What is a digital wallet and how does it work?

Digital wallets have become very popular in today's world of digital assets.

More and more consumers around the world are becoming accustomed to using apps like Metamask and Coinbase Wallet to store their digital assets such as crypto, NFTs, and others.

A version of this article was first published here.

According to a recent report by Square, the coronavirus pandemic has led to a dramatic increase in digital payment adoption “all in the name of a safety-first approach to business” with the number of cashless businesses in the U.S. that utilize Square’s service going from 8 percent on March 1 to 31 percent on April 23.

Prior to the pandemic, the rate of adoption in the U.S. was much slower compared with other countries due to skepticism around security. In fact, Pew Research found that 53 percent of Americans thought of mobile payments as poorly protected in a 2018 study on mobile payment adoption.

What is a digital wallet?

Digital wallets are exactly what they sound like: a digital version of your financial accounts made easily accessible via computer, smartphone or smart device that ultimately eliminates much of the need to carry around an actual wallet.

Apple Pay, Google Pay, and Samsung Pay are probably three of the most popular digital wallets, but there are quite a few others. Some other popular digital wallets include PayPal and Venmo, both of which are uniquely social by allowing you to easily send money to retailers and friends.

How digital wallets work

To get started with a digital wallet, first decide which one you want to use, a decision that is often influenced by the mobile operating system you already use. For instance, if you are an iPhone or Apple Watch user then you will probably lean towards Apple Pay, whereas Android users will lean towards Google Pay or Samsung Pay.

You can also choose to use one or multiple. I personally utilize Apple Pay, Venmo and PayPal, but all for different reasons. I have one card hooked up to Apple Pay just in case I ever forget my wallet. I use Venmo for splitting bills with friends and occasionally for sending money to retailers. And I use PayPal for a quick, easy and secure checkout from retailers that accept it.

If you want to utilize a digital wallet, you’ll need to enter your card information into the app or site of your choice. Your information will then be encrypted and you will only be able to use the wallet when you unlock your device and authorize the wallet’s use.

To make a mobile payment, you simply have to authorize the digital wallet and hold it close enough to the card reader so that your information can be transmitted.

Not all retailers accept mobile payments. Look for the contactless payment indicator on the retailer’s point-of-sale system or card reader. The symbol looks like a sideways Wi-Fi icon.