Virtual Wallets Explained – How They Work And How Safe Are They

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Virtual Wallets Explained - How They Work And How Safe Are They


When my husband started using a virtual wallet, I was concerned. We share a joint credit card and I was bothered about the security side of carrying around credit card information on a cell phone. In my mind, paying for things with your cell phone seemed too easy and a bit dangerous.

Through a combination of reassurance from my husband and a significant number of Google searches on “are virtual wallets safe,” I began to feel more comfortable with the idea. 

I know I’m not alone when it comes to questions about the safety of virtual wallets. So, let’s talk about it. What are virtual wallets and, most importantly, are they safe?

What are virtual wallets?

Are Virtual Wallets Worth It? And Are They Safe? - What are virtual wallets?

A virtual wallet, sometimes referred to as an e-wallet, is an electronic wallet that lives on your mobile device. Virtual wallets can store all of your payment-related information including credit cards, debit cards, rewards cards, membership cards, and coupons, allowing you to pay for things electronically. No more trucking around your bulky wallet or disorganized purse. 

Depending on the type of mobile device you use, you may have a virtual wallet already installed on your phone. For instance, iPhone users will have access to Apple Wallet. Other virtual wallets can be obtained by downloading an app onto your mobile device.  

Virtual wallets vs. mobile wallets

The terms virtual wallets and mobile wallets are often used interchangeably. However, there is a difference. A mobile wallet is a type of virtual wallet that can be accessed by downloading an app on a mobile device like a smartphone or wearable watch. 

A popular example of a virtual wallet is PayPal. However, when PayPal is used on a mobile device it can function as a mobile wallet. 

Popular examples of mobile wallets include Apple Pay, Samsung Pay, and Android Pay. 

Banks like Chase, even offer digital wallets. With Chase accounts, you can get Chase Pay®, which allows you to simply and securely use your phone to make payments.

What are the most popular virtual wallets?

Are Virtual Wallets Worth It? And Are They Safe? - What are the most popular virtual wallets?

There are a variety of virtual wallets available for you to choose from. Some of the most popular virtual wallets include:

  • Samsung Pay.
  • Apple Pay.
  • Android Pay.
  • Chase Pay.
  • PayPal.
  • Google Wallet.
  • Venmo.
  • Zelle.

You can also check out wearables that offer mobile payment options like Garmin Pay and Fitbit Pay. 

From a global perspective, virtual wallets like Alipay and WeChat Pay which are both based in China, service millions and millions of users.  

How do I use a virtual wallet to make a payment?

While each virtual wallet will vary, there are some general steps associated with using an e-wallet. 

The first thing you’ll need to do is launch or install a virtual wallet app. Next, you will have to add a new credit card or debit card. To do this you can take a picture of your card or enter the details manually. 

When you’re ready to make a payment, you will launch the app and then choose the credit or debit card you want to use.

When it comes to actually making the payment, most smartphones use a technology called near field communication (NFP). NFP allows you to simply hold your phone above the payment pad or tap the payment pad to pay for your purchase. 

However, not all mobile devices are equipped with NFP. In this case, you can use a mobile wallet like PayPal. Instead of tapping your phone onto the pay pad, you use your mobile phone number and a pin to make your payment.  

Are virtual wallets safe?

Are Virtual Wallets Worth It? And Are They Safe? - Are virtual wallets safe?

When I heard about virtual wallets my first question was, are they safe? It seemed a bit risky to be carrying around all of my payment information on my phone. I mean, what if I lost my phone? Then what? Could someone hack in and access my virtual wallet?

It was this fear and lack of trust that prevented me from using a virtual wallet for a long time. However, virtual wallets are arguably even safer to use than your regular plastic credit or debit cards. 

First, digital wallets eliminate the potential to expose important information like your credit card number, your pin, or the CVV number on your credit card. When you pay for something with your digital wallet it uses a process called “tokenization.” This means that your sensitive info (like credit card numbers) is removed and replaced with a one-time-use number that is generated by an algorithm. So, none of your sensitive data is ever made public in any way. Unlike when you swipe or tap a credit card. 

Second, all of your payment information is encrypted. When you add a new debit card or credit card to your virtual wallet the information is encrypted and stored in the cloud. Even if someone steals your phone they would need your fingerprint or your passcode to access your virtual wallet. 

On the other hand, if you drop your wallet somewhere or get pickpocketed, your credit cards can be easily used and the information can be stolen. 

Is it easier for hackers to access your virtual wallet vs. your credit/debit card?

While no payment option is 100% hacker-proof, a physical credit card is much more susceptible to being hacked than a card in your virtual wallet. As I mentioned above, digital wallets provide multiple layers of security that aren’t present when it comes to your plastic credit card. 

