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What is a digital wallet, and do you need one?

It's far from a necessity, but it can add convenience and security to your everyday spending.

Yahoo Personal Finance· Getty Images
Ben Luthi
5 min read

Digital wallets are a growing payment method, especially among younger generations. According to market research firm eMarketer, roughly half of Americans use a digital wallet to make purchases, but that figure jumps to 80% for Gen Zers and 66% for millennials.

But what is a digital wallet, how does it work, and does it make sense to use one? Here's what you need to know.

A digital wallet is a mobile application that stores credit and debit card information, allowing you to conveniently and securely make online, in-store, and in-app purchases without needing to carry around your physical cards.

Some digital wallets also allow you to store other electronic documents, such as flight boarding passes, movie and concert tickets, store coupons, insurance cards, and photo IDs.

Apple Pay is the most widely used digital wallet in the U.S., accounting for 92% of digital wallet transactions. Other popular digital wallets include:

  • Google Pay

  • Samsung Pay

  • PayPal

  • Venmo

  • Cash App

  • Amazon Pay

  • Walmart Pay

  • Click to Pay

No two digital wallets are exactly the same, so your experience may differ slightly depending on which one you use.

But in general, you can add debit and credit cards to your digital wallet by providing the card number, expiration date, and CVV code. You can then use the app to make payments online, in-app, or in person at a store:

  • Online: If a retailer accepts your digital wallet, simply select it as your payment method and enter your passcode, or verify your identity in another way and confirm which card you want to use.

  • In-app: If a mobile app accepts your digital wallet, you can select it as your payment method and then verify your identity by entering a passcode or using your device's facial or fingerprint authentication feature. Confirm which card you want to use and complete the purchase.

  • In-store: If a retailer accepts contactless payments, open the digital wallet app on your mobile device, verify your identity with facial or fingerprint authentication or a passcode, and select the card you want to use. Then, tap your device to the card reader until the transaction completes.

Digital wallets are incredibly safe to use. In fact, they add several layers of security for payment cards that make them safer than carrying your physical cards around:

  • Virtual card number: When you add a card to your wallet, the provider doesn't store the details on your device. Instead, it replaces your original card information with a virtual card number, ensuring that merchants and identity thieves never get access to your actual card details.

  • Authentication: Digital wallets allow you to set a passcode or use facial or fingerprint recognition to ensure that no one else who gets their hand on your device can make unauthorized transactions.

  • Tokenization: When you make a purchase, your digital wallet won't provide your original or virtual card number to the merchant. Instead, it'll transmit a random one-time code called a token. If the merchant experiences a data breach, hackers won't get access to your card information, and the transaction token will be unusable.

There are a lot of reasons to consider using a digital wallet instead of your physical debit or credit card, but it's also important to understand the potential disadvantages you may face. Here's what to keep in mind.

  • Protects your card information: Digital wallets offer several security and privacy features that can help keep your financial and personal information out of the hands of identity thieves.

  • Convenient payments: Adding multiple payment cards and other digital documents to your digital wallet means you no longer have to carry those around in your physical wallet everywhere you go. It can also save time when making a purchase because you don't have to manually enter your card information online or in a mobile app, and in-store contactless payments typically complete more quickly than dipping or swiping your card.

  • Expense tracking: With all of your payment cards in one place, you can keep track of your transactions in your digital wallet without needing to log in with each of your card issuers.

  • Not accepted everywhere: Contactless payments are becoming increasingly popular, but you still may need to bring a physical card with you in case you come across a merchant that doesn't accept digital wallets.

  • Exclusivity issues: Depending on which digital wallet you use, you may run into problems with exclusivity. For example, Apple Pay is only accessible to Apple device users, and the same is true for Samsung Pay. If you want to use Apple Pay to make a purchase online, you have to use the Safari browser.

  • Technical issues: You could run into issues if you're trying to use a digital wallet and don't have Wi-Fi access or cell service. It's also possible for a transaction to malfunction due to merchant or device software issues or payment network failures.

Using a digital wallet for any of its features is far from a necessity, but using one can add convenience and security to your everyday spending and keep other information secure.

That said, digital wallets aren't perfect, and relying solely on one could cause problems. If you're considering using a digital wallet, make sure you have a backup payment method on hand, just in case. The same is true for other online documents.

Ultimately, you get to decide how much you want to rely on a digital wallet based on your comfort level with the technology and general preferences.