What Is a Digital Wallet?

Close up of woman in cafe using digital wallet.
martin-dm / iStock.com

A digital wallet is a cashless payment system that stores a user’s payment information and allows that user to make transactions through their devices, without swiping a debit or credit card. These systems are also called e-wallets or electronic wallets, and they can be stored on desktop computer or other device. Mobile wallets, which you store on your smartphone or another mobile device, are a type of digital wallet.

What Is a Digital Wallet and How Does It Work?

A digital wallet works similarly to the wallet you carry in your purse or pocket, but rather than hold money and credit cards, it stores information about your payment methods and other items you might keep in your physical wallet. For example, a digital wallet might store your bank and credit and debit card information as well as loyalty cards, coupons, event tickets you’ve purchased and your ID.

To process a payment, the system instantly withdraws the purchase amount from the bank account or a debit or credit card designated when setting up the digital wallet.

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What Can I Use a Digital Wallet For?

Perhaps the most common use is to pay for purchases you make online, in-store or in-app. Other systems let users keep cash or cryptocurrency in their digital wallets and then use that money to pay for purchases — or, in the case of a cryptocurrency wallet, buy, store and trade Bitcoin and other cryptos. You can also transfer money to family and friends and withdraw cash from an ATM.

Because different digital wallets have different purposes, you might use more than one.

Good To Know

Digital wallets aren’t only alternative for contactless payments in stores and online payments that don’t require entering a credit card number. Virtual credit card numbers are created on the fly when you check out. And contactless credit and debit cards let you pay at the register by holding your card near the credit-card reader or tapping the reader with your card.

Types of Digital Wallets

The three main types of digital wallets are closed, semi-closed and open.

  • Closed: Closed wallets, like Amazon Pay and the Walmart Pay, are for use only with a particular store or website.
  • Semi-closed: Semi-closed wallets like Apple Pay and Google Pay let you shop online and offline with a select group of merchants that accept that particular wallet.
  • Open: Open wallets let you make payments with just about any merchant as well as transfer money between other users of the same app and perform banking tasks like ATM withdrawals

How Do I Get a Digital Wallet?

You can create a digital wallet by downloading the app and installing it on your phone or wearable device. Then follow the prompts to add the cards you’ll use for payments.

How Do I Use a Digital Wallet?

You’ll know a store merchant accepts your digital wallet if you see its logo or the contactless symbol, which looks like a Wi-Fi symbol turned on its side, at the register. Tap the digital wallet app on your mobile device, and select the account or card you want to use to purchase your items.

To purchase online or from within an app, select your digital wallet from the list of payment options.

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What Are the Best Digital Wallet Companies?

TechRadar ranked the five best digital wallets of 2021 in a May review:

  • Apple Pay: Lets Apple users make purchases and send and receive cash. About half of U.S. retail establishments accept Apple Pay.
  • Google Pay: Is compatible with many popular retailers as well Airbnb, DoorDash and other services. The wallet supports a limited number of debit cards, but you can link to your PayPal account to use a debit card linked with that. You’ll need a separate app, Google Pay Send, for person-to-person cash transfers.
  • Samsung Pay: Can be used for nearly any merchant because it works with credit card readers.
  • PayPay: Is used most often for person-to-person payments but is fairly widely accepted by online merchants. Instant Transfer from a linked debit card incurs a fee
  • Venmo: Is mostly for person-to-person payments between people who have the wallet installed on their devices, but a small number of retailers — mostly online — accept it as well.

Are Digital Wallets Safe To Use?

Digital wallets are safer than many people think because the merchant doesn’t ever see the credit card or bank account number. Instead, the system generates a unique, random transaction number for purchases. Account information is encrypted and available only to people with a password. Furthermore, users can lock their digital wallets remotely if they suspect someone has accessed their bank accounts.

Before using a digital wallet, you should take precautions to protect the information you have stored electronically. Take advantage of your smartphone’s built-in safeguards like biometric access from the lock screen. The phone will ask for your fingerprint or scan your face before opening.

This article has been updated with additional reporting since its original publication. Alicia Bodine contributed to the reporting for this article.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Daria Uhlig is a personal finance, real estate and travel writer and editor with over 25 years of editorial experience. Her work has been featured on The Motley Fool, MSN, AOL, Yahoo! Finance, CNBC and USA Today. Daria studied journalism at the County College of Morris and earned a degree in communications at Centenary University, both in New Jersey.

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