Digital Wallet Explained: Types With Examples and How It Works

What Is a Digital Wallet?

A digital wallet (or electronic wallet) is a financial transaction application that runs on mobile devices. It securely stores your payment information and passwords. These applications 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.

Key Takeaways

  • Digital wallets are financial applications that allow you to store funds, make transactions, and track payment histories on devices like phones and tablets.
  • You can store all of your financial information in a digital wallet; some even let you store identification cards and driver's licenses.
  • Digital wallets may be included in a bank's mobile app or payment apps like PayPal or Alipay.
  • Digital wallets allow people in financially underserved parts of the world to access financial services they may not have been able to before.

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 within about an inch and a half (4 centimeters) from 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.

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.

When you hold your phone over a point of sale to make a purchase, you're using your digital wallet to conduct the transaction.

Because cryptocurrency has made its way into 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
  • ApplePay
  • Google Wallet
  • Samsung Pay
  • PayPal
  • Venmo
  • AliPay
  • Walmart Pay
  • Dwolla
  • Vodafone-M-Pesa

Most wallets attempt to distinguish themselves from their competitors using 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 ApplePay services.

Advantages and Disadvantages of Digital Wallets

One of the most significant advantages of digital wallets is that using one limits the amount of financial and personal information you need to carry as you go about your day. If you place everything in your digital wallet, you no longer need to carry physical cards or a physical wallet—there is no chance of a card falling out of your wallet or of leaving your card in the ATM slot. Additionally, you can't lose your entire wallet.

Digital wallets allow businesses and consumers worldwide to accept payments, receive funds, or send and receive remittances from friends and family in other nations.

Digital wallets do not 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, therefore 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.

What Is a Digital Wallet Example?

Google Pay and Apple Pay are some examples of more well-known digital wallets. Both services allow you to access your financial products through your devices and make purchases.

Is PayPal a Digital Wallet?

PayPal is a peer-to-peer payment and money exchange platform, but it has a digital wallet included in its app.

Do I Need a Digital Wallet?

You don't necessarily need a digital wallet. However, they offer a convenient way to pay for your purchases because you don't have to carry credit and debit cards around. This also increases card security—you can't lose your cards if you don't carry them.

Article Sources
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