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Digital Wallet

Welcome to Learn, where we provide straightforward, easy-to-understand definitions of the payments industry.

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A digital wallet (also sometimes called an electronic wallet) is an application that securely stores digital payment information and password data for a user.

What is a Digital Wallet?

Digital wallets store virtual versions of debit cards, credit cards, and bank information and allow users to pay for purchases using devices, such as a phone or tablet. In addition to storing card and banking details, some digital wallets also allow users to hold–and spend from–a balance within the app. Digital wallets allow users to make payments both in-person and digitally.

To use a digital wallet, a user enters their card or banking information into the app of their choice. Their data is then encrypted and can only be used after they’ve unlocked their device and authorized the use of the digital wallet.

Apple, Samsung, and Google Pay, PayPal, CashApp, and Venmo are some of the most well-known digital wallets, but there are retailer-specific digital wallets, too. Starbucks and Target, for example, let users store card information and make payments directly from their respective apps.

In addition to card and banking information, digital wallets can also be used to store:

  • Membership cards
  • Loyalty cards
  • Gift cards
  • Identification cards
  • Driver's licenses
  • Car keys
  • Coupons
  • Hotel reservations
  • Event tickets
  • Boarding passes
  • Transit tickets

How do Digital Wallets work?

How To Make A Purchase With A Digital Wallet

If shopping online, many websites will let you choose a digital wallet as a payment option when completing a purchase. You can select the digital wallet of your choice at checkout and use the stored cards or bank accounts to pay, instead of having to enter and re-enter your card or bank information each time you make a purchase.

When making an in-person payment, digital wallets use Bluetooth, wifi, or magnetic signals from a mobile device to securely transmit payment data from a device to the point of sale.

There are several ways that a Digital Wallet may be used to make an in-person purchase:

  • Magnetic Secure Transmission (MST): The same type of technology used by magnetic card readers when you swipe a card, MST allows older types of point of sale readers to process contactless payments. Your device generates an encrypted field that the point of sale can read when held close (within 3 inches).
  • Near Field Communication (NFC): This is the transfer of information between two smart devices using electromagnetic signals. Typically, you’ll hold your device close (within an inch and a half) to an NFC reader to complete the payment.
  • QR Codes: Using your device’s camera to scan a QR code to initiate payment.

Are Digital Wallets Secure?

One common concern about digital wallets is security. While it may seem like a digital wallet can make it easier for sensitive financial information to be stolen, the opposite is actually true. Digital wallets are much safer than their physical counterparts. Unlike physical cards, digital wallets can not be used by just anyone, even if a user’s device is lost or stolen.

Mobile payments are encrypted and tokenized, meaning that none of a user’s actual financial information is stored within the digital wallet itself. When signing up for a digital wallet, you’ll add your personal banking or card information into an app. That information is then encrypted by the app. Your encrypted data is then tokenized; meaning your encrypted data is replaced with a non-sensitive digital token.

Tokens are randomly generated each time you make a payment from your digital wallet. The token for any given payment can only be matched by the merchant’s payment gateway to accept that particular payment.

Aside from encryption and tokenization, your digital wallet should only be accessible through user verification. If your digital wallet is stored on your phone, for example, there is the added layer of security that comes from a PIN, fingerprint ID, or facial recognition to unlock your device and access the digital wallet.

What is the difference between a Digital Wallet and a Crypto Wallet?

If a digital wallet is an electronic version of what you’d typically have in a physical wallet, a cryptocurrency wallet is slightly different.

In the simplest of terms, a crypto wallet is a storage space for the keys needed to sell or buy cryptocurrencies. Unlike a physical or digital wallet holding cards, a crypto wallet doesn’t hold cryptocurrency itself, rather it stores the private key that accesses a user’s crypto holdings on the blockchain.

While digital wallets enable you to make purchases, cryptocurrency wallets are mostly used specifically for access to buy or sell cryptocurrency. However, if a platform or retailer accepts cryptocurrency, a crypto wallet can also be used to make purchases.

Crypto wallets, like digital wallets, are also safer than carrying physical cards or cash. But it is important to remember that the cards in a digital wallet are likely FDIC-insured or backed by a financial institution against fraud, whereas crypto is largely unregulated and therefore not insured in the same capacity.

To learn more about Digital Wallets and other related topics, check out these resources:

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