People in line use their phone to tap a credit card reader.

What Is a Digital Wallet?

7 min read
Last Updated: August 20, 2025

Table of contents

Key Takeaways

  1. Digital wallets store payment information on your mobile phone to use at checkout where they’re accepted.

  2. Digital wallets encrypt payment information to help keep it secure while processing a transaction.

  3. Using a digital wallet is typically simple and involves just tapping your phone to a payment terminal that allows this type of transaction.

A digital wallet is a type of contactless payment method (usually a mobile app) that stores and encrypts electronic versions of your credit cards, debit cards, and more on your phone. You may complete a contactless payment transaction using your digital wallet with a tap or wave of your smartphone at the checkout terminal, or to enter your info quickly online.

Digital wallets allow you to leave your cash and cards at home. But how does this digital payment method work?

Types of digital wallets & e-wallets

Different types of digital wallets may have unique applications and limitations. Some are designed to work with specific brands, while others have broader reach:

  • A closed wallet only interacts with the company that created it, like Amazon Pay. You may pay for purchases or store rewards with a closed wallet.
  • A semi-closed wallet has contracts with networks of specific brands for payment acceptance.
  • An open wallet, like Apple Pay, Samsung Pay, and Google Pay, is the most flexible digital wallet option. These digital wallets work across various payment platforms.

Most digital wallets allow you to add multiple credit cards to your device, which can be useful for taking advantage of specific credit card rewards where you shop.

How to use a digital wallet

Most digital wallet apps work with the help of a technology known as near-field communication, or NFC. An NFC system integrates with cashier/check-out stations via mobile apps and e-commerce websites to process your payment information. The NFC-enabled devices communicate wirelessly with each other over a very short distance, typically a few centimeters, to complete the transaction. All financial information, like payment details, and personal information shared between the devices is encrypted.

 

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 physical card in a card reader. 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 that particular contactless payment.

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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.

 

Some digital wallets may include additional perks. Phone provider wallets may integrate with loyalty cards and rewards programs, and merchant wallets may let you buy and store their gift cards, order and pay in advance for purchases there, and even use digital coupons from that merchant.

 

Be sure to choose the default payment method for your virtual wallet carefully. You may want to pick a credit card with a high rewards rate. Just make sure you don’t use too much of your available credit. Or, if you choose a debit card, be careful not to overdraw your account.

Are digital wallets secure?

Because the information that is transmitted from a digital wallet is encrypted, contactless payments using a wallet app may be more secure than using your physical credit or debit card. Digital wallets use a combination of EMV® technology and one-time “tokens”. So, with each transaction, your phone encrypts your information on its way to the checkout terminal and the digital wallet provider decrypts the information to identify you before initiating the transfer of your funds to the business.

 

Some people may be concerned about what happens if their mobile device becomes lost or stolen, but extra protections, like two-factor authentication, come in handy here to help keep your information secure.

 

You may keep your digital wallet secure using several of the same strategies you already use online: Don’t 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 an amount you specify, such as $100.

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Some credit card issuers may also offer additional security features. For example, Discover offers $0 fraud liability protection, which means you’re never held responsible for unauthorized purchases on your Discover Card,2 for more peace of mind.

Pros and cons of a digital wallet

Digital wallets are a secure, convenient tool for storing your payment methods, but they’re not without shortcomings. Understanding the pros and cons may help you decide when to use your digital wallet or stick with your physical wallet.

Advantages of digital wallets

Digital wallets may make organizing your payment methods easier in several ways:

 

Store multiple cards: Your physical wallet may be overloaded with everything from your credit card and debit card to gift cards and crumbled cash. With a virtual wallet, you may more easily store and organize each debit card, credit card, gift card, loyalty card, and more. Many open virtual wallets also let you keep concert tickets, membership cards, a boarding pass, and even health insurance cards on hand. 

 

Security: Digital wallets offer a secure payment method. When you make mobile payments, the transaction uses a unique code instead of your card number. Merchants don't store your account information or personal information with the transaction record, which may help protect your data. Plus, your phone’s standard security methods, like a passcode or touch ID, add another layer of protection. 

 

Discounts and bonuses: With certain digital wallets, you may receive discounts on purchases from select retailers. Some payment platforms may even offer rewards, like cash back, for transactions you perform with your digital wallet. 

 

Many closed-wallets offer incentives for your purchases by offering rewards you may redeem for in-store products. Often, they reward users with special discount days or events to earn double- and triple-points. You can usually access the information within your digital wallet app.

 

You don't need to carry physical cards: If you’re like most people, you’re rarely far from your phone. That means you may leave your wallet and physical cards at home if you carry every loyalty card, credit card, and debit card in the mobile wallet on your phone. If a merchant accepts digital wallet payments, you’ve got everything you need right in your phone.

Disadvantages of digital wallets

Before you trade your physical wallet in for a digital wallet, consider the limitations. 

 

Acceptance could be limited: While many major retailers accept digital wallet payments, they’re not a universally accepted payment method. Some merchants, especially smaller businesses, may not have the tools necessary to process mobile payments. 

 

Need Bluetooth or Wi-Fi: Your digital wallet app may need Wi-Fi, Bluetooth, or mobile data to operate. If you can’t access the internet, you may not be able to make a mobile payment.

 

Vulnerable to fraud if your phone is stolen: If your phone is stolen, the thief may be able to access your digital wallet. However, you can protect your information by taking additional security measures, like locking your phone with a passcode or touch ID or adding two-factor authentication or an additional passcode on individual apps.

The bottom line

A digital wallet may be a convenient, flexible payment option for anyone with a smartphone. Remember to maintain smart financial habits when using a digital wallet, so you don’t overspend or leave your financial information vulnerable.

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