Digital Wallet

A digital wallet is an online platform or software application that stores payment information. They can be used on mobile devices, tablets, smart watches, and laptop or desktop computers. Digital wallets don’t process transactions themselves; instead, they store the debit and credit card details, bank account and routing numbers, loyalty card information, and digital coupons, then provide this information to the payment processor upon request. 

Digital wallets can be used for e-commerce transactions or in-person purchases, though some older point of sale (POS) hardware is not compatible with digital wallet technology. In addition to payment details, digital wallets can also store hotel keys, flight boarding passes, concert tickets, and membership cards.

Types of digital wallets

There are many digital wallets on the market that are popular in different parts of the world. These include:

How does a digital wallet work?

In most cases, using a digital wallet starts when a buyer initiates a payment. The user opens the digital wallet app from their mobile device during an in-person transaction or logs into their digital wallet account from a mobile browser. Then, the user provides the required authentication information like a passcode or biometric identifier. Once verified, the user can choose the payment method stored in the digital wallet and complete the transaction.

Most digital wallets complete online transactions by sending encrypted payment information over the internet. However, digital wallet payments are only possible if the ecommerce platform or payment processor has an integration already in place. 

Depending on the digital wallet you choose, it may use one of the following technologies to facilitate in-person transactions:

  • Near field communication (NFC) uses the proximity—typically four inches or less—of two devices to transfer payment information. Most smartphone-based digital wallets use the NFC tag embedded in the device to communicate with NFC payment processors.
  • Magnetic secure transmission (MST) uses magnetic signals between two devices to transfer payment information. This technology functions similarly to magnetic strips on physical credit cards.
  • Quick response (QR) codes are unique two-dimensional barcodes that store payment information. Most smartphones can scan QR codes to send or receive digital payments.

Digital wallets vs. crypto wallets

Though they are similar, digital wallets and crypto wallets are not the same. Crypto wallets are used for transactions on a decentralized crypto exchange like Coinbase, while digital wallets are more widely used for transactions with traditional currencies. Not all digital wallets support cryptocurrency, and not all crypto wallets are digital. Many of the top crypto wallets like Mycelium and Exodus do not support transactions with traditional currencies.

However, many digital wallets do support cryptocurrency and securely store the private keys that are used in a crypto transaction. PayPal, Venmo, and Cash App are among the top digital wallets that also support cryptocurrency.

Are digital wallets safe?

In many cases, digital wallets are safer than physical wallets because they cannot be stolen and used as easily. Most digital wallets have multi-factor authentication (MFA) features that verify the user’s identity before providing payment details.

Additionally, digital wallets use tokenization technology to hide the credit card information, whereas physical cards have all of the details except the billing address printed on them.However, digital wallets are not without their own set of risks. Digital wallet holders must follow fundamental cybersecurity best practices to prevent their information from falling into the wrong hands. This includes using a strong password that cannot be easily guessed, enabling MFA, and closely monitoring all transactions for signs of fraudulent activity.

Webopedia Staff
Webopedia Staff
Since 1995, more than 100 tech experts and researchers have kept Webopedia’s definitions, articles, and study guides up to date. For more information on current editorial staff, please visit our About page.
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