Digital Wallets Explained: Benefits, Types, and Security Tips

Digital wallets are no longer a niche payment method. Instead, they’re quickly becoming the global standard for businesses and consumers. By 2026, over 60% of the worldwide population is expected to use digital wallets. The adoption is driven by technological advancements and needs across developed and emerging markets.

Like a virtual credit card, a digital wallet moves payments online, so you no longer have to depend on cash or credit cards. Digital wallets offer simplicity and convenience, enabling consumers to make faster, more secure transactions, while companies save time and money. 

This article explains what digital wallets are, how they work, and the various types available. You’ll also learn how businesses and consumers can benefit from these digital wallets and which digital wallet is best for your needs.

What is a digital wallet?

A digital wallet (or e-wallet) is a software-based system that securely stores your payment information and passwords, allowing you to make fast and contactless transactions on various devices.

Digital wallets streamline purchases by acting as a virtual version of your physical wallet. You can deposit money directly into your digital wallet or connect it to your bank, credit card, or debit card.

But digital wallets can do more than just handle e-payments. Many also store loyalty cards, boarding passes, digital ID cards, and even cryptocurrency. Some support biometric authentication (like facial recognition or fingerprint ID) to further enhance security and confirm your identity. 

How does a digital wallet work?

A digital wallet connects your stored payment information to merchants to perform secure and contactless payments. 

First, a digital wallet collects a user’s personal data, such as:

• Driver’s license
• Social security number
• Insurance data
• Loyalty cards
• Any other documents needed for identification

At checkout, your digital wallet communicates with the merchant’s point-of-sale system via near-field communication (NFC) or QR codes. The “tap to pay” action securely sends data from your device without needing to swipe your card or enter any payment details. 

Behind the scenes, digital wallets contain:

• Software that encrypts sensitive data (credit card numbers, passwords, IDs)
• Hardware that enables wireless data transfer (often built into mobile phones or smartwatches)
• A secure database for storing information such as:
  
  • Credit/debit card numbers
  • Loyalty cards and gift cards
  • Shipping and billing addresses
  • Contact and authentication details

Digital wallets can be used wherever the contactless payment symbol appears, whether in stores, apps, or on most e-commerce websites. 

To use a digital wallet, download your bank’s mobile app or use a trusted third-party digital wallet. Although digital wallets are most commonly used on smartphones, you can also access them via tablets and computers.

Types of digital wallets

Digital wallets come in several forms depending on the platform, use case, and level of accessibility. Below are the five main types of digital wallets:

Closed Wallet

A closed wallet is a proprietary digital wallet app developed by a company that sells goods and services. This type of mobile wallet can only be used to make transactions with its issuer via a mobile device or online checkout.

Refunds and returns are also stored directly in the wallet, streamlining in-app transactions and improving customer experience. Major retailers like Target use closed wallets to facilitate faster, contactless payments both in-store and online.

Semi-Closed Wallet

A semi-closed wallet allows users to make transactions at specific merchants and locations that have a contract with the issuer. Although you can’t withdraw cash, you can use semi-closed wallets for both in-store and online transactions.

A popular example is Zelle, which integrates directly with bank accounts and supports mobile payments without requiring a separate app login. It’s especially popular for P2P (peer-to-peer) digital payments.

Open Wallet

An open wallet is issued by or in partnership with a bank. With an open wallet, users can make any kind of transaction, including withdrawing cash from ATMs and transferring funds between financial institutions.

PayPal is one of the most well-known open wallets. It offers both a digital wallet and a physical debit card that supports NFC and biometric authentication, making it ideal for both consumers and businesses handling secure financial information.

Crypto wallet

A crypto wallet allows users to send, receive, and store cryptocurrencies like Bitcoin and Ethereum. To ensure privacy, a crypto wallet stores a user’s private keys, which give them access to their cryptocurrency coins that live in an online ledger known as a blockchain.

As more retailers accept crypto payments, platforms like Coinbase and Crypto.com are expanding their mobile app capabilities to include QR code support, multi-currency wallets, and authentication tools for better security.

IoT Wallet

An IoT wallet enables payments from wearable devices (like a smartwatch), appliances (like a smart home assistant), and other everyday objects (like a car with wireless connectivity).

For example, users can reorder items directly from a smart fridge or authenticate purchases via voice using facial recognition or a passcode.

Pros and cons of digital wallets for businesses and consumers

Digital wallets are a fast, secure, and user-friendly alternative to traditional payment methods. They offer time-saving benefits for both consumers and companies, especially for accounts payable teams and online sellers. However, they’re not without their drawbacks.

