What Is a Digital Wallet?

What Is a Digital Wallet?

A digital wallet (or electronic wallet) is a financial transaction application that runs on any connected device. It securely stores your payment information and passwords in the cloud. Digital wallets may be accessible from a computer; mobile wallets, which are a subset, are primarily used on mobile devices.

Digital wallets allow you to pay when you're shopping using your device so that you don't need to carry your cards around. You enter and store your credit card, debit card, or bank account information and can then use your device to pay for purchases.

Digital wallets can also store:

• Gift cards
• Membership cards
• Loyalty cards
• Coupons
• Event tickets
• Plane and transit tickets
• Hotel reservations
• Driver's license
• Identification cards
• Car keys

Learn more about digital wallets, how they work, and how you can use them.

How a Digital Wallet Works

Digital wallets are applications designed to take advantage of the abilities of mobile devices to improve access to financial products and services. Digital wallets essentially eliminate the need to carry a physical wallet by storing all of a consumer's payment information securely and compactly.

Digital wallets use a mobile device's wireless capabilities like Bluetooth, WiFi, and magnetic signals to transmit payment data securely from your device to a point of sale designed to read the data and connect via these signals.

Currently, the technologies used by mobile devices and digital wallets are:

• QR codes: Quick response codes are matrix bar codes that store information. You use your device's camera and the wallet's scanning system to initiate payment.
• Near field communication (NFC): NFC is a technology that allows two smart devices to connect and transfer information using electromagnetic signals. It requires two devices to be close to each other to connect.
• Magnetic secure transmission (MST): The same technology used by magnetic card readers that read your card when you swipe it through a slot on a point of sale. Your phone generates this encrypted field that the point of sale can read. However, at least one digital wallet and mobile phone provider, Samsung, has phased out an MST feature for Samsung Pay on its Android mobile phones.

The card information you've stored in your wallet and choose to use for a transaction is transmitted from your device to the point-of-sale terminal, which is connected to payment processors. Then, through the processors, gateways, acquirers, or any other third parties involved in credit and debit card transactions, the payment is routed through the credit card networks and banks to make a payment.

Because cryptocurrency has become a part of the financial system, companies like Bitpay invented cards that let you pay with cryptocurrency. Digital wallets like Apple Pay and Google Pay allow you to add a Bitpay debit card. The Bitpay card converts cryptocurrency to dollars at the current market value, which your wallet then uses to pay for your purchase.

Types of Digital Wallets

There are several digital wallets available. Here are some of the most well-known:

• Cash App
• Apple Pay
• Google Wallet
• Samsung Pay
• PayPal
• Venmo
• AliPay
• Walmart Pay
• Dwolla
• Vodafone M-PESA

Most wallets attempt to distinguish themselves from their competitors with different methods. For example, Google's digital wallet service allows you to add funds to the wallet on your phone or device. Then you can spend this cash in-store and online at businesses that accept Google payments.

Apple, on the other hand, entered into a strategic partnership with Goldman Sachs to issue Apple credit cards and expand its Apple Pay services.

Age Requirements for Using a Digital Wallet

Most makers of digital wallets place age restrictions on young users. For example, if you're not yet 18, you can't use Apple Pay to reimburse friends or family, although you can buy items with it yourself.

Cash App is a bit more user-friendly for teens. The wallet's payment system is available for kids as young as 13, and it's one of the few mobile options that allows a young person to pay someone else or receive funds—up to $1,000 every 30 days, in peer-to-peer transactions.

Pros and Cons of Digital Wallets

Pros Explained

• Limits exposure for financial and personal information: Having a digital wallet adds security for your credit cards and identification.
• Ends carrying a physical wallet and cards: Possessing forms of payment and ID in your mobile device means you can carry less, avoiding the chance of losing those items.
• Can improve financial services access: Availability of digital wallets gives people in underserved areas more options for payment and commerce.
  

Cons Explained

• May not be accepted everywhere: Smaller shops or less-developed areas may not be set up to accept payment via a digital wallet.
• May not work if Bluetooth or WiFi aren't available: If an internet setup or electronic point-of-sale network aren't functioning, it may not be possible to pay using a digital wallet.
• Vulnerable to identify theft or fraud: If your mobile device is stolen and isn't protected by a password or biometric data, or if your digital wallet is hacked, you could suffer criminal use of the information.

Digital wallets don't require a bank account at a bank with a physical branch. Instead, you can place your funds in an online-only bank—which gives unbanked and underbanked communities access to financial services, enabling broader financial inclusion.

Security might become an issue if you use a digital wallet from a provider that hasn't been vetted or doesn't have an established reputation. If your phone isn't password-protected, you risk giving someone else access to your finances if you lose your phone. Additionally, there might be local businesses you prefer to shop at that don't yet have a point of sale that accepts this technology.

The Bottom Line

A digital wallet is a type of financial transaction app that runs on any connected device. It securely stores your payment information and passwords. Mobile wallets are a form of digital wallet most often used on mobile devices. One of the biggest advantages of digital wallets is that they let you pay for things without credit or debit cards, once you enter and store your card and banking information in the mobile payment platform.