In today’s world, your smartphone can do almost anything—including acting as your wallet. You might hear terms like “digital wallet,” “virtual wallet,” or “e-wallet” used more often, referring to apps that let you pay with your smartphone or smartwatch. If you’re new to the US or just starting to explore mobile payments, understanding how these digital wallets work can make your financial life more convenient and secure.
Here at Remitly, we understand that using new payment technologies can feel overwhelming, especially when you’re managing finances across borders. That’s why we’ve put together this guide to explain digital wallets simply. We’ll cover what they are, how they function, the different types available, their benefits, and most importantly, how to use them safely.
What is a digital wallet and how does it work?
Let’s start by defining what we mean by a digital wallet and understanding how they are transforming the way we pay and manage money.
Definition of a digital wallet
A digital wallet, often called a virtual wallet or e-wallet, is an application on your smartphone, smartwatch, or computer that securely stores digital versions of your payment methods. This can include:
- Credit cards
- Debit cards
- Bank account information
- Gift cards
- Loyalty cards
- Event tickets
- Boarding passes
- Even digital keys or ID cards, in some cases.
Instead of carrying physical cards, you can use the digital wallet app to make payments in stores, online, or within other apps.
Overview of functionality and processes
Essentially, a digital wallet acts as a secure container for your payment details. When you make a purchase:
- You authenticate the payment on your device (using a PIN, fingerprint, or facial recognition)
- The digital wallet app securely transmits your payment information to the merchant’s point-of-sale (POS) terminal or the online checkout system using technologies like Near Field Communication (NFC) or Quick Response (QR) codes
- Your actual card number is usually not transmitted. Instead, a unique digital identifier (a “token”) is often used for the transaction, adding a layer of security
- The payment is processed just like a regular card transaction, but without needing the physical card
Historical context and evolution
The concept of digital payment isn’t brand new. Early forms of digital payments emerged with online shopping in the late 90s. However, the rise of smartphones with technologies like NFC in the 2010s truly propelled electronic transactions like mobile digital wallets into the mainstream. Services developed later, like Google Wallet and Apple Pay, made it possible to tap-and-pay in stores, transforming how people think about carrying physical wallets. As of 2023, about 53% of Americans use digital wallets more than traditional methods.
How digital wallets work
Let’s look closer at the technology that makes digital wallets function.
Technology behind digital wallets (NFC, QR codes)
Two main technologies power most in-person digital wallet payments:
Near Field Communication (NFC): This is the most common technology for “tap-to-pay” in the US and many other countries. NFC allows two devices, like your phone and a payment terminal, to communicate wirelessly when they are very close (usually within a couple of inches). When you hold your phone near an NFC-enabled terminal, it securely transmits the encrypted payment information, often a token, to complete the transaction.
Quick Response (QR) Codes: In this method, either the merchant displays a QR code that you scan with your wallet app to initiate payment, or your wallet app generates a QR code that the merchant scans. The QR code contains the necessary transaction details.
How to set up and use a digital wallet
- Choose a wallet: Your phone likely comes with one pre-installed (Apple Wallet on iPhones, Google Wallet on Android). You can also download others like Venmo or Cash App.
- Download/open the app: Find the app on your device.
- Add payment methods: Follow the prompts to add your credit cards, debit cards, or link your bank account. This usually involves manually entering card details or taking a picture of the card. Your bank will then verify the card.
- Set up security: Enable security features like a passcode, fingerprint ID (Touch ID), or facial recognition (Face ID) for authorizing payments. This is crucial for security.
Steps for making payments using a digital wallet
In stores (NFC):
- Unlock your phone (often required for payment authorization).
- Look for the contactless payment symbol (looks like sideways Wi-Fi waves) on the payment terminal.
- Hold your phone near the terminal.
- You might need to confirm the payment on your phone screen (e.g., via Face ID/Touch ID).
- Wait for confirmation (a checkmark or beep).
Online or in-app:
- At checkout, look for the button representing your digital wallet (e.g., “Pay with Apple Pay” or “Pay with Google Pay”).
- Select it.
- Authenticate the payment on your device when prompted.
- Your stored information (payment card, shipping address) is securely passed to the merchant, saving you from typing it in.
QR code payments:
- Open your wallet app or a specific payment app that supports QR codes.
- Either scan the merchant’s QR code displayed at checkout or present the QR code generated by your app for the merchant to scan.
- Confirm the amount and authorize the payment within the app.
Types of digital wallets
Digital wallets come in various forms and can be categorized in different ways.
Overview of popular digital wallet types (mobile wallet, e-wallet)
While the terms are often used interchangeably:
- Mobile wallet (m-wallet) refers specifically to wallets operating as apps on smartphones or smartwatches, primarily used for in-person contactless payments and mobile app payments.
- E-wallet is a broader term that can encompass mobile wallets and wallet services accessible via web browsers on computers or tablets. These wallets are often used heavily for online shopping and P2P transfers.
Comparison of open, closed, and semi-closed digital wallets
Digital wallets can also be classified by their scope:
- Closed wallets: Issued by a specific company and can only be used to pay for that company’s goods or services, e.g., a Starbucks app wallet or Amazon Pay. Funds often cannot be withdrawn as cash. They usually focus on storing funds loaded from other sources and facilitating payments within that single ecosystem, sometimes offering loyalty rewards.
- Semi-closed wallets: Allow users to make payments at a list of participating merchants who have agreements with the wallet provider. You can store money, but usually cannot withdraw it to a bank account, e.g., some retail gift card apps that work across multiple partner brands.
