Capital One Shopping Research shows that 3.4 billion people worldwide now use these digital payment tools. But what exactly are virtual wallets, and how do they differ from the top picks for our best online banks?
Read on for a closer look at both and the unique benefits each offers.
Key Insights
Virtual wallets let you store multiple payment methods in one place, enabling quick, secure transactions with third parties.
Online bank accounts are deposit accounts where you can deposit, store, and withdraw funds.
Some digital wallet providers offer additional features like peer-to-peer payments, financing options, and digital document storage.
Linking your online bank account to a digital wallet can help protect your bank account against fraud and security risks.
What Is a Digital Wallet?
A digital wallet is an electronic account that securely stores your bank account, credit cards, and debit cards. It enhances payment security through advanced encryption and authentication methods like biometrics and passcodes, protecting your financial information from unauthorized access.
Take PayPal, for example. You can link multiple payment methods to your account, and when shopping online, you log in and select your preferred payment source. The service charges your chosen method and pays the merchant, protecting your financial details.
Mobile wallets like Apple Pay, Samsung Wallet, and Google Pay take a mobile-first approach. When a retailer supports your mobile wallet, you can open the app, authenticate yourself, and hold your phone near the card reader—making checkout quick and seamless.
How Do Digital Wallets Work?
Providers of digital wallets allow you to create an account, securely use your payment methods, and complete transactions with third parties. Here’s a closer look at each of the steps.
Account Setup
Setting up a digital wallet is a straightforward process that typically involves a few key steps:
- Choose a digital wallet: Find the digital wallet you want to use online (e.g., download the app, visit the website, etc.). You can find them from many companies, such as Apple, Google, Samsung, PayPal, and Venmo.
- Get set up: Create an account, secure it with a password and/or biometrics, and log in. Some may require you to confirm your identity via email, text, or by uploading an ID.
- Link payment methods: Add the payment methods you’d like to keep in the wallet, such as credit cards, debit cards, and bank accounts, and verify them when needed.
- Shop: Use a payment method in your digital wallet to make online or in-store purchases.
One key benefit is that your existing card rewards remain unchanged. The primary difference is the convenience of initiating transactions through the wallet rather than manually entering card details with each merchant.
Security
Security is essential with digital wallets, as you want to ensure your payment information is safe. While the protection can vary between digital wallet providers, many employ multi-layered security strategies, which include:
Biometric verification: Access to digital wallets often requires biometric verification via a fingerprint or facial recognition scan.
Two-factor authentication (2FA): Some wallets send a verification code via text or email to confirm your identity before processing payments.
Tokenization: Transactions are secured through tokenization, replacing your card details with unique, randomized numbers. This keeps your actual information hidden from merchants.
Encrypted data: Sensitive data is encrypted both during transmission and when stored.
Fraud protection: Many digital wallets, when linked to major credit cards or banks, offer fraud protection policies that ensure you won’t be held responsible for unauthorized transactions.
Remote wipe: If you lose your phone, you may be able to erase your digital wallet using a remote wiping feature.
Transactions With Third Parties
Digital wallets enable merchants and other users to make payments through various convenient methods:
Online Merchant Payments
When shopping online, your digital wallet must be supported by the merchant. If accepted, you'll see it as a payment option at checkout. Click the wallet, log in, and select your preferred payment method to complete the purchase.
In-Store Merchant Payments
Physical store purchases require the merchant to support contactless payments. Digital wallets like Apple Pay and Google Pay work with near-field communication (NFC) terminals. To pay, hold your phone or smartwatch near the payment terminal. Some wallets also offer alternative payment methods, like QR code scanning.
Peer-To-Peer Payments
Sending money to another user depends on the specific wallet provider. You might transfer funds using:
- The recipient's username
- A scanned QR code
- An integrated messaging app
Each digital wallet has its own unique approach to peer-to-peer transactions.
What Else Can Digital Wallets Do?
As you shop around for a digital wallet, you’ll find that certain providers offer more than just secure payment processing. Below are additional features to consider.
Additional Storage
Some digital wallets let you store information beyond your payment methods. For example, with the Apple Wallet, you can add government IDs, boarding passes, transit tickets, event tickets, and keys.
Similarly, Google Wallet lets you add loyalty cards, gift cards, transit passes, and government IDs.
Financing
Digital wallet providers may provide you with a financing option for purchases. For example, Apple Pay offers pay-later providers like Affirm at checkout. As a result, you could make a purchase and split it up into payments over time rather than paying for it all at once.
Person-to-Person Payments
Some digital wallet apps let you send money to other wallet users to easily pay friends and family. For example, if your friend covers the bill at dinner, you could digitally send them your share from your wallet as you walk out.
Pay with Rewards
In addition to linking your payment methods, some providers link your rewards from those payment methods. For example, if you’ve earned $100 in cash back on a particular credit card, Apple Pay may let you use that reward to fund part or all of the purchase (online or in apps on the iPhone or iPad).