Pros of digital wallets

• Convenient for everyday use: With a mobile device, users can make purchases in-store, online, or in-app without carrying physical cards or cash. Many wallets use NFC or QR codes for quick tap-to-pay options.
• Stronger security features: Most digital wallets include encryption, biometric authentication (such as fingerprint or facial recognition), and tokenization, which hides card numbers from merchants.
• Clear transaction history: Digital wallet apps keep a full record of transactions. This can help users with budgeting, managing expenses, or tracking business purchases.
• Faster checkout experience: Digital wallets reduce friction during checkout, leading to higher conversion rates and happier customers.
• Rewards and loyalty integration: Users can store gift cards and loyalty cards directly in their wallet. This creates a more personalized shopping experience, encouraging repeat purchases.

Cons of digital wallets 

• Dependent on mobile devices: If your phone is lost, broken, or you forgot to charge it, you might not be able to access your digital wallet. Unlike a physical card, if you lose the information in your digital wallet, it could be a challenge to get it back. 
• Merchant limitations: Not all retailers accept digital wallets, and only a few, like Apple Pay or Samsung Pay, are widely supported.
• Greater investment for businesses: Switching to digital card payments often results in operational costs. Businesses will need to invest in new card readers, staff training, and updated payment software. 

Digital wallet vs. bank transfer: What’s best for global payouts

When companies need to send money across borders, they typically look at two main options: digital wallets and bank transfers. While each method has its benefits, the best choice really depends on the size, speed, and compliance needs of the payment.

Speed and Cost 

While digital wallets process payments on the same day, standard bank transfers can take anywhere from 1-5 business days, especially if they are international. Additionally, bank transfers are subject to SWIFT network fees or other intermediary bank charges. 

If a business mainly handles small, recurring payments, digital wallets might offer a better cost-efficient deal. However, for high-value, one-time transactions, some companies may choose to stick with bank transfers. 

Compliance and Security 

Many companies favor bank transfers because of their wide acceptance by compliance teams and how closely they follow financial regulations. While this is still true, digital wallets have come a long way in security. Some are even FDIC-insured when linked to U.S. bank accounts, adding peace of mind for businesses and recipients alike.

Flexibility and Accessibility

Digital wallets give businesses some flexibility when sending money internationally. Unlike standard bank transfers that require full account details, digital wallets can send funds to just an email address or mobile number. This makes them a great option for paying people in countries where access to traditional banking is limited. Wallets are also more accessible for freelancers or gig workers who don’t have a formal bank account.

With support for both local bank transfers and digital wallet-style mass payouts, Tipalti gives finance teams the flexibility to choose the right payment method for every scenario. Whether you’re paying global vendors or remote teams, the right tool depends on your specific goals and geographic footprint.

The best digital wallets

With so many digital wallets on the market, it can be tough to know which ones are worth using. The best options offer strong security, work across multiple devices, and make it easy to manage your payments. Below is a comparison of top digital wallets based on ease of use, versatility, and overall value.

Benefits of digital wallets for accounts payable

Accounts Payable teams are always searching for ways to operate more efficiently. Digital wallets often offer a faster and more flexible way to process vendor payments, making them a great choice for AP teams handling large payouts. 

Here are a few advantages your team stands to gain from using digital wallets:

Speed up vendor payments

Instead of waiting for days for vendor payments to process, digital wallets allow AP teams to send payments in minutes. These faster payments reduce the risk of late fees and unhappy vendors due to late payments. It’s ideal for paying freelancers or contractors in other countries who would otherwise need to wait for tedious bank transfers.

Cut down on transaction costs

Payments made through digital wallets typically cost less than those made via wire transfers, especially for smaller or more frequent transactions. These lower fees can help take your department’s budget further, especially for high-volume payouts.

Make global payments easier

Several digital wallets operate internationally and support multiple currencies. This makes it possible to send payments to vendors worldwide without the complex banking steps. There is no need for extra paperwork or waiting days for an international transfer to clear.

Improve payment security

Digital wallets help AP teams prevent fraud and protect sensitive financial data. They use tools like encryption, passcodes, and biometric logins, and only approved users can access funds or send payments.

Gain better visibility 

Digital wallet apps give you a bird’s eye view of all payments and transactions. Businesses can track outgoing payments as they happen, all from a single dashboard. This makes it easy to match payments to invoices and catch any discrepancies early on. 

Digital wallets and business payouts

For businesses, digital wallets are just one of many payout methods that need to be managed at scale. The real challenge is handling security, compliance, and global reach across all payment types, whether wallets, ACH, wire transfers, or prepaid cards.

Platforms like Tipalti help finance teams integrate digital wallets, like PayPal, into a unified AP workflow, ensuring speed, compliance, and flexibility without extra manual work.

For AP and finance teams, digital wallets are one part of a broader payout strategy. Learn how other leading global payment methods compare in our Comparing Top Global Payment Methods eBook.