What is a digital wallet? How it works, pros and cons, and how to choose one

Key takeaways

• A digital wallet is an app on your phone, tablet, or computer that stores your payment details, so you can pay in-store or online without using a physical card.

• Digital wallets use technologies like NFC and tokenisation to keep your payment data secure, and they now account for more than half of all global eCommerce transactions.

• Airwallex Corporate Cards link to digital wallets like Apple Pay and Google Pay, so your team can spend from multi-currency balances with 0% foreign transaction fees.

A digital wallet is an app that stores your payment details on your phone, tablet, or computer, so you can pay in-store or online without reaching for a physical card. These wallets now account for over half of global eCommerce transactions, and that figure is expected to reach 63% by 2030.

The digital wallet landscape looks different depending on the region. In the West, Apple Pay and Google Pay dominate. In parts of Asia, Alipay and WeChat Pay work as super-apps that go beyond payments and include services like booking travel and securing loans. This article covers how digital wallets work, the main types and examples, their benefits and drawbacks, how to choose one, and how businesses can use them alongside corporate cards to simplify company spending.

What is a digital wallet?

A digital wallet stores your payment information securely on a device like a smartphone, tablet, or computer. Think of it as a digital version of the physical wallet in your pocket, but instead of carrying cards and cash, your phone holds everything for you. You can pay with a tap of your phone or a few clicks online.

Behind the scenes, it's an app that securely stores your card or bank account details. When you check out, the wallet pulls up this information to complete the payment quickly and securely. Many digital wallets also do more than just payments, storing loyalty cards, boarding passes, or gift cards in one easy-to-reach place.

You might already have one without realising it. Apple Wallet comes pre-installed on iPhones, and Google Wallet is standard on Android devices. Popular examples include Apple Pay, Google Pay, and Samsung Pay for mobile payments, while platforms like PayPal and Venmo add a social element for sending money to friends, family, and businesses.

For businesses, adding corporate cards to digital wallets lets employees pay securely from company funds without relying on physical cards. That cuts admin work like expense reimbursements and makes sure transactions are controlled and visible in real time. Now let's clear up some terminology that often causes confusion.

Digital wallet vs mobile wallet vs e-wallet

These terms are often used interchangeably, but there are subtle differences:

• Digital wallet: The broadest term, meaning any software that stores payment information, whether on a phone, computer, or other device.

• Mobile wallet: This specifically refers to wallets on a phone, like Apple Pay or Google Pay.

• E-wallet: This often refers to platforms that hold a stored balance, like PayPal.

For most purposes, you can treat these terms as synonyms. What matters is understanding what the wallet does, not what it's called.

Is a digital wallet the same as a bank account?

No. A bank account is where your money lives. It holds your funds and may earn interest. A digital wallet is how you spend it. It stores your payment details and connects to a bank account or card to process payments. Some wallets like PayPal can hold a balance, but they don't offer the same protections or features as a bank account. Your bank account is where your money lives. Your digital wallet is how you spend it.

How do digital wallets work?

Digital wallets securely store your payment information and process transactions through advanced technology, which makes payments fast and secure. They support various card types, including credit, debit, and prepaid card options, so businesses can cater to diverse payment preferences. Here's what happens when you use one.

Storing your payment details

When you add a card to your digital wallet, the app encrypts your information and creates a unique token instead of storing your actual card number. That means your real card details are never shared with merchants. To access your wallet, you'll need to authenticate with a PIN, fingerprint, or facial recognition, which adds another layer of protection.

Making payments in-store and online

For in-store payments, you tap or hold your device close to a payment terminal. The wallet sends your payment details to the card reader when you hold your phone close to it, using the same principle as tapping an Oyster card on the Tube. For online purchases, you select your digital wallet at checkout and authorise the transaction. The wallet auto-fills your details, so you don't need to type card numbers manually.

The technology behind it: NFC, MST, and QR codes

Different wallets use different technologies to send payment data:

• Near field communication (NFC): Sends your payment details wirelessly when your phone is close to the terminal. Apple Pay and Google Pay use this.

• Magnetic secure transmission (MST): Creates a magnetic signal that mimics a card swipe. Samsung Pay supported this, though it's being phased out in favour of NFC.

