GOBankingRates

What Is a 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.

A Better Way to Bank

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.

A Better Way to Bank

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.

A Better Way to Bank

What Are the Best Digital Wallet Companies?

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

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.

A Better Way to Bank

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.