How Do Digital Wallets Work?

  • June 29, 2021
  • By Anders Skagerberg, Expert

A digital wallet is a software application that allows you to hold many of the same things you would keep in a physical wallet, including payment information such as debit or credit cards, cash, coupons, airline tickets, bus passes, and more.

With the popularity of digital wallets continuing to rise around the world, it’s important to take a closer look at what these applications have to offer.

Using a Digital Wallet

Each digital wallet comes with its own set of unique features, but many wallets will allow you to do some combination of the following:

  • Store credit and debit card information to make payments.
  • Make transactions online or in person with the click of a button.
  • Send and receive cash with friends, family, or employers.
  • Store cash and sometimes earn interest on deposits.
  • Link a financial account to send and receive money.
  • Hold non-payment information like concert tickets, passes, coupons, rewards points, and more.
  • Send, receive, and store cryptocurrency, such as Bitcoin.

Benefits of a Digital Wallet

Using a digital wallet comes with many possible benefits, including easy access, convenience, and security when making transactions.

Easily Accessible

One of the top benefits of using a digital wallet is accessibility. There are people worldwide who don’t have access to the traditional financial system in the form of credit and the ability to send or receive money. Digital wallets bridge that gap and can provide people easy access to send and receive money without having to set up a financial account. This opens the doors of the financial system to many people who would not have had access before. 


Digital wallets can also be straightforward to use, with most having mobile applications that allow you to make transactions online or in person within seconds. Many merchants allow individuals to pay with the simple tap of their phone, specifically when using digital wallets like Apple or Google Pay. They also provide the added benefits of keeping your cards organized in one place and not needing to remember to bring your wallet when you’re on the go—something especially beneficial for those of us who have the tendency to forget our wallets when leaving the house.

Keeps Information Safe

Digital wallets are generally viewed as a safer way to store payment information than a physical wallet. With a physical wallet, if you lose it, it’s gone. If there was cash inside the wallet, you can usually assume you won’t be getting it back, and you’ll likely have to cancel all the debit and credit cards you had in there as well. On the other hand, a digital wallet is typically protected using either a unique passcode or biometric authentication on your mobile device. So even if you lose your phone containing your digital wallet, someone would need to be able to open your phone and digital wallet application—both of which can be protected—to have access to your information.

Additionally, most digital wallet providers encrypt or tokenize your financial information when you make a transaction, meaning it would be either impossible or challenging for hackers to steal your credit or debit card information. 

Potential Drawbacks of a Digital Wallet

Despite the many potential benefits of using a digital wallet, it’s not without its drawbacks.

Tracks Your Spending

One of the most significant drawbacks is the potential for digital wallet providers to track your purchase information. Companies have an incentive to collect data on your spending history, purchases, likes, and dislikes. Each provider will have different rules around what type of information they can collect and possibly sell, so it can be valuable to read the fine print when setting up a digital wallet.

Not Accepted By All Businesses

Another potential drawback to using a digital wallet is that not all merchants can accept payment from a digital wallet. Some businesses choose to only accept cash or checks, and others that will accept cards may not accept payment from a digital wallet. However, over time, this may become less of an issue as digital wallets become more widely used and accepted.

Popular Digital Wallets Around the World

The competition between digital wallets is fierce, which means consumers have many options available to them. Often, people will choose a digital wallet that fits the type of mobile device they use—for example, someone with an iPhone can quickly set up Apple Pay on their device and begin adding their payment information. Alternatively, Android users will typically use Google Pay since it’s compatible with Android devices. Consumers will also have different options to choose from depending on where they live. For example, Alipay is one of China’s most popular digital wallets, while M-Pesa is a popular option in Africa. 

Some other well-known digital wallets include:

  • Venmo 
  • MercadoPago
  • PayPal
  • Alipay
  • GrabPay
  • Wechat Pay
  • Vodafone M-Pesa
  • Cash App
  • Apple Pay
  • Google Pay
  • Samsung Pay

Final Thoughts

In the end, deciding whether to use a digital wallet and which wallet to use often comes down to the distinct features you’re looking for, the type of device you have, and where you live. Because of this, it’s important to compare your options, try a few out, and go with the wallet that best suits your unique needs.

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