October 29, 2024

What is a Digital Wallet and How Does It Work?

You have to store your money somewhere. That might be a checking account at your bank or cash in your physical wallet. But since you already have your phone on you at all times, a virtual wallet is a great new option.

Using a virtual wallet can seem daunting for those used to carrying physical payment options like cash, credit cards, and debit cards. But if you forget your physical wallet at home or just want to speed up your transactions, digital wallets can save you stress and time.

Here’s everything you need to know about virtual wallets, including their safety, their use, and what the best options are for you.

What is a digital wallet?

A digital wallet — also called a virtual wallet — is an electronic version of a physical wallet that allows you to pay instantly from a device like a smartphone. Most banks and financial institutions offer Federal Deposit Insurance Corporation (FDIC)-insured virtual wallets in their mobile apps. PNC Bank’s Virtual Wallet with Performance Select is a great example of this.

Digital wallets also include third-party payment apps, like Apple Pay, Venmo, and PayPal. These options let you upload your debit and credit cards, so you can use your smartphone like a card, making online payments or contactless payments quickly.

Along with bank cards, most virtual wallets also let you upload:

Identification cards
Rewards cards
Gift cards
Coupons
Event tickets
Transit tickets
Hotel and car keys

Digital wallet versus mobile wallet: What’s the difference?

Although they’re often used interchangeably, there are differences between a “digital wallet” and a “mobile wallet.”

“Digital wallet” or “virtual wallet” describes all e-wallets, including online and mobile wallets. You can use digital wallets on any electronic device, from desktop computers and laptops to smartwatches. Managing your direct deposits from a desktop browser is a form of digital wallet, and so is tapping to pay with your phone at the grocery store.

On the other hand, “mobile wallet” references a single type of digital wallet. These wallets — like Apple Pay or Samsung Wallet — are generally accessible only from a mobile device or app on your smartphone. You can only access your cards, not your full banking details like limits or balances.

How does a digital wallet work?

You’ll access your digital wallet from a mobile app or a browser. With a browser or your bank’s mobile app, you can log into your account and make transactions digitally, whether you’re transferring between accounts or to someone else. With a third-party mobile app, you can upload your debit and credit cards to make digital or contactless purchases.

If you’re out shopping, you can pay for your order using your smartphone by opening the mobile wallet app and holding your device near the register or terminal — it uses near-field communication (NFC) or magnetic secure transmission (MST) to interact with the point-of-sale device. The money comes right out of your checking or credit account, depending on which card you use.

Which mobile wallet is best?

Not all mobile wallets are created equal. Some function as a personal finance management app or mobile banking tool. Others only help you pay for goods and services digitally, and you can’t check your bank balance or make online transfers.

Instead of thinking about the "top" mobile wallet, consider the services you use regularly. If you only care about having a payment option on your phone in case you leave your wallet at home, you don’t need an all-in-one digital wallet — a mobile one will be enough. If you love banking on the go, your bank likely has a mobile app for digital payments and money management, and that might be the best option for you instead of a mobile wallet.

Regardless of where you keep your money, here are some common third-party virtual wallets to choose from:

Apple Pay
Google Pay
Samsung Wallet
Cash App
Venmo
Zelle
PayPal
Dwolla
Walmart Pay
Amazon Pay

How much does a virtual wallet cost?

Most banks and payment apps don’t charge you to use a virtual wallet. Some services may cost money, like wire transfers or automatic bill payments, but that’s because your bank may charge fees, not the wallet itself. It depends on the institution you’re with and the accounts you have.

Are digital and mobile wallets safe?

Most digital and mobile wallets are inherently safe, thanks to modern security protocols. They often use strong forms of encryption to protect data and employ data tokenization measures to communicate with retailers and point-of-sale systems. This means retailers don’t have access to your whole card number during a transaction — just the information they need to make the sale.

With anything digital or financial, there’s always a risk. Someone could steal or hack your phone and gain access to your accounts. But if you create strong passwords, keep your phone close, and avoid transactions with questionable merchants, you can reduce the risk.

