Digital wallet

A digital wallet, also known as an e-wallet or mobile wallet, is an electronic device, online service, or software program that allows one party to make electronic transactions with another party bartering digital currency units for goods and services. This can include purchasing items either online or at the point of sale in a brick and mortar store, using either mobile payment (on a smartphone or other mobile device) or (for online buying only) using a laptop or other personal computer. Money can be deposited in the digital wallet prior to any transactions or, in other cases, an individual's bank account can be linked to the digital wallet. Users might also have their driver's license, health card, loyalty card(s) and other ID documents stored within the wallet. The credentials can be passed to a merchant's terminal wirelessly via near field communication (NFC).

Increasingly, digital wallets are being made not just for basic financial transactions but to also authenticate the holder's credentials. For example, a digital wallet could verify the age of the buyer to the store while purchasing alcohol. The system has already gained popularity in Japan, where digital wallets are known as "wallet mobiles".^[1] In addition, a few US states have adapted digital driver's license and state IDs to be added to digital wallet in lieu of the physical card and it can be used at selected TSA checkpoints at airports, banking or enterprise.^[2]

A cryptocurrency wallet is a digital wallet where private keys are stored for cryptocurrencies like bitcoin.

Types of Digital Wallets

Digital wallets can be categorised based on their scope of use and interaction with external payment systems. The three most common classifications are closed, semi-closed, and open wallets. These categories define how funds are stored, transferred, and spent.

Closed Wallets

Closed wallets are issued by a company for use exclusively within its own ecosystem. Funds in a closed wallet cannot be transferred to other wallets or withdrawn in cash. These wallets are typically used to store refunds, loyalty rewards, or prepaid balances for use within a specific platform. For example, Starbucks offers a closed wallet that allows customers to load funds and make purchases only at Starbucks locations and via the Starbucks app.

Semi-Closed Wallets

Semi-closed wallets allow users to make payments to a defined list of merchants or service providers that are contractually associated with the wallet issuer. While more flexible than closed wallets, semi-closed wallets generally do not allow peer-to-peer money transfers or cash withdrawals. Instead, they function within a controlled network, offering convenience for digital commerce while limiting broader liquidity.

These wallets are typically used for transport, retail, entertainment, and service payments. To mitigate fraud and ensure traceability, semi-closed wallets often require user verification and transaction monitoring. For example, some wallets allow payment at retail chains, online stores, or service providers, provided they are integrated into the issuer's acceptance network.

Open Wallets

Open wallets are issued by licensed financial institutions and allow full functionality, including person-to-person transfers, merchant payments, and cash withdrawals via ATMs. These wallets are linked to the traditional banking infrastructure and are subject to regulatory oversight similar to that applied to bank accounts. Examples of open wallets include Apple Pay and Google Wallet when linked to bank-issued debit or credit cards, allowing users to pay at any NFC-enabled terminal or withdraw cash via card-linked services.

Technology

A digital wallet has both a software and information component. Secure and fair electronic payment systems are an important issue.^[3] The software provides security and encryption for the personal information and for the actual transaction. Typically, digital wallets are stored on the client side and are easily self-maintained and fully compatible with most e-commerce websites. A server-side digital wallet, also known as a thin wallet, is one that an organization creates for and about its members and maintains on its servers. Server-side digital wallets are gaining popularity among major retailers due to the security, efficiency, and added utility it provides to the end-user, which increases their satisfaction of their overall purchase.^[4] The information component is basically a database of user-input information. This information consists of a user's shipping address, billing address, payment methods (including credit card numbers, expiry dates, and security numbers), and other information.

Digital wallets are composed of both digital wallet devices and digital wallet systems. There are dedicated digital wallet devices such as the biometric wallet by Dunhill,^[5] a physical device that holds cash and cards along with a Bluetooth mobile connection. Presently there are further explorations for smartphones with NFC digital wallet capabilities, such as smartphones utilizing Google's Android and Apple's iOS operating systems to power wallets such as Google Pay and Apple Pay.^{[citation needed]}

Digital wallet systems enable the widespread use of digital wallet transactions among various retail vendors in the form of mobile payments systems and digital wallet applications. The M-PESA mobile payments system and microfinancing service has widespread use in Kenya and Tanzania,^[6] while the MasterCard PayPass application has been adopted by a number of vendors in the U.S. and worldwide.^[7]

Digital wallets are being used more frequently among Asian countries as well. One in every five consumers in Asia are now using a digital wallet, representing a twofold increase from two years ago. A MasterCard mobile shopping survey among 8500 adults, aged 18–64 across 14 markets, showed that 45% of users in China, 36.7% of users in India and 23.3% of users in Singapore are the biggest adopters of digital wallets. The survey was conducted between October and December 2015. Further analysis showed that 48.5% of consumers in these regions made purchases using smartphones. Indian consumers are leading the way with 76.4% using a smartphone to make a purchase, which is a drastic increase of 29.3% from the previous year. This has inspired companies like Reliance and Amazon India to come out with their own digital wallet. Flipkart has already introduced its own digital wallet.^[8]

Security

Digital wallets enhance transaction security for both consumers and merchants by reducing the need to fill out payment credentials with each purchase. Once a user's payment and shipping information is securely stored in the wallet, this data can be automatically applied at checkout across supported merchant websites, reducing exposure to keylogging, phishing, or form-jacking attacks.

To protect sensitive information, digital wallets typically use multiple layers of security, including:

• Data encryption during storage and transmission
• Tokenisation to substitute card details with randomised identifiers
• Biometric authentication, such as fingerprint or facial recognition
• Two-factor or multi-factor authentication (2FA/MFA)

These mechanisms significantly lower the risk of unauthorised access and fraud. For merchants, digital wallets also reduce chargeback rates, improve payment speed, and can lower transaction costs due to streamlined payment flows.

While most consumer-facing digital wallets are available free of charge, their implementation may vary. Some wallets are integrated at the point of sale or embedded in a merchant's checkout process, while others are acquired independently through wallet providers or mobile platforms.

The growing emphasis on privacy and security in digital payments has prompted regulatory bodies to issue guidelines and frameworks. For example, the European Union’s PSD2 directive mandates strong customer authentication (SCA) for electronic transactions, directly influencing how wallets manage identity and authorisation processes.

European Payments Initiative

With the acquisition of iDEAL, European Payments Initiative (EPI) Company has announced that it will create an all European digital wallet.^{[9][10][11][12]}

See also

• Online wallet
• Universal credit card