digital wallets worth using? Here’s a breakdown of the pros and cons.

Pros

Here are the upsides of using a digital wallet:

•   Safety: Digital wallets use encryption and tokenization to protect your data, which makes it harder for hackers to access your financial information. If you lose your physical wallet, someone immediately has access to your cash and cards. With a digital wallet, your money can be protected by passwords, multifactor authentication, and biometric screening, and card numbers aren’t actually stored on your phone.

•   Convenience: When shopping online, having your information stored via digital wallet can make the checkout process much easier. And with in-store shopping, paying for groceries or a cup of coffee is as simple as tapping the terminal with your phone.

•   Flexibility: When you have a digital wallet, you have an additional payment method at your disposal. No more panicking in the checkout aisle if you realize you left your physical wallet at home.

•   Budgeting: Some digital wallets help you track your spending, even across various payment methods. This can make it simpler to monitor your personal budget and ensure you aren’t overspending. You may even be able to set spending limits within the wallet, which can help if you have trouble talking yourself out of unnecessary purchases.

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Cons

Next, consider the potential downsides of digital wallets.

•   Security: While digital wallets are typically more secure than physical wallets, there are some risks that need to be taken into account. For example, it’s not a good idea to use public wifi when accessing your digital wallet. In addition, to keep your phone and digital wallet safe, set up strong passwords and enable fingerprint or facial recognition. If you don’t take these safety precautions on your phone, your digital wallet may not be as secure.

•   Charging your device: If you rely on your phone for your wallet, you’ll have to keep it charged throughout the day. If your phone dies — or you lose it, break it, or leave it at home — you’ll still need a physical wallet to make transactions.

•   Acceptance: Though acceptance of digital wallets is growing, you may not be able to use digital wallets for payments everywhere you go.

•   Overspending: Though digital wallets may have cool budgeting features built in, they might also encourage poor spending habits. Why? Because it’s so easy to pay for things online and in person. In other words, you may be tempted to buy things more often than you would otherwise. The barriers to purchase may be lower.

Here’s a look at how these upsides and downsides stack up in chart form:

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Using a Digital Wallet

Digital wallets are part of the wave of new tech innovations in finance, similar to the way online banking has disrupted many aspects of traditional banking. Ready to start using a digital wallet? Here are a few tips to keep in mind.

•   Use smart safety precautions. Having a strong password and enabling facial recognition on your smartphone are good ways to increase the security of digital wallets. It’s also a good idea to avoid public wifi when accessing your payment methods.

•   Add additional information. Digital wallets can store more than just payment info. For improved convenience, consider adding things such as boarding passes for flights, loyalty cards, and even your driver’s license.

•   Carry a backup payment method. Things happen. A merchant may not accept your digital wallet, or your phone could run out of juice (or fall and break!). It’s always smart to have a backup payment method available, just in case.

•   Update your payment information. Credit cards expire. If you get a new card in the mail, don’t forget to update it in your digital wallet.

•   Monitor your spending: If you’re on a tight budget, you’ll want to monitor your digital wallet spending the same way you would any other payment method.

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The Takeaway

Digital wallets offer consumers a safer, convenient way of making payments electronically. Your payment information is securely stored, so you can use your mobile device, tablet, and smart watch, among other options, to shop. As long as you practice good smartphone safety, you’ll likely find digital wallets to be more secure than a physical wallet.

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FAQ

What is the best digital wallet?

The best digital wallet depends on your needs from such a technology. For example, Apple Wallet is one of the more popular options, but if you’re not an iPhone user, it’s not available to you. Think about where you typically shop and where each wallet is accepted to determine the most suitable one for your lifestyle. And remember, you can always have more than one digital wallet!

Are digital wallets safer than traditional wallets?

Digital wallets can be more secure than traditional wallets because they encrypt your data and can be password-protected. If a criminal steals your physical wallet, they just grab your cards and cash, but with a digital wallet, you can keep them locked out of your phone with passwords and biometric screening, such as facial recognition. Some digital wallets even require fingerprint scans to complete a contactless transaction.

What is the most common type of digital wallet?

Open wallets are the most common type of digital wallet simply because they have the widest use case. You can use open wallets, including Apple Wallet and Google Wallet, at a wide variety of merchants.

Photo credit: iStock/Dejan_Dundjerski

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