Mary Aleksandrova
/ 23rd July, 2024

Digital wallet app

Digital wallet definition

A digital wallet is software, usually in the form of a mobile app, that stores bank account information and allows users to pay online or with their phone. Since all the banking data is linked to the app, users don’t have to carry physical credit or debit cards with them. Numerous mobile wallets are also available on smartwatches and other connected devices.

There are different types of digital wallets, but they all share a key goal: streamline the payment process and create an enjoyable shopping experience for users, while ensuring a high level of security for such transactions.

How a digital wallet app works

To better explain how a digital wallet works, here is an overview of what happens when a user wants to make a payment:

  1. After downloading the app, a user can input their card details, such as the card number, expiry date, CVV/CVC, the holder’s name, and address to add the card to the wallet. Virtually all digital wallet app solutions allow linking several cards.
  2. When the information is added, the user can select which card they’d like to use for payment. After that, they can conduct a transaction by scanning a QR code at the point-of-sale (POS) or tapping their phone to the POS terminal if the device supports NFC.
  3. Their digital wallet then encrypts and transmits the saved card details to the POS system.
  4. The POS system relays the information to others, for instance, banks and credit card networks, for processing.

Types of digital wallets

The main digital wallet types are open-loop and closed-loop wallets. Open-loop wallets offer the greatest degree of compatibility. They enable users to pay in stores without using their card, purchase goods online, receive cashback, and even withdraw cash at ATMs.

Closed-loop wallets are generally restricted to particular retailers.

Different types of digital wallets can also present various additional features to win customers and expand functionality. For instance, in 2019, Apple secured a partnership with the Goldman Sachs banking company and launched its own Apple Card.

Depending on the type, digital wallet apps can store additional information about a user’s

Are digital wallets safe?

Despite their convenience, a frequent question that users ask is, “how safe is a digital wallet”? Here are several security mechanisms that digital wallet apps apply:

  1. Before conducting each transaction, a wallet demands a user’s permission. Depending on the person’s choice and the app, it can be granted via entering a passcode or scanning biometrics (fingerprints or faces). For some apps, users can also turn on 2-step verification. This way, even if a person’s smartphone gets stolen, only the owner would be able to make a payment.
  2. Digital wallets implement tokenization — encrypting card information — to secure users’ details. This technique makes it possible to avoid revealing card numbers to retailers, and it greatly decreases the risk of a data leak in case a seller’s system gets compromised.
  3. Any digital wallet app solution will be capable of interacting with a limited range of apps on the phone. This way, if a user’s device gets infected with malware, the wallet is safe as long as the specific apps it can access are not compromised.

Examples of the best digital wallet apps

Most e-wallets are cross-platform, however, some are mostly compatible with particular operating systems. As an example, the best digital wallet for iPhone owners is Apple’s natively developed wallet, Apple Pay. For Android users, the best digital wallet app is Google Pay.

Mobile wallet functionality can sometimes be integrated into larger payment platforms. Here are a few digital wallet examples offered by various payment and retail brands:

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