Cashless and contactless payment options have been on the rise for years, spurred by the COVID-19 pandemic. Hand-in-hand with these options, digital wallet apps and services have also increased in popularity. An estimated 60% of the global population — 5.2 billion people — will be using digital wallets by 2026, according to a 2022 study from the data analytics group Juniper Research. As digital wallets have become more widespread, are they viable replacements for bank accounts? Here’s what you need to know.
What is a digital wallet?
A digital wallet is an application or service — typically on a smartphone — allowing users to store debit and credit card information and passwords. Some digital wallets can also store electronic tickets, passes, gift cards and personal identification cards, said Francisco Alvarez-Evangelista, advisor at the financial analysis company Aite-Novarica Group, by email. PayPal, Apple Wallet, Google Wallet and Samsung Wallet are some examples. Though you may lean toward using whatever app is associated with your smartphone, you can also download other digital wallet apps.
There is also some crossover between digital wallets and payment apps such as Venmo since many of these apps have begun to offer many of the same features, like peer-to-peer money transfers and special branded credit cards, as well as the ability to store a cash balance in the app. In some cases, such as when paying for an item or service, the terms “digital wallet” and “payment app” could be used interchangeably.
Can I use a digital wallet instead of a bank account?
You can use a digital wallet instead of a bank account, but there are some significant caveats to consider.
A digital wallet is essentially a collection of your payment cards in one place, but it could also be a place to keep cash, such as your Apple Cash or Venmo balances. This tactic has some downsides, namely that you don’t earn interest, and the Federal Deposit Insurance Corp. might not protect your funds. Some exceptions exist; Venmo, for example, takes funds directly deposited or deposited through the “cash a check” feature and sweeps them into partner bank accounts so that customer funds can be FDIC-insured. As far as interest goes, however, you’re more likely to earn a good return on your money by putting it into a high-yield savings account instead, where interest rates have been increasing.
“While it is possible to replace a bank account with certain digital wallets, most consumers have banking needs that exceed what most digital wallets today offer,” Alvarez-Evangelista said. “While not all digital wallets are the same, most consumers look to digital wallets to augment their financial experiences online.”
A mix of digital wallet apps and bank accounts might meet your needs better than using one alone since you might need different apps when sending money to different people. Also, if you have credit cards compatible with specific digital wallet services — such as the Apple Card or the Venmo credit card — then having the companion app can lead to additional benefits, like bonus cash back.
How to use a digital wallet
Open or download the app. If your mobile device has a built-in wallet, e.g., the Apple Wallet on an iPhone, you may want to explore the app to see if it suits your needs before downloading another app. If you’d prefer to use another service, perhaps to pay a merchant at a farmers market that only accepts a specific app, you can download a new one.
Create a profile and add your payment info. Your app should walk you through the setup process, where you’ll create a user profile. After your profile has been set up, you should be able to link different debit cards, credit cards and bank accounts to the app. Your app may also allow you to hold a money balance in the app, similar to a bank account, in that you’ll be able to add to it and withdraw from it.
Use your smartphone to make contactless transactions. If you’re using a smartphone digital wallet, your phone will be able to be “tapped” at a payment terminal, using near-field communication for the transaction to go through as the two electronic devices trade payment information.
Consider whether you want to maintain a balance in your wallet. As mentioned above, a digital wallet might not be the best option for storing liquid cash, especially not large amounts. However, having a small balance available can be helpful when you need to send money to friends or family on the fly, such as to pay for your share of a dinner tab. You can also link payment cards or bank account information if you don’t want to pay from your app balance.