HomeBankingWhat Is a Digital Wallet?

What Is a Digital Wallet?

A digital wallet is an application available for mobile devices that allows you to make financial transactions using your phone. The application will enable you to pay with your device by storing payment information like debit and credit card information that the application will then use to complete a purchase with participating merchants. 

Digital wallets allow you to pay when shopping using your device rather than carrying all your cards in a regular wallet. Physical cards can be dropped, lost and stolen, whereas a digital wallet can have a pin or biometric protection dependent upon your phone’s capabilities, making digital wallets much more secure.

How do digital wallets work?

Digital wallets are used to secure transactions between customers and merchants. These applications were designed to use payment systems and technologies and improve upon them. 

Digital wallets use a mobile device’s wireless features such as MST, QR codes and NFC to send payment data securely from your device to the merchant’s card reader designed to read the data and connect via these signals.

Not all digital devices have the capability to make payments using a digital wallet. If you have an older phone, verify that capabilities are available on your mobile phone

Technologies used by digital wallets

  • Near field communication (NFC) wireless technology that allows us to exchange digital content between 2 devices with a touch. NFC is compatible with hundreds of millions of contactless card readers and contactless card applications.
  • Quick response codes (QR Codes) are used to scan a barcode by the phone and transmit information directly from the barcode to the phone.
  • Magnetic Secure Transmission (MST) generates a magnetic signal similar to that of a traditional payment card allowing it to work without having to upgrade the terminal’s software or hardware to support more advanced technology, such as contactless payments.

How to use a digital wallet

So you want to pay using a digital wallet and are not sure where to start. First, you will need to verify your phone has NFC capabilities. Many phones will have an option to turn on and off the NFC function under your settings. If you cannot find that, review the manufactured information for NFC abilities on the model of phone you have.

Once you have found out your phone is NFC capable, you can now select a digital wallet application. Each one has a different feature but essentially functions in the same way.

Popular digital wallets

  • Google Pay
  • Walmart Pay
  • Apple Pay
  • Samsung Pay
  • Venmo
  • Paypal

Now that you have chosen a digital wallet application and installed it onto your phone, you will select what cards to add to the wallet. You can add debit cards, credit cards, and bank accounts as forms of payment in the wallet.

After adding your payment methods into the wallet, you will select a default payment method. The application will use this card if you do not specifically choose one or the card you select does not have enough funds and is declined. The default method is the card the application will use if the first method does not work or you do not select a specific card.

Types of digital wallets

There are three types of digital wallets: a closed wallet, a semi-closed wallet, and an open wallet. 

Closed wallet

Closed wallets are used between merchants and customers as a place for the merchant and customer to store funds for future use buying their products. These wallets can only be used with the specific merchant or business offering them. An example of a closed wallet is the Starbucks app. These closed wallets allow merchants to ensure the funds are used to purchase goods and services with their company.

Semi-closed wallet

Semi closed wallets like Apple Pay and Google Pay let you shop online and off, with merchants that accept that wallet.

Open wallet

Open wallets are issued by banks or their partners, and can be used for any kind of transaction, including sending money to other users within the network, and perform banking tasks like ATM withdrawals.

Advantages and disadvantages of digital wallets


One of the main advantages of a digital wallet is that it provides security for your financial information. When using a digital wallet, you no longer need to carry all your cards. There is less of a chance that you will lose your cards or that they will be stolen or lost while you are out. 

A digital wallet offers the security of a bank account for people who cannot open a bank account or do not qualify for one.


One of the primary disadvantages of digital wallets is the availability of use. NOt all merchants accept touchless pay by NFC. This can present an issue if you left all your physical cards at home and stopped for gas, but the merchant cannot accept your payment.

Although digital wallets are convenient and offer security, you may still need to carry a physical card if a merchant will not accept your digital card as payment. 

Are digital wallets safe?

Digital wallets are safe, but like any other financial product, you have to be aware of the risks and how to secure your information. When securing a digital wallet, you need to add features ensuring the ability to access your phone. Below we have listed how you can protect your digital wallet.

  • Lock the digital wallet app in your phone by requiring a PIN to open
  • Create a unique pin to access your phone or set up biometrics like fingerprint or facial recognition to unlock
  • Avoid using your digital wallet over a wifi network where information is less secure
  • Monitor financial accounts for fraudulent charges
  • Install security apps that allow you to:
    • Locate your phone
    • Wipe personal data off your phone from a desktop if the phone is stolen


Digital wallets are a convenient option that enables you to use your phone as a storage and payment device for your financial information and debit and credit cards. Although they are a convenient payment method, digital wallets are not a total solution to ending the use of physical bank cards because not all merchants and businesses accept NFC (touchless) payments. As technology improves and more companies adapt, more people will turn to digital wallets to take advantage of their convenience and security features.

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