What is a Digital Wallet? (Definition and Types)

By Indeed Editorial Team

Published December 14, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Digital wallets make it easy to securely store your credit and membership cards. They also make it more convenient, and faster, to make a purchase. Learning what a digital wallet is and how it works can help you decide if one is right for you. In this article, we discuss the definition of a digital wallet, how it works, the benefits it offers and the different types of digital wallets available.

What is a digital wallet?

A digital wallet is a software program that stores customers' payment information. Digital wallets can make online shopping faster because customers don't have to enter their payment or shipping information every time they make an online purchase. Digital wallets have many built-in capabilities, including:

  • Store funds

  • Track and make payments

  • Transfer funds

  • Purchase items

  • Hold digital coupons

  • Track membership perks

  • Store plane and concert tickets

  • Load gift cards

  • Store driver's license

  • Organize health records

Related: 8 Ways To Organize Business Cards Effectively

How a digital wallet works

Digital wallets work by storing a customer's information in a secure and confidential way. When the customer accesses the digital wallet, the program communicates with the other company to swap information. This process is similar to that of a credit card reader when making a purchase using a credit card or debit card.

Digital wallets also allow companies to learn more about their customers. This can lead to more personalized offers and marketing that targets a customer with messaging that relates to them. Most digital wallets work in one of the following ways:

  • Near field communication: Near field communication refers to the process of two programs or devices within close proximity transferring information. The two devices must be a maximum of four centimeters from each other to transfer information between them.

  • Magnetic secure transmission: Magnetic secure transmission refers to the process of using a magnetic signal to transmit information. This is similar to how the process works when swiping a credit card to make a payment.

  • QR code: A QR code refers to the process of using a barcode to provide the card reader with your payment information. Each QR code is unique and the program generates it for that purchase.

Related: How To Make and Use a QR Code

Benefits of a digital wallet

Consider these benefits of using a digital wallet:

Secure passwords

Because digital wallets store customers' passwords, customers can create more secure passwords. When a customer has to recall their password, they're likely to choose ones that are easier to guess. A digital wallet makes it so users can use special characters or longer phrases without having to remember them when logging in.

The stored passwords and information are also secure as many digital wallets require entering a PIN number or using your fingerprint to access them. Many digital wallet providers today are shifting toward two-factor authentication, which is a security process that uses two factors to verify identity.

Related: A Guide to Two-Factor Authentication

Mobile use

You can also use digital wallets on your smartphone or other mobile devices. This means that customers can make fast, secure purchases using their phones or tablets. Customers can add the items they want to their virtual shopping carts and then click buy, without having to enter in their payment or shipping information.

Related: Web App vs Mobile Apps: A Definitive Guide

Loyalty card access

Digital wallets often have built-in features that can store additional information, like loyalty card membership numbers. Customers can access digital coupons or membership perks, without having to use the physical member card. This can provide benefits to both customers and brands that want to build a loyal customer base.

Contactless payment

A digital wallet can also offer customers the ability to make payments without using cash. Users can even use their digital wallets to send money to friends or family without having to withdraw funds from their bank. Using a digital wallet can also activate tap to pay on devices, which allows users to simply tap their phone to the credit card reader, without having to make any contact with the cashier.

Faster payment

Digital wallets can significantly increase the time it takes to make payments. Tapping a phone or wallet in the checkout line speeds up in-person transactions. Digital wallets that store payment information online allow customers to skip payment as they don't have to enter their information each time.

Store tickets

Some digital wallets even allow you to store other important documents, like plane or event tickets. This can make it easier, and faster, to board a plane or access your concert tickets. A digital wallet can also hold other reservations, like hotels or cars, making it faster to check-in or pull up reservation information.

Secure payments

Digital wallets can offer customers a more secure method of online payments. When processing a transaction, a digital wallet doesn't actually swap credit card information. Instead, it uses a one-time token code that the system creates just for that purchase. The token code contains a randomized collection of numbers that keeps your confidential information secure.

Store personal records

Digital wallets have other uses besides that of storing bank information and making payments. A digital wallet can also store other information, like personal records. Customers can use the digital wallet to store health records or even vaccination records that they don't want to carry around but may need access to without notice.

Types of digital wallets

There are two main types of digital wallets, including:

Hot wallets

Hot digital wallets refer to digital wallets that connect to the internet. Most digital wallets are hot wallets, which means the app or program communicates virtually using the internet to access the customer's information. Many programs have built-in security features, like two-factor authenticators or biometric logins to overcome this.

Cold wallets

Cold digital wallets refer to digital wallets that don't connect to the internet. Customers most commonly use cold wallets to make fast payments. Cold wallets are typically secure and free of cyber threat risk because, without an internet connection, people cannot access their information. You may also refer to a cold wallet as a desktop wallet because the information is only accessible on the device in which it's stored.

Tips for using a digital wallet

Here are a few tips you can use for security and convenience when using a digital wallet:

  • Choose reputable digital wallets: Reputable digital wallets from well-known brands can help you keep your data secure. Larger providers are also more likely to notify you when your data may have been compromised.

  • Set up added security: Adding additional layers of security to your digital wallet can also help to keep your information secure. Two-factor authentication and biometric technologies significantly increase the security of your information.

  • Change your password frequently: For maximum security, it's best to still routinely change your passwords. You can easily update the digital wallet to store these passwords so they're easier to remember.

  • Set up notification alerts: Many digital wallets also have built-in features that can notify you when you access the information. This can help you identify unapproved transactions as they occur, helping you to secure the rest of your information.

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