What is a digital wallet

Digital Wallets 101: What are digital wallets and their key functionalities?

Welcome to our series of blog posts dedicated to digital wallets. Every month we will publish a piece of content exploring their marvelous world and providing you with useful information on how to build your own digital wallet and choose the right go-to-market strategy.

But let’s start from the very beginning and dive into digital wallet’s history, purpose, key features, and functionalities.


What is a digital wallet?

Digital wallets are exactly what they sound like – a digital version of your regular wallet. They allow you to store, send and receive money, make payments as well as store other important information like e-vouchers, passwords, and various documents.

At their core, digital wallets are software programs usually designed as mobile applications. Their main purpose is to challenge the banking industry by easing the payment process and providing an alternative for the unbanked and underbanked population.





There are different opinions on what to be considered as the beginning of the digital wallet revolution. Some see Coca Cola’s vending machines, which the company distributed in Helsinki in 1997, as the predecessors of modern e-wallets. The machines allowed customers to pay for their drinks via SMS, which was one of the first mobile payments.

Others dub PayPal’s financial services the first available e-wallet.

Third sources acknowledge Google’s e-wallet from 2011 as the first digital wallet.

It doesn’t really matter what people consider as the first digital wallet. What matters is that they are here to stay. So, let’s look into the different types of e-wallets.


Types of digital wallets

E-wallets can be used for various types of transactions but based on their limitations, they are divided into three main types:

Closed wallets

Closed digital wallets are issued usually by big brands (e.g. Walmart Pay) and are restricted only for transactions and payments at the brand’s physical and online stores. They are a good way for maintaining customer loyalty by offering discounts and promotions when paying with the e-wallet.




Semi-closed wallets

A good example of a semi-closed wallet is Amazon Pay. Semi-closed wallets can be used online in a closed network of merchants that have agreed to accept payments made with the e-wallet. Users cannot make payments elsewhere and cannot withdraw or transfer money.


Open wallets

This type of wallet is issued by banks or bank-backed institutions and allow their customers to perform a wide range of transactions including ATM withdrawals. Additionally, customers are able to send money directly to other users with the so-called peer-to-peer (P2P) transactions.

A great feature that open wallets have is the creation of virtual and disposable virtual cards that can be used for payments in online stores and websites. The disposable virtual cards are usually used for one-time payments as an extra security measure. After paying with such a card, it disappears, and the card details are no longer active.


Crypto wallets

Crypto wallets may not fall into this categorization, but we think that they should be mentioned as another type of e-wallets. Depending on their specifications, they allow their customers to store, exchange and trade with cryptocurrencies.


How e-wallets work

As mentioned above, digital wallets are applications that users install on their computers or mobile phones. After installing the application, the customers create an account where they connect their credit or debit cards by entering the card details, which then get encrypted.

For the next step, the user should successfully pass the KYC verification process to activate and use the digital wallet. Fortunately, technologies have developed to the extent that now a KYC check can be done in a matter of a few hours.




But when it comes to payment processing, e-wallets use some of the following technologies:

QR codes

Maybe the less used technology by digital wallets to process payments is the QR code. They are more often used by merchants to request payments, but the other way around is also possible. E-wallet users can generate a QR code that allows them to use their accounts to make payments.


Magnetic Secure Transmission (MST)

The second most common technology is the MST. It generates a magnetic signal similar to the one used when customers swipe the magnetic stripe on their payment cards. The signal is then transmitted to the merchant’s POS terminal.


Near Field Communication (NFC)

NFC is the most common technology used by digital wallets to process payments. To make a payment the two devices should be placed close to each other in order to exchange the needed information. To use this method both devices should have the NFC feature available. Some examples of digital wallets that use this technology include Google and Apple Pay.


E-wallets’ functions

Digital wallets can have different functionalities depending on the service provider and customer needs. But here are some of the most common actions that you can use your digital wallet for:

  • Peer-to-peer payments – P2P payments are becoming more and more popular as they allow customers to send money to other users in their network directly with just the click of a button and without any additional fees. It is one of the fastest, easiest, and most convenient functions that a digital wallet can offer.





  • Budget planner – This is another great functionality of digital wallets, as it offers their users to plan, schedule and optimize their monthly budgets as well as make forecasts on upcoming bills and unexpected spending.


  • Voice payments – Although voice payments aren’t still a thing, it is expected their usage to quadruple in the upcoming years especially among young adults in the USA. With the advancement of voice search technologies, voice payments will sure be the next big trend.


  • Custom notifications – Users can receive notifications from the app, but they can also set custom notifications and alerts for specific events, e.g., when reaching their budget limits.


  • Savings – Digital wallets can be used as digital vaults where users can store their savings, as well as set deadlines for reaching a specific amount and incorporate recurring savings on a weekly or monthly basis.


  • Geolocation – This technology helps users find the nearest ATMs, bank offices, and some wallets can even give information on how much cash there is in the ATM.




Benefits of digital wallets

There are multiple advantages of using digital wallets. Some of the most important ones include:

  • Convenience – E-wallets give their user the convenience of carrying just their phones and nothing else with them.


  • Little to no costs – There are little to no costs of using digital wallets. Most if not all of the service providers offer free plans, which are characterized by low or no transaction fees, and it actually turns out to be cheaper than using your bank card directly.


  • Contactless – Contactless payments are the new big trend, and it is forecasted that they will become the main payment method. That’s why e-wallets have an advantage over other payment methods.


  • Rewards – The wallets can be used to earn bonus points, discounts and other customer loyalty programs, which are beneficial for both the users and the merchants.


  • Actionable data – Users can keep track of their spending and adjust their monthly budgets accordingly so that they can save money more easily. Who doesn’t want to be able to save money?


What’s next

We have covered a lot in the first article from our Digital Wallets 101 series, but there is still a lot that we can discuss. Stay tuned for our next piece of content, where we will talk about what the present and the future of digital wallets look like.


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