People in line use their phone to tap a credit card reader.

What Is a Digital Wallet?

5 min read

Last Updated: February 17, 2025

Table of contents

Key Takeaways

Digital wallets store payment information of things like your credit cards on your mobile phone to use at checkout where they’re accepted.
Digital wallets encrypt payment information to help keep it secure while processing a transaction.
Using a digital wallet is typically simple and involves just tapping your phone to a payment terminal that allows this type of transaction.

A digital wallet is an electronic means of encrypting your virtual payment information, guarding your personal information as you use your phone to make purchases. Typically, digital wallets–sometimes referred to as e-wallets–take the form of an app, storing electronic versions of your credit cards and digital assets. As a result, you may be able to use your digital wallet app at checkout—both in-person and online—if the retailer you’re buying from accepts the service.

Types of digital wallets & e-wallets

First, it helps to understand that there are a few major categories of digital wallets. Those offered by digital outlets like Apple (Apple Pay), Samsung (Samsung Pay), and Google (Google Pay) are one example. Those offered by banks and financial services are another. And still others are offered by individual merchants, in which you’ll download their app to your mobile device and store payment credentials on it to use for payments.

Did you know?

Most digital wallets allow you to add multiple credit cards to your device, which can be useful for taking advantage of specific credit card rewards where you shop.

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Digital wallets work by storing your payment credentials either directly on your device, or off the device network entirely on a third-party server. At the point of sale, wallets such as Apple Pay can be used at a merchant that accepts Apple Pay, whereas merchant digital wallets can only be used at that respective merchants’ stores.

Digital wallets process transactions by utilizing near-field communication (NFC) technology, allowing the devices to digitally communicate with each other in uniquely encrypted ways to complete user purchases without ever touching the retailer’s payment device.

Having an e-wallet can also mean that your physical credit cards can be kept at home while you’re shopping, protecting you from accidentally misplacing or having your physical wallet stolen.

How to use a digital wallet

Paying with a digital wallet typically involves taking out your phone and simply holding it over or tapping a payment terminal—not so different from swiping or inserting your credit card. If you have several different cards stored in your digital wallet, then tapping your device will initiate a prompt asking you to select the card you’d like to use for that particular contactless payment.

Your smartphone then transmits your encrypted payment information and asks you to verify your purchase by entering a code, identifying a pattern, or taking your fingerprint. Once the user is verified, the transaction is carried out as if you had paid with a physical credit or debit card.

Some digital wallets may include additional perks. Phone provider wallets may integrate with loyalty cards and rewards programs, and merchant wallets may let you buy and store their gift cards, order and pay in advance for purchases there, and even use digital coupons from that merchant.

Are digital wallets secure?

Because the information that is transmitted from a digital wallet is encrypted, contactless payments using a wallet app may be more secure than using your physical credit or debit card. Digital wallets use a combination of EMV^® technology –an acronym created for the advent of chipped cards –and one-time “tokens.” So, with each transaction, your phone encrypts your information on its way to the checkout terminal and the digital wallet provider decrypts the information to identify you before initiating the transfer of your funds to the business.

Some people may be concerned about what happens if their mobile device becomes lost or stolen, but extra protections, like two-factor authentication, come in handy here to help keep your information secure.

When using a digital wallet, the same good habits around security and responsible spending should apply as when you’re using a physical card. Choose your “default” card carefully, and make sure that your usual sound financial behaviors follow you into cyberspace.

You can keep your digital wallet secure using several of the same strategies you already use online: Don’t give out your username or password, for example. Change your passcode to enter your phone often and be sure your internet access connections are secure. And lastly, the same way you wouldn’t buy something from someone you don’t trust, be mindful of making financial transactions over public Wi-Fi to keep your personal information away from prying eyes.

Your credit card issuer is also part of your security team, and may send automatic emails and alerts for certain, pre-authorized activities to help you stay on top of potential fraudulent activity. For example, you can typically request a text or email alert whenever a transaction is posted that is over an amount you specify, such as $100.

Some credit card issuers may also offer additional security features. For example, Discover offers $0 fraud liability protection, which means you’re never held responsible for unauthorized purchases on your Discover Card,² for more peace of mind.

The bottom line

A digital wallet is another way for you to pay for the goods or services you need, and it can be more convenient for some people to use a mobile payment compared to other traditional payment methods. But it’s still a good idea to maintain smart financial habits when using a digital wallet so you don’t overspend or use it in a situation where your financial information may become vulnerable.

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