- Open wallets: These are the most versatile. They are often issued by banks or major payment networks and sometimes linked with debit cards. They allow you to pay online or in stores, transfer funds to others, and often withdraw funds to a linked bank account or even at ATMs.
Key providers and brands in the market
Some of the most well-known digital wallet providers in the US and globally include:
- Apple Wallet/Apple Pay: Built into Apple devices (iPhone, Apple Watch)
- Google Wallet/Google Pay: Available for Android devices
- Samsung Wallet/Samsung Pay: Available on Samsung devices, notable for supporting both NFC and MST (Magnetic Secure Transmission, which mimics a card swipe, increasing compatibility with older terminals)
- Venmo: Very popular in the US for peer-to-peer (P2P) payments between friends and family
- Cash App: Offers P2P payments, a linked debit card, and options for buying stocks or Bitcoin
- Zelle: Often integrated directly into US bank apps, facilitating fast bank-to-bank transfers between individuals
Benefits of digital wallets
Why are digital wallets becoming so popular? They offer several advantages.
Convenience and ease of use
Instead of carrying multiple physical cards, you just need your smartphone or smartwatch. Paying is often faster than inserting a chip card or counting cash—just tap or scan. Online checkout is simplified, as you don’t need to repeatedly enter card numbers and addresses. Many wallets also consolidate loyalty cards, tickets, and passes in one place.
Security features and protection measures
Digital wallets are generally considered more secure than carrying physical cards. Key security features include:
- Tokenization: Your actual card number isn’t shared with the merchant during the transaction. A unique, one-time-use code (token) is used instead.
- Encryption: Your stored payment information is encrypted within the app
- Authentication: Payments require authentication via passcode, fingerprint, or facial recognition, preventing unauthorized use even if your phone is unlocked
- Remote deactivation: If your phone is lost or stolen, you can often remotely lock or wipe your digital wallet
Integration with mobile devices and apps
Digital wallets are seamlessly integrated into the mobile experience. They work directly with your phone’s hardware (NFC chip, camera) and security features (biometrics). They also integrate easily with many shopping apps, ride-sharing apps, food delivery services, and more, making online and in-app payments quick and simple.
Are digital wallets safe?
Digital wallets come with strong security features that ensure user and data safety.
Security concerns and how they are addressed
- Device theft: Wallets require authentication (PIN, biometrics) for payments. You can also remotely lock or erase your wallet data via services like Find My iPhone or Google’s Find My Device.
- Data breaches: Reputable providers use strong encryption and security measures. Tokenization means your actual card numbers aren’t typically stored in a way that’s useful to hackers, even if a breach occurs at the merchant’s end.
- Malware/fake apps: Only download wallet apps from official app stores (Apple App Store, Google Play Store). Keep your phone’s operating system and apps updated with the latest security patches.
Privacy considerations and regulatory standards
Digital wallet providers collect transaction data. Review the provider’s privacy policy to understand how your data is used. In the US, financial transactions are subject to various regulations aimed at protecting consumers and ensuring data security (like PCI DSS standards for handling card information). Reputable wallet providers adhere to these standards.
Tips for enhancing wallet security (encryption, passcodes, biometrics)
- Use strong device security: Always lock your phone with a strong passcode, pattern, fingerprint, or facial recognition
- Enable wallet authentication: Ensure your wallet app requires authentication (PIN/biometrics) for every transaction
- Use unique, strong passwords: If your wallet has a separate password, make it strong and unique. Consider a password manager like LastPass.
- Beware of phishing: Never share your wallet login details or card numbers in response to unsolicited emails, texts, or calls
- Avoid public wi-fi for sensitive actions: Don’t set up your wallet or access sensitive financial info on unsecured public Wi-Fi. Use a secure network or your cellular data.
- Monitor transactions: Regularly check your digital wallet transaction history and linked bank/card statements for any unauthorized activity. Enable transaction alerts if available.
- Keep software updated: Install updates for your phone’s operating system and wallet apps promptly, as they often contain security fixes
Common troubleshooting and activation issues
- Card verification failed: Ensure you entered the card details correctly. Check that your bank supports the digital wallet you’re using. Sometimes you may need to call your bank to approve adding the card.
- NFC payment not working: Make sure NFC is enabled on your phone settings. Ensure you’re holding the phone close enough to the correct spot on the terminal. Check if the merchant’s terminal actually supports contactless payments. Restarting your phone can sometimes help.
- App freezing/crashing: Ensure the wallet app and your phone’s OS are updated. Try clearing the app cache or reinstalling the app (make sure you know your login details before doing so).
- Forgot passcode/login: Use the app’s “forgot password/PIN” recovery options, which usually involve email or SMS verification
FAQs
Can you withdraw money from a digital wallet?
Most digital wallets don’t allow direct ATM withdrawals. Instead, transfer funds to your linked bank account, then withdraw cash. Some wallets, like those tied to debit cards, may offer ATM access, but check with the provider.
What are the differences between a digital wallet and a bank account?
A digital wallet stores payment info for quick transactions, while a bank account holds your money and offers services like interest or loans. Wallets link to bank accounts but focus on payment convenience, not full banking.
While some wallets can hold a balance, they usually lack the full range of services and deposit insurance (FDIC in the US) of a traditional bank account. Think of a digital wallet more like a virtual replacement for your physical wallet’s contents, rather than a replacement for your bank.
What are the common troubleshooting and activation issues of a digital wallet?
- Card verification failure
- Near Field Communication (NFC) payment not working
- App freezing/crashing due to outdated versions or app cache overload
- Forgotten passcode/login