What Are Digital Wallets and How They Work (2024)

Advancements in payment technology made it possible for businesses to sell online. Ever since the first digital payment was processed in the early ‘90s, technology has evolved even further—including the creation of digital wallets.

A digital wallet stores customers’ payment details and billing addresses in secure software. Customers can sign into their wallets and make purchases often with a single click, which is why they’re the preferred payment method for more than half of online shoppers.

Ignoring the popularity of digital wallets could cause you to lose customers. Some 11% of people abandon items in their shopping cart if their preferred payment method is unavailable. This article shares what digital wallets are and how they work, so you can decide whether to accept them on your ecommerce site.

What is a digital wallet?

A digital wallet is an electronic payment method that customers use to buy products virtually. People can store their credit card details in their device’s encrypted mobile wallet, such as Apple Pay or Shop Pay, and use their credit or debit cards to pay for goods. In most cases, the merchant doesn’t see these payment details since the digital wallet tokenizes payment data.

How digital wallets work

Digital wallets work by securely saving a customer’s credit card details in a secure vault. When the shopper goes to make a purchase through their device, they can open the app (or sign into their provider’s online account) and choose their stored details to make a purchase. 

If you’re accepting payments from digital wallets in-person through a point of sale system, the process differs slightly. The app will use one of the following technologies to process the payment from their mobile device:

  • Near-field communication (NFC): This technology can transmit payment information between two devices, like your customer’s phone (with their digital wallet app open) and your card reader, using low-speed radio.
  • Magnetic secure transmission (MST): Some payment providers, including Samsung Pay, use this technology instead of NFC. MST generates a magnetic signal that mimics the magnetic stripe you’d find on a physical card. Your card reader picks up the signal to gather payment information.
  • QR codes: Merchants can create a unique QR code that customers can scan using their smartphone camera to open a personalized cart. From here, the customer can retrieve payment details and use their digital wallet to pay for the goods.

Pros and cons of digital wallets 

If you’re debating whether to accept digital wallet payments for your business, here are some advantages that you’ll experience:

  • Limit cart abandonment: Digital wallets save a customer’s credit card and billing details, so customers can make purchases in a single click. This alone can recoup the 18% of people who abandon online shopping carts because the checkout process is too long or complicated.
  • Increase average order value: A report by PYMTS found that customers spend up to 33% more when they’re using a digital wallet. The AOV for a non-wallet sale was $33, compared to a digital wallet average of $44.
  • Reduce cash handling: Customers don’t need to hand over physical cash, nor carry their actual wallet, when paying for purchases with a digital wallet. This is a major advantage for retail stores since they don’t have to worry about protecting cash or checking for counterfeit bills when processing in-store payments

Bar chart showing how digital wallets are the payment type with the largest transaction growth worldwide. Digital wallet use is on the rise, as per PYMTS.

Despite these benefits, there are some drawbacks to consider when dealing with digital wallet payments:

  • Payment security: Although most digital wallets have two-factor authentication, biometric data (like facial recognition), and payment tokenization to protect cardholders from unauthorized use, it’s possible for fraudsters to hack a digital wallet and spend money from the connected credit card. A digital wallet is only as secure as the mobile device it’s being used on. 
  • Lack of adoption amongst older shoppers: Just 25.7% of Baby Boomers have a digital wallet compared to 80% of Gen Z shoppers and two-thirds of Millennials. 
  • Dependency on mobile wallet providers: Companies like Google, Apple, and PayPal can change their policies at any time. They can choose to increase transaction fees, limit reporting, or release new payment technologies with little warning, all of which can impact how you accept mobile payments.

How to choose a digital wallet provider

The advantages of accepting digital wallet payments often makes it an attractive payment option for your online store. It doesn’t make sense, however, to turn on every available option. This can trigger the paradox of choice: the idea that if too many options are presented to someone, it makes it harder to make a decision. That’s not the type of feeling you want to induce in shoppers at checkout.

Before toggling on every option, prioritize which digital wallet providers you should accept by evaluating:

  • Compatibility: Does your ecommerce platform allow you to accept the digital payment method for both online and in-person credit card transactions?
  • Fees: Some payment gateways offer discounts for digital wallet transactions. Check what these are before you opt into losing a portion of your revenue to payment processing fees.
  • Shopper location: This is especially important as you scale your business internationally. Certain payment methods are more popular in some counties than others. Alipay and WeChat Pay, for example, are the most-used payment methods in China, but they’re rarely used by shoppers outside of the region. 

Shopify Payments allows you to accept different payment methods on your online store. With competitive payment processing fees and the highest PCI compliance standards that keep sensitive data safe, turn on Shopify Payments and start accepting digital payments. 

Shopify Payments admin that shows a merchant accepting PayPal and Amazon Pay digital wallets. This online store accepts PayPal and Amazon Pay.

Digital wallet examples

There are several digital wallet providers that your customers are likely already using. Among the most popular digital wallets are:

  • Digital wallet apps like Shop Pay: More than 150 million customers use Shop Pay to save their payment information in a secure wallet so they can quickly checkout on any Shopify store.
  • Mobile wallets such as Apple Pay, Samsung Pay, WeChat, and Google Wallet
  • Peer-to-peer payment platforms like Venmo, PayPal, and Cash App 
  • Marketplace wallets like Amazon Pay and Alipay
  • Crypto wallets like Coinbase Wallet and MetaMask

Support digital wallets with Shopify Payments

You don’t need to overhaul your ecommerce infrastructure or enlist the help of specialist developers to accept digital wallet payments on your store. Shopify Payments is integrated on Shopify so you can choose the digital wallets that you’d like to accept on your checkout. 

If you’re still questioning “Are digital wallets safe?”, remember that Shopify Payments is certified PCI Level 1 compliant, the highest level of compliance in the payments industry. And in Europe, Shopify Payments is compliant with PSD2 regulation as well by supporting 3D Secure at checkout. It’s a great way to process not only digital wallets, but any payment method your customers prefer.

Start accepting payments fast with Shopify Payments

Skip lengthy third-party activations and go from setup to selling in one click. Shopify Payments comes with your Shopify plan, all you need to do is turn it on.

Discover Shopify Payments

Digital wallet FAQ

What is a digital wallet and how does it work?

A digital wallet is an online payment tool that allows people to securely save their payment details and shipping information. It works by encrypting the data stored in the wallet so that it’s protected from hackers. When used in-person, digital wallets rely on near-field communication to securely transmit the data from a credit or debit card reader to a payment terminal.

Is Google Pay a digital wallet?

Google Wallet, formerly known as Google Pay, is a digital wallet. Anyone with a Google account can save their credit card information in the secure digital wallet to make purchases on a smartphone, tablet, or computer.

What is my digital wallet on my phone?

A digital wallet, also known as a mobile wallet, is a mobile app that securely stores payment details. You can use a digital wallet to make electronic or contactless payments from your smartphone without having to manually type out your card details each time you buy something online.

Is PayPal a digital wallet?

PayPal is a free digital wallet that allows shoppers to save their payment and billing details inside a secure PayPal account.

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