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What Is a Digital Wallet?

Reading time: 3 minutes

Highlights:

  • Digital wallets are software applications that allow you to make purchases on your smart devices without using credit cards or other physical payment methods.
  • There are many different digital wallet options to choose from, many of which are free, allowing you to select the solution that best fits your unique situation.
  • Digital wallets are generally safe to use and are often encrypted and password-protected to help keep hackers from accessing your personal or financial information.

Smart devices provide accessibility and convenience at your fingertips. So, it’s no wonder the use of digital wallets is on the rise.

But what is a digital wallet? How do digital payment apps work? Can they safely hold your personal and financial information? Be sure you understand the answers to these and other questions before considering a digital wallet of your own.

How does a digital wallet work?

Also called virtual wallets or mobile wallets, digital wallets are software applications that let you make purchases without using credit cards or other physical payment methods.

Most digital wallets can be installed as an app on your computer, your phone or another smart device. The user then connects the wallet to their bank account and loads information for other forms of payment such as a credit or debit card.

With your payment information successfully added, your digital wallet takes the place of a physical wallet. Online shoppers may be able to pay with a digital wallet and bypass entering their payment information at checkout. When shopping in person, you may be able to pay for your purchases simply by opening your digital wallet on your mobile device and allowing it to be scanned by a virtual wallet-enabled reader.

Certain digital wallets also allow you to store transit and gift cards as well as virtual passes such as concert tickets and airplane boarding passes.

What are the different types of digital wallets?

There are many kinds of digital wallets available. Some of the most popular virtual payment services include Amazon Pay™, Apple Pay®, Google Pay™, PayPal®, Venmo® and Zelle®. Each of these options offers its own range of services for users. Research the available choices when considering a digital wallet provider to find one that best fits your unique situation.

Are digital wallets safe?

Since digital wallets require access to your personal and financial details, many people wonder if they’re safe.

Digital wallets are often encrypted and password-protected to help keep hackers from accessing your information. To that end, your actual credit card number isn’t usually stored within the software. Instead, the app assigns a unique number to each of your credit and debit cards that become tied exclusively to the digital wallet and the device you’re using.

Many virtual wallets also use proven security measures such as two-factor authentication and one-time-use PINs. You can keep your digital wallet even more secure by enabling automatic screen lock on your smart device. This way, even if a thief gets their hands on your device, they’ll need to get past your password protection or other security measures, such as fingerprint or facial recognition, to access your data.

Pros of digital wallets

There are many reasons you might consider using a digital wallet:

Digital wallets can be incredibly convenient. Forget pulling out your physical wallet and fumbling for the right card to use. With a digital wallet, you have everything neatly organized and securely stored on your device.

There are many different digital wallets to choose from. Most digital wallets are free, and some may even come pre-installed on your smartphone. The range of options allows you to choose which wallet works best for your lifestyle and the merchants you frequent.

You may find special rewards exclusive to virtual wallets. Some digital wallets offer special offers, bonuses and other incentives to encourage consumers to spend more using their service. Check with your virtual wallet provider to learn about any rewards available through their service.

Cons of digital wallets

It’s also important to keep certain caveats in mind before committing to a digital wallet:

Not all merchants accept virtual wallets. Although this may change in the future, many stores don’t yet offer an electronic payment option. You’ll likely still need a physical wallet for some purchases.

Easy access may encourage excessive spending. A digital wallet allows you to make purchases within seconds, but that convenience could have a downside. Some people tend to shop more freely when they are not physically handling their cash or credit card, so beware of overspending.

Security is still a consideration. A digital wallet’s encryption can prevent hackers from accessing your credit and debit cards. However, the strength of your wallet’s security is still connected to the password protection on your device. If someone can easily guess the password to unlock your phone, they may also be able to access your digital wallet.

Is a digital wallet right for me?

Digital wallets can be helpful options in certain situations, but they may not be for everyone. If you’re considering a digital wallet for yourself, be sure to:

  • Do your research to determine which digital wallet provider best fits your needs.
  • Keep careful track of your spending to avoid going overboard when you don’t have to use a physical credit card or cash.
  • Be aware that not all merchants will accept payments via digital wallets.
  • Keep security in mind and take extra precautions to better protect your smart devices.
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