• QR codes: Some wallets, like PayPal, use scannable barcodes to start payments, especially for peer-to-peer or point-of-sale transactions.

The wallet connects to payment processors, gateways, and banks to finalise the purchase in seconds. Payment terminals must support contactless payments or QR codes to accept these transactions. Now that we've covered the mechanics, let's look at the different types of digital wallets available.

Types of digital wallets

Digital wallets fall into three main categories, each with a different level of flexibility. Understanding these helps you choose the right option for your needs.

Closed wallets

A closed wallet can only be used with the company that issued it, like a gift card for a single shop. The Starbucks app wallet is a good example: you load money onto it and can only spend it at Starbucks. These wallets are simple, but limited in scope.

Semi-closed wallets

Semi-closed wallets work at multiple merchants but don't let you withdraw cash. A payment app that works across a network of partner retailers but doesn't support ATM withdrawals is a typical example. They give you more flexibility than closed wallets whilst still having some restrictions.

Open wallets

Open wallets are issued by or partnered with banks and can be used for virtually any transaction, including ATM withdrawals. A bank-issued digital wallet linked to your current account falls into this category. They offer the most flexibility, but you may need a banking relationship to get access. Now let's look at some specific examples you're likely to come across.

Popular digital wallet examples

The digital wallet landscape is diverse, with options from tech giants, payment platforms, and regional super-apps. Here are seven of the most widely used:

Apple Pay is built into Apple devices and is popular for its convenience and security. It uses tokenisation along with Touch ID, Face ID, or passcode for authentication. If you've got an iPhone, you likely already have access to it.

Google Pay works across platforms, not just Android devices, which makes it a flexible option for businesses and individuals who use different types of devices. It makes both online and in-store transactions simpler by linking credit or debit cards.

Samsung Pay stands out because it works with older payment terminals through MST technology, though this feature is being phased out. It's especially useful in regions where NFC adoption is still catching up.

PayPal is widely accepted by online retailers, so it's easy to shop without entering credit card details over and over. It also holds balances and supports peer-to-peer payments.

Venmo is particularly popular in the United States for peer-to-peer payments. It uses two-factor authentication and lets users freeze accounts if needed, adding a social element to money transfers.

Alipay dominates in China and is used for everything from general purchases to travel booking and city services like parking. It's essentially a financial super-app.

WeChat Pay is just as central to daily life in China, built into the WeChat messaging app. Users can pay bills, transfer money, and make purchases without leaving the app they're already using.

Comparison table of popular digital wallets

With so many options out there, how do you work out which one suits your needs? Let's look at the benefits and trade-offs.

Benefits and drawbacks of digital wallets

Like any payment method, digital wallets have strengths and limitations worth thinking about, whether you're using one yourself or rolling them out across a business.

For consumers

• Speed at checkout: Tap your phone and you're done. No fumbling for cards or counting cash.

• No need to carry physical cards: Your phone holds all your payment methods, loyalty cards, and boarding passes in one place.

• Stronger security: Tokenisation means your actual card number is never shared with merchants. Biometric authentication adds another barrier against unauthorised use.

• Better protection than physical cards: If you lose your phone, you can lock it remotely. Lose your wallet, and those cards are gone.

For businesses

Digital wallets can link to virtual corporate cards, which lets businesses issue cards to employees for company expenses. Say an employee is travelling for a conference. They can tap their phone to pay for meals and transport, and the finance team sees each transaction in real time.

This setup gets rid of the hassle of processing reimbursements. Employees spend directly from company funds instead of paying out of pocket and waiting to be paid back. Finance teams get control over spend limits and complete visibility over company spending as it happens. With features like encryption protecting sensitive payment data, businesses can also reduce the risk of fraud with company-issued cards.

Drawbacks to consider

• Not all merchants accept them: Smaller vendors or those in less technologically advanced markets may not have the point-of-sale systems needed for contactless payments. You might still need a backup payment method.

• Device dependency: If your phone battery dies, your wallet goes with it. Unlike a physical card, a digital wallet needs power to work.

• Privacy considerations: Wallet providers may collect data about your transactions. It's worth checking privacy policies to understand what information is being gathered and how it's used.