Types of Digital Wallets
Not all digital wallets work the same, although some categories do overlap. Here are the basic types of digital wallets:
Closed wallets: These are issued by a specific company for transactions within its ecosystem. Examples include the Starbucks app, Walmart Wallet, and Amazon Wallet.
Open wallets: Open digital wallets are issued by banks or financial organizations and can be used for transactions with many external establishments. Examples include Apple Pay, PayPal, Samsung Wallet, and Google Pay.
Mobile wallets: This refers to digital open wallets primarily accessed on smartphones. They often use NFC to enable payments at terminals. Examples include Google Pay, Apple Pay, and Samsung Wallet.
Web-based wallets: These are digital wallets primarily designed for online transactions in web browsers, although they may branch out and be compatible with multiple devices. Examples include PayPal and Skrill.
Wearable wallets: These digital wallets are accessible through wearable devices like Garmin Pay Wallet, Google Wallet on Fitbit, and Apple Pay on Apple watches. They often use NFC to enable payments at payment terminals.
Cryptocurrency wallets: Cryptocurrency wallets are digital wallets for storing and managing digital currencies. Examples include Coinbase and Trust.
Choosing Your Digital Wallet
Select the right digital wallet by considering:
- Usage location: Identify where you'll primarily use the wallet (online, in-store, or specific retailers).
- Payment methods: Check compatibility with your preferred credit cards, debit cards, and bank accounts.
- Device ecosystem: Match the wallet to your existing devices. For example, Apple users will use Apple Pay, and Fitbit users can consider Google Wallet.
- Retailer specifics: Explore closed wallets from frequently visited stores like Starbucks or Walmart for additional benefits
The best digital wallet should seamlessly integrate with your lifestyle, devices, and shopping habits.
Virtual Wallets vs. Online Banking Compared (Pros and Cons)
Virtual wallets and online banks have important differences that make them useful for unique purposes. Below are the main advantages and disadvantages of each.
Virtual Wallet Pros and Cons
Pros:
- Multiple payment methods: You can store multiple payment methods in one place, including credit cards, debit cards, bank accounts, and more.
- Convenience and speed: Allows quick transactions online and in-store with contactless payments.
- Enhanced security: Uses biometric authentication, tokenization, and encryption to protect payment details.
- P2P payments: Some providers allow instant money transfers between users.
- Diverse storage: Some wallets store IDs, boarding passes, tickets, digital keys, and more in addition to payment methods.
Cons:
- Limited merchant acceptance: Not all merchants accept every digital wallet.
- Dependent on devices and internet: Requires a smartphone, smartwatch, or other compatible device.
- Potential for account freezes: Some digital wallet providers (e.g., PayPal) can freeze accounts for security reasons.
- Limited banking features: Doesn't replace traditional banking services like direct deposit, check writing, or cash withdrawals.
- Transaction fees: Some wallets charge fees for certain transactions, such as instant transfers.
Online Banking Pros and Cons
Pros:
- Full banking services: May offer a variety of accounts and services, such as checking accounts, savings accounts, loans, and investment options.
- Direct deposits and bill pay: Users can receive paychecks, make purchases, and schedule bill payments.
- Interest earnings: Many online banks provide interest on the money you keep in your accounts.
- FDIC insurance protection: Funds are typically insured up to $250,000 in case of bank failure.
- ATM access and debit cards: You can use a debit card to withdraw cash from ATMs or make purchases.
Cons:
- Slower transactions: Unlike instant wallet payments, Bank transfers (ACH) can take one to three business days.
- Limited security on card payments: Using a debit card directly exposes account details to merchants.
- Fees for certain services: Some banks charge monthly, overdraft, or international transaction fees.
- Less flexibility for small transactions: Sending small amounts to friends (like splitting a bill) is often easier with a digital wallet.
Bottom Line
A bank account can serve as a home base for your financial life, offering a secure and insured place to store your earnings. Online banks, in particular, can be appealing because their lower overhead costs often translate into reduced fees and better interest rates.
However, regularly using your debit card with merchants can expose your attached bank account to security risks. By linking your bank account to a digital wallet, you can enjoy the best of both worlds—the benefits of a bank account with the security and convenience of a digital wallet.
Frequently Asked Questions
1. What is a virtual wallet?
A virtual wallet (also called a digital wallet or e-wallet) is an app or online service that stores your payment methods, loyalty cards, and sometimes even identification digitally. It allows you to make secure transactions online and in-store without needing physical cards or cash.
2. How is a virtual wallet different from online banking?
They overlap in some features but serve different purposes.
Virtual wallets are focused on making payments and storing card information digitally.
- Online banking gives you full access to your bank account—such as checking balances, transferring funds, paying bills, and managing savings.
3. Do I need a bank account to use a virtual wallet?
In most cases, yes. Virtual wallets usually connect to your debit or credit card, which is tied to a bank account. However, some wallets allow you to receive and hold funds directly without a traditional bank account.
