What Is a Mobile Wallet? Pros and Cons You Need to Know

There’s an alternative to carrying a bulging leather wallet stuffed with receipts and cards. Mobile wallets (also known as digital wallets) provide an electronic method of corralling credit cards, digital ID cards, loyalty cards, membership cards, and of course, money.

Nearly 60% of Americans use a mobile wallet, according to FedNow, an instant payment processor developed by the Federal Reserve. Friends and family can send money to a mobile wallet, or you can use it to make payments at a store or online. You can track your spending with a mobile wallet, use it to transfer funds securely, and store electronic concert tickets and boarding passes.

But what exactly is a mobile wallet? And how does it work? Learn more in our guide below.

Key takeaways

• Mobile wallets are an electronic way of storing payment methods on your smartphone.
• When you download a mobile wallet app and link your bank account or credit card, you can send and receive payments, transfer money, and shop online and in-store using your mobile device.
• Mobile wallets are convenient and secure, but they require a mobile device and regular internet access, and they’re not always accepted as a payment method everywhere.

How does a mobile wallet work?

A digital wallet is a way of linking your smartphone or other mobile device to a payment system. It’s a convenient way to shop, spend, pay, and transfer money.

For instance, you can use the funds in your mobile wallet account to make purchases or pay others, and you can receive payments with most wallets, too. You can link your mobile wallet to your bank account or credit card, then pay for a purchase with a tap of your smartphone.

For a mobile wallet to be convenient as well as secure, it relies on a few important pieces of tech.

Tokenization

Tokenization is an encryption technology that essentially replaces your actual account numbers or card numbers with a bit of code called a token. When you use your mobile wallet to send or receive a payment, it’s the token that gets sent, not your sensitive information.

Biometric security

The biometric protection on your mobile device provides another layer of mobile wallet safety. It allows you to authorize transactions using your fingerprint or a scan of your face—two things not easily duplicated by would-be thieves.

Near-field communication (NFC)

Near-field communication is the technology that powers “tap-to-pay” purchases. By holding your device near a merchant’s NFC payment terminal, you can authorize a secure, encrypted transaction with your face, PIN, or fingerprint, no swiping required.

Types of mobile wallets

Mobile wallets come in three main types: open, closed, and semi-closed.

Open mobile wallets

An open digital wallet is one that you can use with a wide range of merchants. PayPal, Apple Pay, and Google Pay are open wallets. You can use these wallets to send and receive money, store payment information and cards, or transfer funds into and out of your bank account.

Closed mobile wallets

A closed digital wallet only works with one retailer or brand. A Starbucks wallet is one example of a closed mobile wallet. Amazon Pay and Walmart Pay are two other types of closed mobile wallets.

Semi-closed mobile wallets

Semi-closed wallets let you receive money from anyone, but the funds in your semi-closed wallet can only go into your bank account or be used to send money to others using the same service. Stripe and Square are two examples of semi-closed wallets.

Benefits of mobile wallets

People like mobile wallets for many reasons. Some of the benefits of using a digital wallet include:

• Convenience: Mobile wallets can hold all of your store loyalty cards, membership cards, boarding passes, concert tickets, credit cards, and payment information, keeping the info you need close at hand.
• Cashless transactions: A mobile wallet means you can travel light and leave your physical wallet and cash at home. When your wallet is your phone, you can breeze through the coffee line with a tap and without waiting for change. You can tip with your mobile wallet, too.
• Speed: If you need to send or receive money, you can do it in an instant using your mobile wallet. You can use it to pay your teen for mowing the lawn, split a restaurant bill with friends, or send money overseas to a family member in moments.
• Security: The digital technology underpinning a mobile wallet can reduce the risk of fraud, protecting your information and your money from scammers and criminals. When you make a payment using your mobile wallet, you know that the transaction is encrypted and your data is safe.

Limitations of mobile wallets

For all their benefits, mobile wallets have some drawbacks, too. Weigh the convenience against potential limitations, which can include:

• Smartphone required: You can’t use a mobile wallet if you don’t have a mobile device.
• Consistent WI-Fi a must: You might be able to pay in-store using your mobile wallet even if you have a weak signal or no internet access. However, you’ll need regular internet access if you want to update your transactions, shop online, and refresh your tokens for future transactions.
• Not always accepted: Many merchants accept mobile wallet payments, but not all. According to Apple, 85% of retailers accept Apple Pay. But that still means there are plenty of places that don’t, so you’ll need an alternative form of payment.
• Possible fees: Some mobile wallets impose a fee on transactions, especially if you use a linked credit card. For example, PayPal offers free person-to-person payments if you use your bank account or PayPal balance, but charges 2.9% to use a credit card.
• Cross-border limitations: Using a digital wallet for international money transfers is a convenient way to send and receive money from one country to another. However, some mobile wallets are limited to certain countries or regions. If you’ll be sending money abroad, make sure your mobile wallet and any linked cards allow international transactions.

Sending money to mobile wallets with Western Union

Western Union empowers your cross-border transactions. With the Western Union money transfer app, you can send money around the world directly to a bank account, to a Western Union location for cash pickup, or to a mobile wallet in participating countries.

Give friends and family fast, flexible access to funds when they need it, and receive money just as quickly.  Send money now in just a few taps.