How to set up a digital wallet

Setting up a digital wallet takes about as long as downloading a new app and logging in. Most people finish in under five minutes. Here's how:

1. Choose a wallet: Most people start with the one pre-installed on their phone. iPhone users have Apple Wallet; Android users have Google Wallet. You can also download alternatives like PayPal or Samsung Pay.

2. Open the app and add a payment card: Follow the prompts to enter your card details. You can usually scan the card with your camera or type the numbers manually.

3. Verify your identity: Your bank may send a verification code by text or email, or ask you to confirm through your banking app. This step makes sure you're the legitimate cardholder.

4. Set up authentication: Turn on fingerprint, face recognition, or a PIN to secure your wallet. This stops anyone else from using it if they get hold of your phone.

5. Start using it: Look for the contactless symbol at checkout and tap your phone to pay. For online purchases, select your wallet at checkout and authorise the transaction.

Once you've set up one card, adding more is even quicker. Now let's look at what to think about when choosing between different wallet options.

How to choose a digital wallet

Here's what to look for when picking a digital wallet for personal or business use.

Security and encryption

Strong security is essential for protecting sensitive transactions. Look for wallets that offer tokenisation, so your real card number is never shared, along with encryption and biometric authentication like fingerprint or face recognition.

Device and regional compatibility

Apple Pay only works on Apple devices, while Google Pay is compatible across platforms. Think about which wallets work in the regions where you or your employees operate, because a wallet that's dominant in one country may have limited acceptance elsewhere.

Fees and costs

Many wallets are free for basic use, but some charge fees for international transactions or currency conversions. Check the fee schedule before you commit, especially if you'll be making cross-border payments regularly.

Simplify global spend management with Airwallex Corporate Cards

Your team shouldn't have to pay out of pocket and wait for reimbursements. By issuing digital corporate cards to employees, which can be added to digital wallets like Apple Pay and Google Pay, businesses can let staff spend directly from company funds. You get better control through individual card limits and visibility into spend as it happens.

Airwallex offers a Business Account that holds 20+ currencies in a company Wallet. Airwallex Corporate Cards can be issued to employees and used through digital wallets. Employees then spend directly from multi-currency balances, avoiding foreign exchange fees entirely.

Cut costs on international spending

Airwallex Corporate Cards help businesses avoid hefty FX and international transaction fees:

• Spend internationally from multi-currency balances with 0% foreign transaction fees

• Access interbank FX rates when you need to convert currencies

• Save up to 80% on conversion costs compared to traditional providers

Real-time visibility and spend controls

Issue cards to employees, set spending limits, and control purchases through merchant category code restrictions, all whilst tracking expenses in real time. For example, you can set a £500 monthly limit on an employee's card for travel expenses and get notified the moment they make a purchase.

Once linked to a digital wallet, employees can use Airwallex Corporate Cards for online and in-person payments worldwide. Whether they're paying suppliers abroad or covering travel expenses, the process is efficient, secure, and easy to monitor.

Open an Airwallex Business Account today to get started.

Frequently Asked Questions (FAQs)

How do I set up a digital wallet?

Download a wallet app, or open the one pre-installed on your phone, then add a payment card and verify your identity. Most setups take under five minutes, and you can start using it straight away for in-store and online payments.

Are digital wallets safe?

Yes, digital wallets are generally safer than carrying physical cards because they use tokenisation and encryption to protect your payment details. Your actual card number is never shared with merchants. Biometric authentication, like fingerprint or face recognition, adds another layer of security.

What are the disadvantages of a digital wallet?

The main drawbacks are device dependency, because if your phone dies you can't pay, limited merchant acceptance in some regions, and potential privacy concerns around transaction data. It's worth keeping a backup payment method for situations where digital wallets aren't accepted.

Is a digital wallet the same as a bank account?

No. A digital wallet stores your payment details and connects to your bank account or card to process payments, but it doesn't hold your money the way a bank account does. Some wallets like PayPal can hold a balance, but they don't offer the same protections or interest-earning features as a traditional bank account.

Sources and references

1. https://business.bofa.com/en-us/content/digital-wallets-adoption-digital-payments-strategy.html