What Is a Digital Wallet and How Does It Work: A Complete Guide

Nov 24, 2023 By Triston Martin

The more conventional ways of carrying out transactions involving cash and loose money have been rendered obsolete due to technological advances. Shrewdly and digitally, mobile phones have replaced traditional payment methods such as checks, credit cards, and debit cards.

Since the introduction of digital wallets, people have begun using mobile payment applications such as Paytm to carry out their day-to-day financial dealings. However, a digital wallet's storage capacity is not limited to just credit and debit cards; it can also hold other forms of payment.

You can also store coupons, gift cards, membership and loyalty cards, event tickets, plane tickets, and even more types of tickets. Additionally, you can send money to other people using various digital wallets.

What Is A Digital Wallet?

Software known as a digital wallet, sometimes an e-wallet, enables purchasers to carry out speedy digital transactions by saving their payment and password information in a safe and secure location.

Consider a digital wallet the equivalent of an online bank account in that it enables users to make payments and stores a history of those payments. Users can connect their digital wallets to their respective banks or make direct deposits into the wallets themselves.

A digital wallet is capable of more than only carrying out financial transactions. It can also hold identity documents, boarding passes, tickets, gift cards, loyalty cards, and anything else you typically carry in a traditional wallet. They can also be utilized in the process of verifying the identification of a user.

How Does A Digital Wallet Work?

You may make purchases with merchants on-site, transfer or send money, and keep track of rewards programs. Using an electronic wallet, secure software or an online platform for managing money allows you to do all these things.

You can link your electronic wallet to your bank account or use the prepay feature to pay for purchases as you go. It is simpler than you think to switch from a traditional wallet to a digital wallet, which probably holds most of your spare change and old receipts.

You may track all your credit and debit cards issued by Summit in a digital wallet that is kept directly on your phone if you use a payment app. This wallet is thus always ready for use, whether you are shopping online or in person, anywhere you see the pay wave icon.

Mobile payments are functionally equivalent to traditional financial dealings. It is sufficient to wave or tap your phone to complete the transaction successfully.

Types Of Digital Wallets

Open Wallet

A bank or affiliate may provide an open wallet for their customers. Users can conduct any transaction, such as withdrawing cash from an automated teller machine or transferring money to a different financial institution, when they have access to an open wallet.

It can be used to make purchases at stores that accept digital contactless payments utilizing NCR or MST technology and transactions made online and through apps. It can also be used to transfer money to and from other wallets.

Closed Wallet

A closed wallet is a digital wallet produced by a company that provides products and services and is only available to that firm's customers. This particular variety of digital wallets can only be used to conduct business with the entity that issued it.

The closed wallet also contains the monies processed from any cancellations, returns, or refunds issued. Closed wallets, offered by major stores such as Target, let customers make payments more quickly, both online and in person.

Semi-Closed Wallet

Users of a semi-closed wallet can conduct transactions only at those stores and establishments that have established business relationships with the wallet's issuer. Even though you can't get cash out of a semi-closed wallet, you may use it for online and offline transactions. Users of a semi-closed wallet have direct partnerships with banks, allowing them to deposit and receive money in their bank account immediately.

Are Digital Wallets Safe?

Consumers are usually wary of new technology, but they are especially wary of any technology that involves their sensitive financial and credit card information. However, when you make a transaction, your credit or debit card number will remain hidden thanks to a built-in security feature of digital wallets known as "tokenization."

This procedure protects your card number from being revealed. Instead of sending your actual credit card or debit card number to the merchant when you pay with a digital wallet, it generates a temporary token of random numbers. This token can only be used once.

This token is utilized to complete the payment while ensuring the confidentiality of your personal information. In addition, accessing your digital wallet in the first place requires additional levels of protection, such as the use of a personal identification number (PIN) or other biometric details.

Nevertheless, you should proceed with some degree of care. If you are entering your passcode in a public location, you should always keep a careful eye on your phone and cover the screen while you do so.

How To Create A Digital Wallet?

Creating a digital wallet is a simple process to undertake. After selecting the digital wallet provider that best suits your needs, you must enter your payment information so the system can safely store it in a single location.

You must have the appropriate app installed to access your digital wallet from your mobile device. It will enable you to make payments using contactless technology in stores.


A digital wallet is a mobile or desktop application that stores and manages digital currency and other digital assets. The digital wallet app is the most popular form of digital wallet because of its portability and adaptability.

In addition to their increased security, digital wallets offer more convenience in some scenarios. The only way for customers to use digital wallets is to get official applications developed by banks or reputable third parties.

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