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Digital Wallet Explained

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

How Does a Digital Wallet Work?

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.

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

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 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.

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