What Is a Digital Wallet and How Does It Work?

Contactless payment methods have become ubiquitous among both merchants and consumers, with adoption exploding in the wake of the COVID-19 pandemic. Digital wallets are one of the most popular such technologies. They store your payment options, such as credit and debit cards, allowing you to conveniently use your smartphone or smartwatch to make a purchase.

In fact, some top credit card issuers reward you for using mobile payments. And as more merchants offer cardless payment systems, major digital wallets like Apple Pay, Google Pay and Samsung Pay can be your ticket to a more streamlined and secure shopping experience.

Credit and debit cards aren’t the only things you can keep in a digital wallet, though. You can also store gift cards, membership and loyalty cards, coupons, event tickets, plane tickets and more. Plus, you can use many digital wallets to transfer money to other people.

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How digital wallets work

Different digital wallets use different technologies to process payments:

Near Field Communication, or NFC: This allows two devices to exchange information if they’re placed close to each other. Apple Pay and Google Pay use this technology. To use one of these digital wallets, the merchant must have compatible card readers at checkout.
Magnetic Secure Transmission, or MST: This generates a magnetic signal, much like when you swipe the magnetic stripe on a credit card. The signal is transmitted to the payment terminal’s card reader. Samsung Pay uses both MST and NFC technology.
QR codes: These are barcodes you can scan with your smartphone’s camera. In the PayPal app, for example, you can generate a QR code that lets you use your account to pay for an item in a store.

While the digital wallet examples above can be used at any merchant that accepts them, there are also “closed” digital wallets, like the Starbucks app, that are designed to be used only at a specific store.

Note that not all merchants accept digital wallets yet, so it's a good idea to also carry a physical credit or debit card as backup.

» MORE: Will using a digital wallet cost you in credit card rewards?

How to use your digital wallet

Major digital wallets like Apple Pay, Samsung Pay and Google Pay are dependent on the phone you carry. You can’t use Apple Pay on an Android phone, for example. So by sticking to a specific brand of phone, you’ve also chosen a potential digital wallet. PayPal is an exception because the app is available through the Apple App Store and Google Play.

Here’s how the top mobile wallet services work and how to use your credit cards with them.

How to use Apple Pay

Apple Pay can be used only on Apple devices. When you're checking out at a store that accepts Apple Pay (you can tell by the logo on the merchant’s point-of-sale system), log in to your iPhone using your passcode, Touch ID or Face ID. Then, just hold the phone close to the payment terminal to validate the purchase. No swiping required. (If you have multiple payment cards loaded, you may be asked to specify which one you want to use.)

Here’s how to add your credit card to Apple Pay:

Open the Wallet app on your Apple device.
Tap the "+" sign at the top right of the app screen.
Tap to input your payment method (credit or debit card). You can either enter the number manually in the Wallet app or scan a picture of your card. You may also be able to simply tap the card. Keep in mind that some banks may ask that you verify your card before you can start using it.

How to use Google Pay

With Google Pay (a merging of what was previously Android Pay and Google Wallet), you can use debit, credit, gift and loyalty rewards cards to make contactless purchases in person, as well as transactions in-app and online. The Google Pay mobile wallet service is accepted widely across restaurants, grocery stores, gas stations, online merchants and the like, anywhere you see the Google Pay logo or another symbol that indicates contactless payments are accepted.

Here’s how to use your credit card with Google Pay:

Download the Google Pay app to your phone.
Log in to your Google account.
Enter your debit or credit card information. Users will be asked to provide their card number, expiration date, CVV and billing address, all of which will be verified by the issuing bank. You can add multiple cards to your account, but you’ll have to choose a default card, which you can change at any time.
Enable NFC (or near field communication) by opening your phone’s settings, typing "NFC" in the search bar and tapping to enable. If you can't find NFC, your phone cannot use Google Pay.
When making a physical transaction, unlock your phone and tap it on the card reader.

How to use Samsung Pay

Samsung Pay users can add up to 10 credit and debit payment cards to the digital wallet to make contactless payments in-store. You can also add membership or loyalty cards and gift cards to your account. Like Google Pay and Apple Pay, Samsung Pay is widely accepted. However, Samsung Pay is more limited in terms of what compatible devices can be used with the service. The digital wallet will work only with select Samsung devices, and is not available on iOS devices.

Note that to use the service on a non-Samsung phone smartwatch, you’ll need to update to Android 6.0 or higher.

Here’s how to use your credit card with Samsung Pay:

You can use Samsung Pay in Samsung-owned apps, but you cannot use the mobile wallet to make direct purchases online or in other apps.
To add your first card, tap “Add credit or debit card.” If you've already added cards but need to include a new one, tap the "+" sign in the upper right corner, and then tap “Add credit or debit card.” You may have to verify your card's banking app or website.
To use Samsung Pay for in-store purchases, swipe up on your phone from the home screen to select the card you want to use, then authenticate your identity with a fingerprint scan or password before putting your phone next to the card reader to complete the transaction.

Are digital wallets safe?

New technology can give consumers pause, especially technology involving sensitive banking and credit card information. However, digital wallets have a built-in security feature — a process called “tokenization” — that keeps your credit or debit card number a secret when you make a purchase.

Essentially, when you pay for something, instead of sending your actual credit or debit card number to the merchant, the digital wallet generates a one-time-use token made up of random numbers. That token is what’s used to process the payment, while your personal information remains secure.

Plus, even accessing your digital wallet in the first place involves other layers of security, like requiring a PIN or biometric information (fingerprint or facial recognition).

Still, you need to exercise some caution. Always keep a close watch on your phone and cover the screen if you’re entering your passcode in a public place.

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