Digital wallets have become increasingly popular over the past few years. Apple has released a digital-first credit card. “Just Venmo me” has become a common phrase, and you can even board public transit by simply holding your watch or phone at the turnstile.
According to research from McKinsey & Company, 89% of Americans will be using at least one digital payment form in 2022, and more than two-thirds expect to own a digital wallet within two years. I am.
If you’re still unsure about using digital wallets for payments, here’s everything you need to know about what they are, how they work, and why they’re a safe option I will.
What is a digital wallet?
A digital wallet is a way to pay from your financial account via your computer, smartphone, or smart device. Eventually, there will be little need to carry around an actual wallet.
Apple Pay, Google Pay, and Samsung Pay are probably three of the most popular digital wallets, but there are quite a few others out there. Other popular digital wallets include PayPal and Venmo. Both have unique social features that allow you to easily send money to retailers and friends.
Zelle is another popular option for digital payments that comes automatically with many bank accounts.
Please note that digital wallets and crypto wallets are not the same thing. Digital wallets are typically used for everyday purchases, while crypto wallets are often used to purchase cryptocurrencies.
How a digital wallet works
Before you can use your digital wallet, you must enter your card information into the app or site of your choice. Your information will then be encrypted and you will only be able to use the wallet if you unlock your device and authorize use of the wallet.
Digital wallets enable payments using several different technologies, including:
- Quick response (QR) code: A QR code is a unique barcode-like code used to initiate payments in some apps. This technology allows you to scan a code with your smartphone camera and authorize the payment using your digital wallet.
- Near field communication (NFC): This technology allows two devices to “talk” to each other and transfer data when they are in close proximity.
- Magnetic Safety Transmission (MST): This technology uses magnetic waves to transmit data, similar to reading the magnetic stripe on a credit card.
When using mobile wallets that use NFC and MST technology, you typically need to keep the device in close proximity to the payment terminal. Look for a contactless payment indicator on the retailer’s POS system or card reader. The symbol looks like a landscape Wi-Fi icon.
When it comes to certain peer-to-peer payment apps, such as Venmo and Zelle, you can often only send money to users who have accounts with the same app. Not all retailers accept mobile payments. So while digital wallets are convenient, they are not yet a complete replacement for physical payment methods.
What else can you do with a digital wallet?
Digital wallets are not only great for simplifying payments, but they’re also great for keeping other important documents organized and easily accessible.
Here’s what you can store in your digital wallet:
- credit or debit card
- boarding pass
- Hotel reservation
- concert tickets
- gift card
- coupon
- loyalty point card
Many apps also offer their own digital wallets. Especially fast food chains also offer loyalty programs. For example, Starbucks encourages customers to use its app by giving them “stars” that can be redeemed for free drinks and other perks. Starbucks gift cards can be uploaded and can also be reloaded with a debit or credit card.
Types of digital wallets
There are various digital wallets on the market. Here are some examples of common digital wallets.
- cash up
- apple wallet
- samsung wallet
- Google Wallet
- paypal
- Venmo
- cell
Some of these digital wallets have unique features that make them different from others. For example, Venmo works like a social media network in that you can view and comment on your friends’ transactions in addition to making and requesting payments. And Apple has developed a credit card designed to be stored and used in Apple Wallet.
There are also so-called closed digital wallets that only support payments to the wallet issuer. Walmart Pay is an example of a closed wallet because you can only use this digital wallet for purchases at Walmart.
You can even use more than one digital wallet, as different types of digital wallets offer different features and uses.
Are digital wallets safe?
A common hesitation when it comes to digital wallets is concerns about safety and security. What happens if your phone is stolen? Can hackers easily steal your information? Will you put your finances at risk?
The answer is no. Digital wallets are actually more secure than physical cards, as mobile payments are highly encrypted and tokenized. This means that your actual card or account number is not stored within your digital wallet.
But how does it work?
When you add personal information to a digital wallet, that data is encrypted into a unique code that can only be accessed by authorized entities.
Digital wallets also go a step further by adding tokenization, which takes sensitive encrypted data and replaces it with non-sensitive digital equivalents called tokens. These unique tokens are randomly generated every time a user makes a payment, and only the merchant’s payment gateway can match this token and accept the payment.
Ultimately, when encryption and tokenization are used together, the information becomes useless and unreadable to fraudsters. Even if the specific retailer you shop at is hacked, multiple layers of protection will ensure that your personal payment information remains protected.
Contactless digital payments are generally more secure than paying using a physical card chip or magnetic stripe, as they require authentication as well as tokenization technology. If someone steals your card, it’s much easier to use it, but digital wallets often have additional layers of security, such as fingerprint scanning, facial recognition, and password protection.
Advantages and disadvantages of digital wallets
Strong Points:
- convenience: Accessible from your device, making it more convenient to carry and freeing up pocket space. Additionally, you can store multiple types of cards in your digital wallet.
- additional backup: If you forget your wallet, you can still pay at most retail stores.
- safety: Digital payments have the added protection of data encryption and tokenization, making them more secure in many ways than traditional debit and credit card transactions.
Cons:
- There are some restrictions on where it can be used.: Not all retailers or individuals you send money to may not accept payments from digital wallets, or may not yet have the technology in place to accept payments from digital wallets.
- Depends on device: If the battery of the device on which your digital wallet is stored dies, or if you become inaccessible for any reason, that means you will also lose access to your digital wallet.
conclusion
Digital wallets offer consumers a convenient, efficient, and secure way to make virtual payments, tickets, gift cards, and more. While it may not be time to give up your physical wallet just yet, adoption by U.S. consumers and merchants will continue to increase as consumers become accustomed to contactless digital financial services.
–Freelance writer Emily Butdorff contributed updates to this article.