5 benefits of using digital wallets

If you already carry physical cards with you, you don’t necessarily need a digital wallet. But virtual and mobile wallets are more convenient and fast, and they can save you when you accidentally leave a card at home. Here are more benefits:

1. Convenience. You can store all your favorite payment methods in one easily accessible place via your mobile device. There’s no need to carry traditional payment methods like cash or cards.

2. Lower costs. Since mobile and digital wallets are considered an extension of regular accounts, they tend to have zero to low transaction fees. This is a huge advantage when transferring money or during large transactions that would otherwise generate high fees.

3. Faster technology. Most payments and money transfers are streamlined via digital wallets, and transactions happen near-instantly.

4. Security. As long as you follow basic practices, digital wallets have better security than their physical counterparts. Someone could easily steal and use a physical card, but if someone steals your phone, they can’t access your wallet without a password or other verification.

5. Peer-to-peer opportunities. Virtual wallets like Cash App and Venmo make it easier and faster to send money to family, friends, and colleagues.

How to use a digital wallet safely

Learning how to use digital wallet apps is easy. Open the app, log in, and pay with contactless tap. Here are some extra security tips you might consider to keep your virtual wallet safe:

1. Use strong passwords. Always use strong, unique passwords, including upper and lower-case letters, symbols, and numbers. If you have difficulty remembering them, use a trusted password management tool or app. This makes it harder for hackers to access your accounts.

2. Enable multi-factor authentication. Multi-factor authentication (MFA) means having multiple login options, adding an extra layer of security. For example, you could log in with both a password and a confirmation email, making your accounts more difficult to breach.

3. Use tracking and remote access apps. Apps like Find My (iOS) or Find My Device (Android) let you locate, wipe data, and lock your phone remotely. This keeps anyone else from accessing your digital wallet in case you lose your phone.

4. Keep your phone close. Avoid sharing your phone with others, and never leave it unattended in public areas. Even if you have passwords and multifactor authentication, you don’t want to take any risks.

5. Monitor your online accounts. Make it a habit to regularly check your bill statements and credit reports for unauthorized events. You might spot suspicious activity before your bank or wallet catches it.

6. Don’t store large sums. Only store large sums of money in FDIC-insured banking accounts and apps. It’s okay to use other apps for small transactions, but storing large sums could be risky.

7. Shop at trusted sites or merchants. Regardless of if you’re using your digital wallet or your regular card, spend your money only at places you trust. If you must pay at questionable locations, use a credit card backed by insurance and fraud coverage just in case.

What to do if your device is lost or stolen

Losing your phone is devastating, and it’s especially hard when you lose access to your digital wallets and payment apps. But there are security measures you can take to reduce financial risk when your phone gets lost or stolen.

Regardless of what happened or where your phone is, change your passwords as soon as possible. If someone did steal your phone or finds it and has access to it, you’ll want to make sure they can’t use your digital wallet.

If you know someone stole your phone, report the theft to police on a non-emergency hotline. Share the make, model, serial number, and identifying information, like the international mobile equipment identity (IMEI). Your carrier may ask for the police report to confirm the phone was stolen.

You’ll also want to disable your device so nobody else can access or use it at all. Your carrier may be able to do this remotely. You can also disable your phone yourself using recovery tools like Apple’s Find My services or Google’s Find My Device. If you’ve just lost your phone or aren’t sure where it is, these tools can also show you where it’s located — so if you left it somewhere, it’ll be easy to recover.

Simplify, secure, and succeed with EarnIn

A digital wallet isn’t the only app that can help you access your money. EarnIn’s Cash Out tool lets you to get your pay as you work — even on the same day. You can get up to $150 a day and up to $750 every pay period with no credit checks, interest, or mandatory fees. And if you’ve connected your account to a virtual wallet, you can access those funds through your phone right away.

Download the EarnIn app today and experience money at the speed of you.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. Earnin is a financial technology company, not a bank. Subject to your available earnings, Daily Max and Pay Period Max. EarnIn does not charge interest on Cash Outs. EarnIn does not charge hidden fees for use of its services. Restrictions and/or third-party fees may apply. For more info visit earnIn.com/TOS.