What is a Digital Wallet?

Whitney Anderson
Whitney Anderson
Technology Writer
Last updated: May 20, 2024
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A digital wallet is a software application that allows authorized users to carry out financial transactions using an electronic device. These devices include smartphones, tablets, and computers. In recent years, the rapid evolution of technology has transformed various aspects of our lives. And with that came innovative solutions for convenient and secure financial transactions.

The use of mobile technology in everyday activities and the demand for secure and contactless payment methods have made many people increasingly rely on digital wallets. As restrictions on in-person shopping were put into place during the COVID-19 pandemic, there was a need for alternative payment solutions. Online shopping and contactless payment systems became more popular, which allowed platforms like PayPal and Apple Pay to not only gain acceptance among consumers but also drive these platforms to improve.

Understanding What Digital Wallet Means

Understanding What Digital Wallet Means

When considering what a digital wallet is it must first be understood how physical wallets work. A traditional wallet protects an individual’s cash, credit cards, and identification. Similarly, a digital wallet is designed to safeguard virtual representations of these items. With this safe storage it becomes easy for users to manage their finances as the convenience provided by digital wallets makes it easy to engage in financial transactions both online or in-person.

How Digital Wallet Works

Setting up a digital wallet requires several steps that protect the user’s sensitive information while prioritizing security and privacy. The wallet application encrypts payment information along with personal identifiable information (PII). This information can either be stored on the user’s device or in the cloud depending on what type of encryption your particular wallet employs.

To ensure privacy even further when initiating a transaction using their digital wallet, the merchant receives data that does not represent any personal details of yours at all; just gibberish characters! This process known as tokenization keeps your real identity hidden from everyone except yourself while completing transactions.

Digital wallets also employ more technologies beyond tokenization:

Near Field Communication (NFC) Technology

NFC technology allows two devices in close proximity to communicate over radio waves. This is widely used in smartphones and smartwatches for contactless transactions at point-of-sale (PoS) terminals.

Secure Element (SE)

A safe sector is a chip that is impossible to tamper with and is inside digital items. It stores the users personal and financial information. The chip is isolated from the rest of the device’s software, not allowing malware to get through. When sensitive data is kept away from operating systems it gives an extra layer of security to keep unwanted people out

Biometric Authentication

Many digital wallets on mobile devices use biometric authentication such as fingerprint scanning or facial recognition technology to add an extra identity factor when making payments. Because this requires the user to confirm their identity with biological data only they could provide, no one else would be able to make any transactions using your device if it gets lost. This type of double identification makes things much more secure.

Digital Wallets vs Crypto Wallets

Both these wallets are designed for storing digital information but that’s about all they have in common. In traditional use cases and underlying technologies they are very different.

Digital wallets usually store electronic currency using traditional fiat currencies like the US dollar or the euro. They can only work when connected to the internet which allows them to work on smartphones, smartwatches, tablets, and computers. This wallet makes transactions easier when paying bills online or transferring money P2P.

Crypto wallets however are used for storing crypto currency like Bitcoin or Ethereum. Unlike other software based wallets these can be physical hardware devices shaped like USB drives which lets users store their currencies offline reducing risk of hacking or theft. Since they don’t need wifi they are typically used for long-term storage since they cannot be hacked at all while being turned off in a drawer.

Traditional options are starting to adapt though since cryptocurrencies are now becoming more popular everyday use is becoming normal even outside of digital shopping.

Types Of Digital Wallets

Knowing what you want out of a digital wallet will help you pick the right one! Here’s some different types:

Closed Wallets: This wallet was made by companies just for customers within their ecosystem. You can’t use the funds to buy anything from an outside merchant and you can’t even transfer the funds out of the wallet itself!

Semi-Closed Wallets: Closed wallets kind of suck for people who want to buy things outside of the realm of their wallet. With semi-closed wallets, there’s a limited number of pre-approved vendors that users can make transactions with. These are usually issued by partnerships between companies and shops, giving users more flexibility than closed wallets. However, once you put money in it, there’s no way to withdraw it or transfer it into another wallet.

Open Wallets: Open wallets are pretty much what they sound like. They’re beyond flexible and usable with any vendor that takes digital payment, as long as you’ve got enough. Link them up with your bank account or credit card and you’ll be able to move money in and out using open wallets for purchases or withdrawal right off the bat. Banks issue these types of wallets along with other financial institutions, subjecting them to rules that ensure safety and compliance.

