What Is a Digital Wallet?

What Is a Digital Wallet? article image.

While you certainly can still pay for most transactions with a traditional plastic card, digital wallets are becoming the go-to payment method for more and more shoppers. They require a degree of tech savvy, and not all merchants accept them, but digital wallets offer compelling benefits including speed and security. Here's how to start using one.

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 allow you to make contactless payments with your cards in person via a smartphone or smartwatch. These include Apple Pay, Google Pay and Samsung Pay.

Contactless payments utilize a technology called near field communication (NFC) that transmits your payment even if your phone is on airplane mode. To make a payment, you'll simply hold your phone up to a payment kiosk much like 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. PayPal is one of these options. Some digital wallets also allow you to store items such as flight boarding passes, loyalty cards, event tickets and potentially even your COVID-19 vaccination card in one place.

What Are the Advantages of Digital Wallets?

Paying with a digital wallet isn't always possible, but when it is, you'll enjoy these benefits:

  • Speed: Digital wallets aren't universally accepted, so it's wise to continue carrying a physical card or cash. But when they are accepted, the transaction is usually processed much faster when you pay with a tap from your phone or smartwatch versus inserting a card with an EMV chip. You also won't have to dig around in your wallet, stick a card in a machine or sign anything, which saves you time and hassle. This is especially handy for those taking public transport that accept contactless payment.
  • Convenience: Using a digital wallet can also just make life easier. You can add multiple cards to mobile wallets, allowing you to quickly change your payment method. When you're shopping online, it's handy to have everything stored and not have to go get your wallet from the other room. Plus, if you travel or go to events, you may be able to store those tickets in your digital wallet without printing them.
  • Security: Digital wallets have various security features that help ward off data breaches and identity theft. For one, mobile wallets use unique card numbers called tokens when you pay, so merchants don't see your real card number. Additionally, most digital wallets require verification for payment. For example, when paying in person with a phone, you typically have to do a fingerprint or face scan, or manually enter your passcode, to process a payment. When using an option like PayPal from your laptop, you'll likely have to enter a password.
  • Versatility: If you have a mobile wallet set up on your smartphone or your smartwatch, but you forget your wallet, you can use your device to make a payment. Some payment apps such as Venmo can now be used to pay at some retailers as well. Additionally, some apps and websites now accept payment via digital wallets like Google Pay or PayPal. It can get a bit confusing to choose the best digital wallet, however, especially since they're not accepted. But once you find what works best for you, digital wallets can streamline your payments and offer flexibility.

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 come pre-loaded on your smartphone or smartwatch. If you have an Apple device, it comes with Apple Pay, while Android devices use Google Pay. Samsung can also use Samsung Pay. You then add compatible credit and debit cards. Then, when you're at a business that accepts contactless payment, you tap your phone or smartwatch to pay. If you have a Fitbit or Garmin smartwatch, these devices also have their own digital wallet applications for contactless payments.
  • Online payment: Some online shops now also allow you to pay via Apple Pay or Google Pay, allowing payments from a computer, though this is less common. What's more often seen is PayPal, which lets you send and receive payment via linked bank accounts and credit or debit cards.
  • Payment apps: Peer-to-peer payment apps such as 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.

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 CreditMatch™, where you'll get free personalized offers based on your credit score.