What Is a Digital Wallet?

How Does a Digital Wallet Work?

A digital wallet stores your payment methods in one secure place, with the goal of streamlining payments. Common digital wallets, such as Apple Pay, Google Pay and Samsung Pay, allow you to make contactless payments with your cards in person via a smartphone or smart watch.

Contactless payments use a technology called near field communication (NFC) that transmits your payment even if your phone is in airplane mode. To make a payment, you'll simply hold your phone up to a payment kiosk as you would a contactless credit card or debit card (the same technology enables both payment methods).

There are also digital wallets that aren't used for contactless purchases, but instead store your payment methods and can be used to pay when shopping online or to send money to other people and receive money from them. PayPal and Venmo are two of these options. Some digital wallets also allow you to store items such as flight boarding passes, loyalty cards and event tickets.

Are Digital Wallets Safe?

Digital wallets are generally safe to use, thanks to several layers of built-in security that help protect your personal and financial information. While no system is 100% foolproof, most digital wallets offer strong safeguards against fraud and unauthorized access:

• Encryption: Digital wallets encrypt your payment data, making it unreadable to anyone who might try to intercept it. This helps keep your card details hidden during transactions.
• Tokenization: Instead of sharing your actual card number, digital wallets use a unique, one-time code called a token for each transaction. This means your real card information isn't exposed to retailers or hackers.
• Biometric authentication: Many digital wallets require a fingerprint, facial recognition or device passcode before you can make a payment. This adds an extra layer of security in case your phone is lost or stolen.
• Remote device control: If your phone goes missing, you can usually lock or erase your digital wallet remotely. This helps prevent unauthorized use, even if someone gets access to your device.
• Purchase notifications: Digital wallets allow you to enable instant alerts after each transaction. These real-time updates can help you catch fraud quickly if anything looks suspicious.

Pros and Cons of Digital Wallets

Digital wallets come with various advantages and disadvantages, and it's important to understand both to determine whether using one is right for you. Here's what to keep in mind.

How to Use a Digital Wallet

There are several types of digital wallets, and they all work a bit differently. Since some are more commonly used for in-person shopping and services, while others are for online shopping or peer-to-peer payments, you may want to use a mix of them:

• Mobile wallets: These apps typically come preloaded on your smartphone or smart watch. You'll then add compatible credit and debit cards. Then, when you're at a business that accepts contactless payment, you'll open the app and tap your phone or watch to pay.
• Online payment: Some online shops now also allow you to pay with a digital wallet, such as Apple Pay, Google Pay, PayPal or Venmo, enabling you to make payments online with linked bank accounts and credit or debit cards.
• Payment apps: Peer-to-peer payment apps like Venmo and Zelle have become popular for their focus on sending money between people via linked cards or bank accounts. Some have also become an accepted form of payment for some retailers, both online and in person. You can download these apps from your device's app store.

Tips for Protecting Your Digital Wallet

Digital wallets are generally secure, but taking a few extra precautions can help keep your information safe. Here are some smart habits to follow:

• Secure your devices and apps. Use a strong passcode, fingerprint or facial recognition to lock your phone. Also, be sure to keep your operating system and wallet apps updated to minimize security vulnerabilities.
• Be cautious with transactions. Only use your digital wallet on trusted websites and at secure payment terminals. It's also important to avoid entering any personal details on unfamiliar or suspicious platforms.
• Watch out for scams. Be skeptical of emails or texts asking you to confirm wallet info or click a link. Scammers often impersonate digital wallet providers to steal your data.
• Use multifactor authentication. Enable multifactor authentication when possible for added protection. This makes it harder for someone to access your account even if they steal your login information.
• Monitor your activity. Check your digital wallet or linked bank accounts often for unusual charges. Set up notifications to stay informed about all transactions.
• Avoid public Wi-Fi when possible. Public networks can make it easier for hackers to intercept your data. If you must use public Wi-Fi, consider connecting through a virtual private network (VPN) for added security.

The Bottom Line

Digital wallet technology can be intimidating at first, but you can always start with just one, like the mobile wallet that's included by default on your smartphone. Just know that not all banks and cards are compatible with mobile wallets yet. If yours isn't, consider exploring Experian's credit card comparison tool, where you'll get free personalized offers based on your credit profile.