Carrying cash and cards is no longer essential for many, thanks to the advent of digital wallets. This technology enables millions of purchases and money transfers to be made with a few clicks or taps of a smartphone. The term “digital wallet” encompasses several types of applications and payment methods, all facilitating transactions through virtual transmission of card information.
What Is a Digital Wallet?
Sometimes also called an e-wallet, a digital wallet is a type of software that facilitates payments digitally. You can think of it like a digital version of your physical wallet, as it can store a collection of your credit cards, debit cards and more. If you’ve ever tapped to pay with your phone, you’ve used a digital wallet.
Digital wallets allow you to make secure in-person and online transactions using a smartphone or smartwatch instead of a physical card. Some of the most popular digital wallets include Apple Pay, Google Pay, Samsung Pay, PayPal, Venmo, Zelle, Cash App and Amazon Pay. Each of these platforms has different functionalities, but they all can make payments more convenient and secure.
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Types of Digital Wallets
Digital wallets can be bucketed into a few types based on the different kinds of transactions they facilitate.
Tap-to-pay. These types of wallets are ultra-common and include Apple Pay, Google Pay and Samsung Pay. They are typically used for in-store purchases. You might double-click your phone’s lock button and then scan your face or fingerprint to use this. Tap-to-pay wallets usually use near-field communication, or NFC, technology to communicate with merchants’ payment terminals. And the adoption of this payment technology is growing rapidly. According to a 2024 McKinsey study, in-store digital wallet use grew from 19% in 2019 to 28% in 2024.
Peer-to-peer. Applications like Venmo, Zelle and Cash App are primarily used to transfer money between people, rather than between businesses and consumers. This type of digital wallet can be great for splitting bills, paying friends back or sending money to family. It usually takes a few days for these transactions to go through, unless you pay for expedited processing. Zelle, however, processes most transactions within minutes and is integrated into many mobile banking apps, like Bank of America. To use Zelle, you’ll need to have a bank account with a bank that offers it.
Hybrid digital wallets. Some digital wallets, like PayPal, offer peer-to-peer and merchant payments. PayPal can be used for online shopping, some in-store purchases and sending money to others. In a similar vein, Amazon Pay can facilitate purchases on and off Amazon’s platform.
How Digital Wallets Work
The technology behind digital wallets is part of the reason for their appeal. Not only are digital wallets convenient, but they’re also sometimes the most secure payment method.
So, how does a digital wallet payment physically happen? Most contactless mobile phone payments at physical stores typically use NFC technology. The two devices, usually a smartphone and a payment terminal, use NFC to communicate with each other through electromagnetic signals and process the transaction almost instantly.
For online purchases, digital wallets usually use secure application programming interfaces to communicate with a merchant’s payment software. Typically, the wallet will confirm your identity through a password or biometric data, then securely send over the needed payment information to process the purchase.
When you add a card to your digital wallet, the software doesn’t store your actual card number. Instead, it uses a process called “tokenization,” where your payment information is replaced by a unique digital token, or a one-time code that is used to complete the transaction. This makes the token useless if later accessed by a bad actor.
Bank transfers are the basis of many peer-to-peer payment features in digital wallets. This method connects directly to bank accounts to facilitate money transfers between individuals.
QR codes are another option. Shoppers can scan a merchant’s QR code to pay, or people can generate their own QR codes to accept transfers from others.
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Are Digital Wallets Secure?
While online transactions may be vulnerable to cybercrime, digital wallets are generally considered more secure than cash or physical cards, since the tokenization process eliminates the need for your actual card number to be stored on your device or shared with merchants. This makes your transactions less vulnerable to data breaches and hacking.
Biometric authentication measures like face scanning and fingerprinting add another layer of security. Usually, every digital wallet transaction requires authentication, whereas an in-person contactless purchase with a card is as simple as tapping. And, unlike PINs and passwords that can be exposed or guessed, this biometric authentication can sometimes be hard for criminals to bypass.
However, no payment method exists without risk. When your phone essentially becomes your wallet, it’s crucial to keep your device secure. If someone — even a mischievous child, for example — gains access to your unlocked phone, they may be able to make unwanted purchases.
“With a digital wallet, you may be at an increased risk of loss in a SIM swap attack,” warns Mike Casey, a certified financial planner who specializes in financial advice for families, business owners and senior executives at American Executive Advisors. “Most mobile devices have a SIM PIN feature that can be turned on to add a level of protection.”
And it’s especially important to be careful with peer-to-peer apps like Venmo or Zelle, says Melissa Caro, a certified financial planner, financial literacy advocate and founder of My Retirement Network. “Unlike credit cards, those platforms don’t come with the same dispute protections, so if you send money to the wrong person — or worse, fall for a scam — it’s often gone for good.”
Should I Use a Digital Wallet?
Your comfort with technology, lifestyle and spending habits will all influence whether a digital wallet makes sense for you.
The most compelling advantage of using a digital wallet would probably have to do with its convenience. If you’ve ever experienced the feeling of fumbling for your wallet at the register only to realize you forgot it at home, you’d probably appreciate having a digital wallet. And for those who often send money to friends or family, peer-to-peer apps like Venmo can be huge time-savers. They eliminate the need for cash, checks and verbal IOUs, and they often process transactions faster than traditional bank transfers.
On the flip side, digital wallets have some downsides.
May lead to increased spending. Convenience is a double-edged sword. When making purchases is essentially frictionless, it’s easier to overspend.
Device reliance. A dead phone means no access to your digital wallet, which could be a problem if you get out of the habit of carrying your physical wallet. Plus, some businesses are still cash-only.
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The Bottom Line
Digital wallets have quite a few benefits over cash and physical cards, including additional security, convenience and functionality. As technology continues to advance and adoption increases, digital wallets are likely to proliferate. Still, carrying cash and physical cards is never a bad idea. The best strategy depends on your preferences, but having a physical and digital wallet allows you to get the best of both worlds.
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What Is a Digital Wallet? originally appeared on usnews.com
Update 06/27/25: This story was previously published at an earlier date and has been updated with new information.
