What Are Digital Wallets?

By Timothy Moore · April 28, 2023 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Are Digital Wallets?

Digital wallets, also called electronic wallets or e-wallets, offer consumers a convenient way to make payments from their financial accounts using devices such as smartphones, laptops, tablets, and even wearables. Digital wallets store payment information securely, typically allowing for safe, efficient, and fast transactions in person and online.

Read on to learn more, including:

•   What is a digital wallet?

•   How do digital wallets work?

•   What are examples of digital wallets?

•   What are the pros and cons of digital wallets?

What Is a Digital Wallet?

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

•   While 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, tablet, and even internet-connected devices like a smartwatch or a smart fridge.

•   If you’re shopping at a store that accepts digital wallets, you can pay using your smartphone, with no physical credit cards, debit cards, or cash necessary. You can also keep payment information online on sites like Amazon or Walmart and quickly pay using that 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 and receive money when they send it to you. 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, such as COVID-19 vaccination cards

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’ll then enter in any payment information you’d like to link to the digital wallet to make it easy to spend and send your money.

•   When shopping in person with a digital wallet, your mobile device will interact with a point of sale reader or terminal, using technologies like 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 will go to the right person.

Recommended: How to Send Money to Someone Without a Bank Account

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!

What Are the Different Types of Digital Wallets?

There are a few different types of digital wallets. Understanding the options can impact what you decide to use since it informs how and when you can use them.

Closed Wallet

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

For example, Target, Walmart, Amazon, and Starbucks all have their own proprietary digital wallets. These make the checkout experience faster and easier online and in the 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 IoT wallets. (IoT stands for internet of things.) IoT wallets allow you to make payments from wearables like smart watches and even smart appliances.

Recommended: 15 Causes of Overspending

Digital Wallet Examples

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

•   Apple Wallet

•   Google Wallet

•   Samsung Pay

•   PayPal

•   Venmo

•   Cash App

•   Zelle

•   Amazon Pay

•   Walmart Pay

Pros and Cons of Digital Wallets

Are digital wallets worth using? Let’s break down the pros and cons.


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, a criminal immediately has access to your cash and cards; with a digital wallet, your money can be further protected by passwords, multi-factor authentication, and biometric screening — and card numbers aren’t actually stored on your phone.

•   Convenience: When shopping online, having your information already stored via digital wallet can make the checkout process much easier. And when you have your information stored in a mobile wallet, paying for groceries or a cup of coffee is as easy as tapping 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 make it easy to 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.

Quick Money Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.


Next, consider the potential downsides of digital wallets:

•   Security: While digital wallets are largely safer than physical wallets, there are some security concerns. For example, it’s not a good idea to use public WiFi when accessing your digital wallet. In addition, keeping your phone and digital wallet safe entails setting good passwords and enabling fingerprint or facial recognition; if you don’t take these safety precautions on your phone, your wallet won’t be as safe as it could be.

•   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 for any transactions.

•   Acceptance: Though acceptance of digital wallets is growing, you probably still can’t 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, 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:

Pros of Digital Wallets

Cons of Digital Wallets

SafetySome security vulnerabilities
ConvenienceMust keep your device charged
An additional payment optionNot yet accepted everywhere
Can help with budgetingMay allow overspending to happen more easily

Recommended: Why Do People Feel Guilty About Spending Money?

Using a Digital Wallet

Ready to start using a digital wallet? Here are a few tips to keep in mind:

•   Using 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.

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

•   Carrying 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.

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

•   Monitoring 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.

The Takeaway

Digital wallets offer consumers a safe, 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.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.


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 your needs from a digital wallet — and where each wallet is accepted — to determine the best digital wallet 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 safer than a traditional wallet because they encrypt your data and can be password-protected. If a criminal steals your physical wallet, they just have to reach inside to grab your cards and cash, but with a digital wallet, you can keep them locked out of the phone with passwords and biometric screening, like facial recognition. Some digital wallets even require fingerprint scans or facial recognition 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 like Apple Wallet and Google Wallet at a wide variety of merchants.

Photo credit: iStock/Dejan_Dundjerski

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender