What is a Digital Wallet?

A digital wallet is an electronic means of encrypting your virtual payment information, and guarding your personal information as you use your phone to make purchases. Typically, digital wallets take the form of an app, storing electronic versions of your credit cards and digital assets. As a result, you may be able to use your digital wallet at checkout—both in-person and online—if the retailer you’re buying from accepts the service.

Types of digital wallets & e-wallets

First, it helps to understand that there are a few major categories of digital wallets. Those offered by digital outlets like Apple, Samsung, and Google are one example, those offered by banks and financial services are another, and still others are offered by individual merchants, in which you’ll download their app to your device and store payment credentials there to use for payments.

These digital wallets work by storing your payment credentials either directly on your device, or off the device network entirely, on a third-party server. At the point of sale, wallets such as Apple Pay can be used at a merchant that accepts Apple Pay, whereas merchant wallets can only be used at that respective merchants’ stores.

Digital wallets do this by utilizing near-field communication (NFC) technology, allowing the devices to digitally communicate with each other in uniquely encrypted ways to complete user purchases, without ever touching the retailer’s payment device. An e-wallet can also mean that your physical credit cards can be tucked safely away at home while you’re shopping, protecting you from them being lost or stolen.

How to use a digital wallet

Paying with a digital wallet typically involves taking out your phone and simply holding it over or tapping a payment terminal—not so different from swiping or inserting your credit card. If you have several different cards stored in your digital wallet, then tapping your device will initiate a prompt asking you to select the card you’d like to use for these contactless payments.

Your smartphone then transmits your encrypted payment information and asks you to verify your purchase by entering a code, identifying a pattern, or taking your fingerprint. Once the user is verified, the transaction is carried out as if you had paid with a physical credit or debit card.

And a bonus to using digital wallets? Phone provider wallets may integrate with loyalty and rewards programs, and merchant wallets may let you buy and store gift cards, order and pay in advance, and even use coupons.

When using a digital wallet, the same good habits around security and responsible spending should apply as when you’re using a plastic card. Choose your “default” card carefully, and make sure that your usual sound financial behaviors follow you into cyberspace.

Are digital wallets secure?

Because the information that is transmitted from a digital wallet is encrypted, a contactless payment can be more secure than using your physical charge card. Digital wallets use a combination of EMV^® technology, an acronym created for the advent of chipped cards, and one-time “tokens.”¹ So, with each transaction, your phone encrypts your information on its way to the checkout terminal and the digital wallet provider, which decrypts the information to identify you before sending initiating the transfer of your funds to the recipient of your business.

Some people may be concerned about what happens if their mobile device becomes lost or stolen, but this is where extra protections, like two-factor authentication, come in handy.

Additionally, you can keep your digital wallet secure using several of the same strategies you already use online: Do not give out your username or password, for example. Change your passcode to enter your phone often, and be sure your internet access connections are secure. And lastly, the same way you wouldn’t buy something from someone you don’t trust, be mindful of making financial transactions over public Wi-Fi to keep your personal information away from prying eyes.

Your credit card issuer is also part of your security team, and may send automatic emails and alerts for certain, pre-authorized activities to help you stay on top of potential fraudulent activity. For example, you can typically request a text or email alert whenever a transaction is posted that is over a specific amount you specify, such as $100. Many credit card issuers, including Discover, offer $0 fraud liability protection, which means that you’re never responsible for unauthorized purchases on your Discover Card account.²

So, what is a digital wallet? It’s yet another way that your smartphone is taking over for an important tool in your life—first, it came for your calendar and camera, and now it can even replace the plastic cards in your physical wallet.