There’s also a couple different ways digital wallets can be accessed:

Online Wallets: Accessible through browsers like Google Chrome or Mozilla Firefox, online wallets allow users to log on from multiple devices so long as they have internet access. This makes them extremely convenient for online shopping because they don’t have any device restrictions. However, hackers may be able to attack these types of wallets easier than others due to how web browsers work.

Mobile Wallets: The name says it all – mobile wallets can only work on smartphones and other small devices that fit into your pocket (or purse). You’ll need to download them through apps before using them at physical locations. Some versions even use features within your device such as face recognition software or bluetooth connections as extra security measures.

Desktop Wallets: Like online wallets, desktop ones are also accessed through the internet but only on the specific computer they’ve been installed on. Users then have full control over their wallet’s private keys and transaction history without fear of losing information thanks to cookies or malware. However, they’re not as convenient on the go compared to mobile wallets.

Digital wallets can also be classified by the way you put money into them:

Prepaid Wallets: There’s no accessing primary bank accounts or credit cards with prepaid wallets unless you want to add more funds later on. For those who value their privacy and find comfort in only spending the amount available, this is a good choice. Just know that once the balance runs out, the wallet becomes useless until it gets a top up.

Card-Linked Wallets: As long as you hook up your credit or debit card to these types of wallets, you won’t have to reload them at all. Using these cards for purchases will automatically deduct funds from linked cards without making users manually do so themselves.

Bank-Linked Wallets: Connect directly with your bank account and pay for things using its balance. This is probably one of the fastest ways to make transactions since everything is managed through a singular platform. You’ll be able to track expenses and pay bills with ease too.

5 Best Digital Wallets

Picking the best digital wallet is really subjective. It depends on a lot of different things such as device compatibility, location, and user preference. However, the following options are generally considered to be some of the best:


It’s highly likely that everybody knows about PayPal. It’s reliable and easy to use. If you’re in another country, it will still work with your currency. You can send and receive money just by providing an email address, or use it to pay for goods and services online.

Apple Pay

Apple Pay is only available on Apple devices. If you have an iPhone, Apple Watch or Mac then you might want to look into using this digital wallet. Even though it’s only usable on a specific subset of devices, it’s still incredibly secure.


Alipay has taken Asia by storm and is now used by millions all over the world. Aside from mobile payments, Alipay also offers other financial products that people love like wealth management tools and insurance policies.

Google Wallet 

Google Wallet was once called Google Pay, but nothing else has changed aside from its name. This Android-exclusive payment platform allows users to store payment cards and even digital tickets right on their mobile device.

Samsung Pay 

Samsung Pay works in more places than any other mobile payment app on the market today because it supports both NFC (near-field communication) technology for new terminals and Magnetic Secure Transmission (MST) for older ones. Additionally, Samsung claims that its service is safer than most because “it doesn’t share your actual card number during a transaction.”

Digital Wallet Safety

While all modern digital wallets come with fancy encryption features that are designed to keep your information safe from prying eyes, there are still some things you should do when using them.

Unfortunately, no system is perfect so we should never put all our trust in them without being cautious ourselves as well. Be sure to always update apps when necessary which usually includes security patches. It’s also recommended to be cautious of any personal information that you provide online.

Pros and Cons of Digital Wallets

Digital wallets make paying for things super easy, but they do come with some downsides. Here are a few pros and cons:


  • Diverse Payment Options: Similar to PayPal, most digital wallets support a wide range of payment methods, including credit cards, debit cards, bank accounts, and even cryptocurrencies in some cases.
  • Faster Transactions: You don’t have to physically swipe or tap your card into a machine anymore. With just a touch of your thumb or the scan of your face you’re good to go.
  • Enhanced Security: Online wallets use top-of-the-line security features such as encryption and tokenization to keep users’ sensitive financial information safe. Some digital wallets also come with additional measures like biometric authentication and real-time fraud detection for an added layer of security.
  • Versatility: One of the biggest advantages of digital wallets is their versatility. They can be used for everything from online purchases to in-store payments, bill payments and peer-to-peer transfers. As a result, many people consider them an all-in-one solution for managing all kinds of financial activities.
  • Privacy Protection: Through the use of tokenization and other security methods, digital wallets are able to protect users’ privacy by limiting the amount of personal information that gets shared with merchants during transactions. This not only helps reduce the risk of identity theft, but it also makes data breaches less likely.


