8 Min Read | Published: August 30, 2024
How to Use a Digital Wallet
Discover how digital wallets work, the benefits of using them, and practical tips for using them securely for online and in-person transactions.
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
At-A-Glance
Digital wallet adoption is predicted to continue to increase in the coming years, especially among Gen Z and younger generations.
Thanks to tokenization and other technological advancements, digital wallets are a secure way to process payments online and in-store.
A digital wallet can be an excellent backup option for those who want to continue to use debit and credit cards or cash to make payments.
Credit cards revolutionized how people paid for goods and services in the 20th century; now, cell phones and digital wallets are poised to do the same. In early 2024, a reported 79% of Gen Z was using digital wallets instead of physical ones, exposing an obvious desire for younger generations to ditch wallets and money clips in favor of doing everything from the comfort and safety of their phones.1
If you’ve yet to hop on the digital wallet bandwagon, it’s a good time to do so, with digital wallet transactions expected to more than double by 2030.2 In this article, we’ll break down what a digital wallet is, how it works, and share tips on how you can start using one.
What Is a Digital Wallet?
A digital wallet is any financial app that allows you to pay for things using your phone. There are a number of widely known digital wallet apps that allow financial transactions and peer-to-peer payments. And people are embracing the shift to digital payments. A recent Forbes study revealed that 53% of survey participants used their digital wallets more frequently than traditional payment methods like cash or a credit card.3
It’s worth noting that the term digital wallet can encompass more than just financial payment apps. Some people are going so far as to digitally store their driver’s licenses, event tickets, loyalty cards, and more.
How Do Digital Wallets Work?
Digital wallets work using technology that encrypts and securely stores payment information on your device. However, it stores payment information in your phone without disclosing your card details to a merchant. Instead, when it’s time to make a payment, the app creates a one-time token that’s shared with the vendor and can’t be linked back to your card number in case of a data breach. For this reason, digital wallets are a secure way to pay today.4
Where Can I Use a Digital Wallet?
A 2024 study suggests 88% of small businesses accept digital wallets vs. 94% that accept debit and credit cards.5 And many expect that gap to lessen in the coming years. While you’ll want to confirm digital wallet acceptance with individual retailers, the odds are in your favor that many of the businesses you frequent, especially larger national chains, will accept contactless payments through a digital wallet. Here’s how to use your wallet for different types of payments.
In-Store
In locations that accept digital wallet payments, you’ll see a contactless symbol on the payment terminal. To pay in-store, open your app and confirm the payment using any verification, such as Face ID or Touch ID, then place your device near the terminal.
Online
When using a digital wallet online, how you pay depends on the merchant. Some sellers may require you to scan a Quick Response (QR) code on your phone to complete payment, while others may ask you to log in to an app or provide a personal identification number (PIN).
In-App
An in-app purchase works much like an online purchase. Within the app, you choose the payment method you want to use, which will trigger verification using either biometrics or a passcode.
ATM
You may also be able to use a digital wallet to get cash at an automated teller machine (ATM). As long as you’ve linked a debit card, you can hold your digital wallet close to the contactless symbol at an ATM, similar to how you’d pay for an in-store purchase. You’ll still need to enter your PIN on the ATM terminal to complete the transaction.
Did you know?
Because of the frictionless payment associated with digital wallets, you may end up spending more. In a recent Forbes study, 67% of respondents said they always or sometimes lose track of spending when paying with a digital wallet.6 If you worry you’re going overboard by tapping your phone to pay at too many merchants, consider budgeting strategies like the 50/30/20 budget to combat potential overspending.
How to Use a Digital Wallet
Setting up your digital wallet is as easy as adding any other app to your phone.
- Download the App
After you’ve decided which digital wallet you want to use, you’ll need to go to your phone’s App Store and download the app.
- Create a Password
Depending on the app you’ve selected, you may need to create a username, password, or both. You may also need to enable facial recognition or another biometric verification like fingerprint technology within the app to use it as an added layer of security for payments.
- Add Payment Information
You’ll need to add your bank account, credit card, or debit card information to the app. While this information is stored within the app, it won’t be shared with merchants when you pay. Instead, the app will share a one-time token for increased security.
- Start Using It
Using your digital wallet for contactless payments is simple. When you’re ready to pay online, in-store, or in-app, simply follow the merchant process for tap-to-pay at a contactless terminal, scan a QR code, or enter a PIN or passcode.
Are Digital Wallets Safe?
Thanks to the underlying technology, digital wallets are considered a safe way to pay for goods and services. When you make a purchase in person using a digital wallet, the app doesn’t share your card number with the vendor, as would happen in a manual credit card swipe. Instead, the app generates a one-time token and shares it with the card reader. In this way, digital wallets offer protection against data breaches and other instances where someone could end up with your credit card number.
However, much like physical wallets, digital wallets are not always 100% safe. Similarly to how you’d be in a bind if your physical wallet were stolen, losing your phone could also be problematic for your ability to pay digitally. However, even if someone bypasses your passcode to unlock your phone, many digital wallets require further authentication through Face ID or other biometric verification, which could prevent thieves from accessing your funds. For this reason, it’s important to check the security measures on your financial apps and ensure you have every available security precaution in place.
For more information about the pros, cons, and safety of contactless payment technology, check out “Is Contactless Payment a Wiser Choice?”
How to Choose a Digital Wallet
For convenience, many people choose the default digital wallet associated with their phone’s operating system. However, you can choose from many digital wallets and financial apps. As you weigh options for a digital wallet, consider these key questions.
- Is it easy to navigate the app?
Since you’ll be managing your payments through the financial app, choose one that’s user-friendly and reliable. Aside from downloading the app, you can check user reviews in the app store or online forums to get a feel for the experience other people are having and whether it’s positive or negative.
- Is the digital wallet widely accepted?
You’ll want to confirm which vendors accept the digital wallet you’re considering, ensuring the stores you frequent are on the list. If you plan to travel internationally, it’s also critical that you confirm the presence of vendors that accept digital wallet technology at your most frequently visited destinations.
- Can you use the digital wallet at an ATM?
If you want to go fully digital and ditch your physical cards altogether, you may still want a way to get cash from an ATM if you’re in a pinch. The good news is many banks and ATM providers are adding contactless technology, plus most debit and credit card providers have digital wallets. As you explore options for a digital wallet, confirm if there are ATMs near you where you can get cash using the contactless option, keeping in mind that you’ll still need to enter your PIN.
- Does the wallet use the latest security protocols?
As a baseline, you’ll want to ensure the digital wallet you choose has standard encryption and security features, including multi-factor or biometric authentication. The app should enforce security protocols upon login and when you perform a financial transaction.
The Takeaway
Digital wallets are an increasingly popular, safe, and convenient way to manage payments. If you’ve yet to start using digital wallets, getting started is as easy as downloading an app.
1 “55% of High-Earning Consumers and 79% of Gen Z Use Digital Wallets,” PYMNTS
2 “Navigating the payments matrix: Charting a course amid evolution and revolution,” PwC
3,6 “53% Of Americans Use Digital Wallets More Than Traditional Payment Methods: Poll,” Forbes
4 “Digital wallets: A beginner’s guide to how they work,” Bankrate
5 “ Despite Ubiquity, Credit and Debit Card Processing Drags Down Small Business Satisfaction with Merchant Services Providers, J.D. Power Finds,” J.D. Power
Brooke Joly is a writer on a mission to unravel the mysteries of personal finance and make them accessible to the everyday reader. When she’s not behind the keyboard, you can find her enjoying the outdoors in Charleston, SC.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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