What Is a Digital Wallet? How the Technology Makes Credit Card Payments More Secure and Convenient

Back in the day, I always used to fish out a credit card when paying at a store or restaurant. For a long time, that was all most places could manage. But I started using a digital wallet a few years ago, and I’ve never looked back. 

Nowadays, it seems that the digital wallet revolution is upon us, and most places welcome them.

A digital wallet is a secure app or software that stores payment information and allows you to make transactions using your phone, computer, or other digital device.

There’s a lot to like about my digital wallet. It frees up space in my other wallet, supports lightning-quick transactions, and is a heck of a lot more secure than its plastic predecessors. It only takes a minute to add a credit or debit account to a digital wallet, but it’ll save you a ton of time in the long run. 

Let’s take a look at why these wallets are becoming so popular, and maybe give you the information you need to start using one, too.

Digital wallets (DWs) seem so simple, but there’s a lot of heavy tech involved. They don’t just store your payment information — they secure it, organize it, and make it convenient to use. 

Encryption and Security 

Security is one of the main reasons why digital wallets have become so popular. They use advanced encryption to scramble your payment details so they can’t be stolen. 

Instead of sending your real card number when you make a purchase, digital wallets use tokenization, which replaces your card details with a one-time code. This way, even if a hacker intercepts transaction details, it’s useless to them if they try to make another purchase.

Most digital wallets also have multifactor authentication, such as a fingerprint, face scan, PIN, or a one-time password to confirm a payment. This extra security layer makes it much more difficult for a cybercriminal to steal your information, even if they get their hands on your device.

Storage and Management 

Sure, digital wallets are a secure way to pay. But they’re also a convenient way to access all of your payment sources in one place. Instead of lugging around a stack of credit cards, you can link them to your digital wallet and choose which you’d like to use at checkout.

Some wallets update your card details automatically when they change or when you open a new account, so you may not have to enter new details manually. 

Whether you use a credit card, a debit card, or a bank account, a digital wallet enables you to choose a way to pay with ease.

Smooth Transaction Processing

Digital wallets make paying faster and easier. You can use them in stores, online, and even for peer-to-peer transactions. Here’s a sampling of the technology they include and how it facilitates payments.

• Near-Field Communication (NFC): Apple Pay and Google Wallet, among several digital wallets, use NFC technology. This enables you to hold your phone close to a checkout scanner instead of swiping a card.
• QR Code Payments: You can use a wallet to scan a QR code to receive or make a payment instantly. A QR code is a square-shaped barcode that stores information. A smartphone or other device scans the code quickly to access links, make payments, or verify information.
• One-Tap Checkout Online: Instead of having to input your card details for each purchase you make, a digital wallet can fill them in for you automatically, making shopping online faster.

By combining these features, digital wallets offer a secure, efficient, and convenient way to make payments. 

Digital wallets work in more than one way. Some are specific to a particular store, while others let you pay almost anywhere. 

Closed Wallets

You can use a closed wallet for a designated business. You’ve used a closed wallet if you’ve ever put money in a store’s app to cover purchases.

• Retailer-Specific Wallets: Retailers such as Starbucks and Amazon offer wallets that store payment details you can apply online, in-store, or in-app.
• Store Credit and Reward Integration: Closed wallets may also feature loyalty programs, which let you collect and redeem points in-app.

The downside to closed wallets is that you can use them only with the designated merchant. Once you put money into one, it will remain there until you use it with the retailer.

Semi-Closed Wallets

Semi-closed wallets support purchases across multiple merchants but with some limitations.

• Merchant Partnerships: Individual merchants and service providers often accept these digital wallets.
  
• Preloaded Funds: They ask you to fund them in advance, similar to how a gift card operates.

While they offer more freedom than closed wallets, semi-closed wallets have restrictions, too. You can’t use them everywhere, and they might not support direct banking transactions.

Open Wallets

Open wallets are flexible, and you can use them in stores, online, and even to withdraw cash from ATMs.

These wallets are backed by banks that link to traditional financial institutions. You can use interoperable wallets globally and across different payment networks.

There are a variety of leading digital wallets with distinctive features and benefits. Here are some of the best-known digital wallets out there:

Apple Pay

This app is a widely embraced method for Apple customers to securely make purchases using their iPhones, Apple Watches, iPads, and Macs.

The wallet authenticates transactions using Face ID or Touch ID for extra security. 

Apple Pay also supports transit cards, digital car keys, and loyalty cards. Apple Pay is accepted by millions of merchants worldwide.

Google Wallet

Google Wallet is a cross-platform digital wallet that can be installed on Android and supported browsers.

It operates on smartphones, smartwatches, and other devices. 

Google Wallet uses Google Pay, so it’s easy to shop online and make peer-to-peer money transfers.

The wallet can also be used to make NFC tap-to-pay and QR code purchases.

PayPal and Venmo

PayPal and Venmo provide convenient personal and online payment choices and support many different uses.

PayPal Checkout even offers secure and quick online shopping with single-click purchases. 

Venmo has social features, such as public payment messages that let you and your connections know what they covered. It shines for bill-splitting and recurring payments.

Venmo and PayPal both provide extensive online and in-store acceptance.

These mobile wallets continue to expand their features and keep getting faster, more secure, and easier to use.

Digital wallets are all about convenience, security, and budget features, although they do have some flaws. 

Benefits

Several benefits are driving the adoption of digital wallets. Here are a few of the most prominent:

More Security

One of the biggest advantages of digital wallets is security. They use encryption to protect sensitive information, and your actual credit card details are never disclosed during a transaction. Another security feature is tokenization, which generates a new one-time code for each transaction. 

Multifactor authentication, such as fingerprint or face recognition, can make it even harder (if not impossible) for another person to use your wallet. Some wallets even include remote locking in the event that your device gets stolen or lost.

Speed and Convenience

A digital wallet makes paying quick, whether you’re shopping in a store, online, or paying a friend. You don’t have to fumble for a card or type in payment details. You simply pay with a quick tap or scan. 

Digital wallets can operate on smartwatches and other mobile devices, making them more versatile. Many times, issuers even update card details so you don’t have to type in new ones when you replace a card.

Budget and Spending Insights

Most digital wallets include features that let you monitor expenses. Some automatically categorize purchases, providing you with a clear view of your spending patterns. 

Real-time payment alerts notify you about each purchase, so it’s simple to keep a close eye on spending and identify any suspicious activity. These features make digital wallets an excellent tool for managing day-to-day finances.

Drawbacks

While digital wallets have many advantages, there are negatives as well. Here’s a quick look at some of those downsides:

• Not all merchants accept digital payments, especially small ones that don’t have an NFC terminal. 
• International use can also be spotty, and some nations lack support for any digital wallets.
• A dead battery will strand you because digital wallets are mobile-based. 

 In addition, digital wallets track information, which is intrusive in many consumers’ opinions.

Digital wallets changed how I use my credit cards. That makes me one of a growing number of enthusiasts who prefer to do business more quickly, securely, and conveniently. I still carry a few credit cards in my real wallet but have put the others in the sock drawer.

What I like about digital wallets is that they come with security features like encryption and tokenization that shield you from identity theft. I appreciate the real-time spending updates and faster checkouts. 

Moreover, I feel comforted that most small establishments in my small town now accept digital wallets as a form of payment.