  • Battery Dependency: Since digital wallets only work on mobile devices, they’re unable to function when a device runs out of battery life. This means that if your phone or tablet dies while you’re at a store, you won’t be able to access your wallet or make any purchases until it’s charged back up again.
  • Cybersecurity Vulnerabilities: While providers take great effort in building robust security features into their digital wallets, there’s no such thing as being too secure. Hackers and cybercriminals are always finding new ways to exploit vulnerabilities in software and technology, so users must remain vigilant about updating their software regularly -as well as following best practices- to ensure everything stays locked down.
  • Merchant Restrictions: Unfortunately not all merchants currently accept digital wallet payments — especially in areas with limited technology infrastructure — which can make these platforms somewhat unreliable for everyday use. Until more businesses start accepting this kind of payment method across the board, users will have to continue carrying around alternative options just in case.
  • User Tracking: Certain providers may collect and analyze user data for targeted advertising and other purposes, which some users might find invasive. People who are especially sensitive about sharing their personal information online may not be as likely to sign up for a digital wallet if they know it means giving others access to their transaction history and other identifying details.

As time goes on, we’ll undoubtedly see new features and technology that strengthen security even more, as well as additional incentives that make the payment method more appealing for all kinds of transactions. As it stands today however, there’s no denying the many benefits of using digital wallets over traditional ones in terms of both convenience and safety.

Nonetheless, like any form of technology out there, digital wallets aren’t without risk. Potential users should always remain informed about the potential risks involved with keeping all their payment information online. They should also always follow best practices when it comes to security — such as keeping software updated at all times and only using strong authentication measures — so they can enjoy everything that’s great about these innovative products while minimizing the chances of someone hacking into their accounts or stealing from them.

With the world becoming increasingly digital by the day, it’s unlikely that we’ll ever see a decline in demand for easy-to-use electronic wallets. Their usefulness extends far beyond simple shopping purchases online too; people are starting to use these platforms to pay for almost anything you can think of.

The good news is that this continued demand should prompt providers to create even better products moving forward. With new features like support for cryptocurrency payments and easier management systems for loyalty programs already in development, digital wallets are positioned perfectly to continue reshaping how consumers move money around digitally.

But again: Users must always prioritize finding the most secure options out there if they want to protect themselves from cyberattacks or fraud.

The most ideal digital wallet will be different for everyone. It’s all based on preferences, compatibility, payment methods, and where you are in the world. Some of the top digital wallets out there now include PayPal, Google Wallet, Apple Pay, Samsung Pay and Alipay. Each one offers something unique.


Do I really need a digital wallet?

Not everyone will find use in having a digital wallet. However, it does offer a lot of convenience for those who make online purchases often, want to better manage their money or just use contactless payments.

Is PayPal considered a digital wallet?

PayPal is one of the oldest and most well-known online wallets out there today. Users can easily store payment info as well as credit or debit cards to make purchases online. You are also able to send and receive money with this service.

How secure are these types of services?

To keep financial information safe from hackers, companies use things like encryption and fingerprint identification systems to keep accounts secure. While measures are taken on their side, it’s still important that users do what they can to protect themselves too.

Can I use one in stores?

Yes. If you have NFC-enabled technology built into your mobile like with Apple Pay or Google Wallet then you’re good to go! All you need is a mobile near the terminal and you’ll complete your transaction in no time.

Are fees included when using these services?

It all depends on which service you decide to go with. Some companies charge fees for certain types of transactions while others keep it free across the board. Be sure to explore this aspect before committing so you don’t get hit by surprise charges.

Can any device work with any type of storage?

No, not at all actually. You’ll have to carefully decide which system works best for your device if that’s what you’re looking for specifically (Apple Pay = apple devices only).

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XPS's editorial policy focuses on providing content that is meticulously researched, precise, and impartial. We adhere to rigorous sourcing guidelines, and every page is subject to an exhaustive review by our team of leading technology specialists and experienced editors. This method guarantees the integrity, pertinence, and utility of our content for our audience.

Whitney Anderson
Whitney Anderson
Whitney Anderson is a dynamic technology writer and content creator known for her quick learning and strong interpersonal skills. With a passion for community service and travel, she excels in crafting engaging tech content and leading diverse teams. Whitney is eager to bring her tech expertise and creativity to make a significant impact in your organization.

Why Trust Us

Our editorial policy emphasizes accuracy, relevance, and impartiality, with content crafted by experts and rigorously reviewed by seasoned editors for top-notch reporting and publishing standards.

Purchases via our affiliate links may earn us a commission at no extra cost to you, and by using this site, you agree to our terms and privacy policy.

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