What Is a Digital Wallet?

What Is a Digital Wallet?

A digital wallet, also known as an electronic wallet, is a software application that stores your payment details and passwords, enabling seamless transactions on connected devices, chiefly mobile phones. By securely holding your financial data, digital wallets remove the necessity for physical wallets. You simply load your credit, debit, or bank account information into the application, allowing you to conduct purchases directly via your device without the need to carry physical cards.

Digital wallets can also store:

• Gift cards
• Membership cards
• Loyalty cards
• Coupons
• Event tickets
• Plane and transit tickets
• Hotel reservations
• Driver's license ( only in some states as of now, AZ, CO, GA, MD)
• Identification cards like driver's licenses
• Cryptocurrency
• Car keys

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

Understanding the Functionality of Digital Wallets

Digital wallets are apps that use mobile devices' features to give better access to financial services. They store all payment info securely, so you don't need a physical wallet.

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.

Mobile devices and digital wallets currently use these technologies:

• 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): This is primarily for Samsung mobile phone users. It is the same technology used by magnetic card readers that read your card when you swipe it through a slot at a point of sale. Your phone generates this encrypted field that the point of sale can read. Samsung has phased out MST features for Samsung phones from 2021 onwards to focus on NFC, which is more prevalent.

Your stored card info is sent from your device to the point-of-sale terminal that connects to payment processors. Then, through processors, gateways, acquirers, and other third parties, your payment travels through card networks and banks to complete the transaction.

As cryptocurrency becomes part of the financial system, companies like Coinbase offer cards for crypto payment, with Visa issuing Coinbase's card. Digital wallets like Apple Pay let you add a crypto debit card, which converts cryptocurrency to dollars at current rates for purchases.

Different Types of Digital Wallets Explained

Many digital wallets are available. Here are some well-known ones:

• Cash App
• Apple Pay
• Google Wallet
• Samsung Wallet
• PayPal
• Venmo
• AliPay
• Walmart Pay
• 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.

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 Restrictions and Access for Using Digital Wallets

Most digital wallets have age limits. You can't have your own Apple Pay account if you're under 18, but Apple offers "Apple Cash Family." This lets kids in a family send or receive money and make purchases. Parents must set it up and approve it from their accounts.

Cash App limits services for users under 18. They can make peer-to-peer payments up to $1,000 every 30 days. Services like borrowing, deposits, cross-border payments, and phone support are for those 18 and older.

Advantages and Disadvantages of Digital Wallets

Advantages

• 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: The availability of digital wallets gives people in underserved areas more options for payment and commerce.
  

Disadvantages

• 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 isn't available: If an Internet setup or electronic point-of-sale network isn'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 need accounts at traditional banks. Funds can be stored in online-only banks, giving unbanked or underbanked communities access to financial services and promoting 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.