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5 Min. Read

What Is a Digital Wallet and How Does It Work?

What Is a Digital Wallet and How Does It Work?

Digital wallets, like PayPal, have been around for more than two decades. But it’s only in the past few years that they’ve come into their own. Nowadays, there are dozens of options, from Venmo to Stripe to more obscure offerings. Here’s what you need to know about this growing technology.

Here’s What We’ll Cover:

What Is a Digital Wallet?

How Does a Digital Wallet Work?

Are Digital Wallets Safe?

Why Use a Digital Wallet?

Key Takeaways

What Is a Digital Wallet?

Digital wallets, also known as mobile wallets, are online payment services that also allow you to maintain a balance. In the past, you accessed them through a web browser. Nowadays, most digital wallets use a smartphone app instead.

Either way, they function much like a physical wallet. You can keep your money inside, and – at least in theory – you’re the only person who has access.

Digital wallets have exploded in popularity largely because of growth in developing nations. People in many countries don’t have easy access to banking. But with a digital wallet, anyone can accept payments online. You can even send money overseas, although foreign transaction fees will typically apply.

Normally, digital wallets allow you to transfer funds to other types of account. In most cases, you can use a credit card or debit card to load funds. You can also transfer funds to and from checking accounts.

In the case of cryptocurrency, digital wallets are your only option. Because you’re dealing with digital currency, there’s no way to transfer it to the real world. Making payments in cryptocurrency is a different matter entirely, and beyond the scope of this post.

How Does a Digital Wallet Work?

Nowadays, most digital wallets come in the form of a smartphone app. However, some can also be accessed for the web. Most require two-step authentication, and some require a biometric lock. In the case of some crypto wallets, you’ll even get a physical USB fob that needs to be inserted like a physical key.

How you use your mobile wallet will depend on what you’re trying to do. For many purposes, sending money through the app will be the easiest method. If the other person uses the same digital wallet software, you won’t have to worry about transferring money via a bank or a card.

In fact, many major retailers already accept payments from some digital wallets. Some services, like Google Pay, use near field communication (NFC) so you can tap your phone to pay. Others, like PayPal, even issue you with a physical credit card that you can use at almost any point of sale (POS).

Not every POS will be compatible with every app. For example, a merchant may accept Apple Pay, but not the Cash App, or vice-versa. And in some cases, you might be limited by platform. There's no way to get Apple Pay on an Android phone, or to get Google Pay on the App Store.

The same is true for withdrawing money from ATMs. Not all ATMs support all wallets. Not only that, but the same rules apply to ATM withdrawals as apply to withdrawals with a physical card. Even if your mobile wallet doesn’t charge a fee, the ATM might.

Are Digital Wallets Safe?

It’s impossible to make a blanket statement about the safety of every digital payment platform. That said, there are a few reasons why most digital wallets are considered safe.

First and foremost, “safe” is a relative term. Traditional wallets have no security features whatsoever. If they’re not in your pocket, anyone can access them.

Secondly, digital wallet transactions are invariably encrypted. This makes it difficult for hackers to perform a man-in-the-middle attack, since any intercepted data would be encrypted.

Finally, most major financial processors have strict certification programs. Without those certifications, digital platforms would have no way of transferring your money to or from the real world.

Why Use a Digital Wallet?

When compared to an actual card, digital wallets provide a number of benefits. For one thing, they allow for easy payment from your mobile device, which is an essential feature for many modern people.

They’re also fast becoming the gold standard for online purchases. If you’re scaling your business or moving your business online, accepting digital payment is an important step.

Finally, many digital wallet apps provide benefits to long-term or high-volume users. Oftentimes, these will synergize with popular rewards cards. This creates huge value for consumers and small businesses alike.

Key Takeaways

For any growing business, it’s important to make it easy for people to pay. Digital wallets are a popular technology that shows no sign of losing steam. By accepting as many forms of payment as possible, you’re one step closer to gaining new customers. And if you’re a consumer, the convenience alone is enough reason to use one.

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