A physical credit card presents more opportunities for thieves or hackers to get your information. If someone steals your credit card they can easily make a purchase online, or even in a store as many merchants don’t confirm that you are the actual cardholder. 

A virtual wallet requires a more intense authentication process that involves a password or proof from a biometric marker (fingerprint, retinal scan). Not to mention that you have to be able to unlock the phone before you can even gain access to the virtual wallet. There are simply more security steps involved. 

If you believe that your virtual wallet has been compromised or you’ve lost your phone, it’s easy to suspend all payments. For instance, with Apple Pay, if you put your phone into lost mode, it will automatically suspend all of your payment cards. This is much easier than having to call up each bank or financial institution to cancel your cards if you lose your physical wallet. 

Additionally, when you use a virtual wallet on your phone you also have the option of installing apps that will help you to locate your phone. So, if it is stolen the thief will have to figure out how to open your phone, won’t be able to authenticate, and you will be able to track their location. 

Is the money in your virtual wallet FDIC insured?

Are Virtual Wallets Worth It? And Are They Safe? - Is the money in your virtual wallet FDIC-insured?

The Federal Deposit Insurance Corporation (FDIC) has been around since the 1930s. It’s their job to ensure stability and public confidence in the financial system. The FDIC insured all deposit accounts including checking, saving, money market deposit accounts, and certificates of deposit up to a standard amount of $250,000 per depositor, per insured bank. 

When it comes to whether or not your virtual wallet is FDIC insured the answer is a bit murky. However, as a rule of thumb, if your money is stored within a non-banking institution then the money is not insured. For instance, PayPal and Venmo are not considered banking institutions, so any money stored in these apps is not FDIC insured. There are some exceptions including Google Wallet. According to Yahoo Finance!, as of 2015 money stored in Google Wallet became FDIC insured. 

Before you assume that any funds stored in your mobile wallet are FDIC insured, make sure you thoroughly investigate.

The pros and cons of virtual wallets

Pros:

  • Security. Despite my initial reservations about the security of virtual wallets, security is actually one of it’s biggest benefits. Because virtual wallets eliminate the need to use credit card numbers, CVVs, or pins, it makes them impervious to hacking.
  • Convenience. With a virtual wallet, you no longer have to carry around a wallet or a purse. You will also never have to worry about forgetting a particular credit card or rewards card at home because they are all nicely organized on your phone.  
  • Time-saving. Paying with a virtual wallet can also save you time. No more waiting for a salesperson to swipe your card or enter your number. 
  • Contactless payment. Many virtual wallets eliminate the need to touch the germy buttons on a debit machine or pass your credit card from your hand to the merchant. It makes for a clean and touchless payment experience. 

Cons:

  • Not universally accepted. One of the main challenges associated with using virtual wallets is that they aren’t accepted by all retailers.
  • Compatibility. Not all virtual wallets will accept all credit cards. While most mobile wallets are accepted by the big banks, some business credit cards might not be accepted. You can check with your bank or log onto the mobile wallet website to confirm which cards are accepted.
  • Trust. As I admitted, a lack of trust was the reason I put off using a virtual wallet. And, I know I’m not alone. While virtual wallets offer additional security over a credit card this is not necessarily the shared perception among all Americans. 
  • Battery. Unlike a conventional purse or wallet, your phone requires battery power to be used. If your phone runs out of batteries while you’re shopping, you can’t make a purchase until you recharge. 
  • Variability. Not all virtual wallets will allow you to store all of your card information. For instance, some e-wallets will permit debit and credit cards only while others will permit everything from credit cards to reward cards and airline tickets. 

Who should use a virtual wallet?

Are Virtual Wallets Worth It? And Are They Safe? - Who should use virtual wallets?

Virtual wallets are available to anyone with a desktop or mobile device. However, when it comes to whether or not you should use a virtual wallet there are a few questions you can ask yourself to decide if it’s right for you. 

Do you want to increase your security?

Virtual wallets provide additional security features that just aren’t available for plastic debit or credit cards. If you want encryption and multiple steps of authentication, then perhaps a virtual wallet is the right choice. 

Do you value time savings and convenience?

If you enjoy online shopping, virtual wallets can save you a lot of time when it comes to paying for your purchases. No more time wasted on manually entering your credit card number, expiration date, and CVV code. I mean, we’re not talking days or weeks in time savings, but a few minutes here and there adds up over the long haul.

Are you always looking for your credit card?

A virtual wallet provides a single organized location for all of your payment information. So, if you’re someone who is constantly leaving your credit card in your coat pocket or forgetting to bring your rewards cards when you go shopping, a virtual wallet could help to keep you more organized. 

Who shouldn’t use a virtual wallet?

While virtual wallets offer a number of perks, they aren’t necessarily the right payment tool for everyone. Here are a few additional questions to ask yourself to see if perhaps a regular old wallet or purse is a better option for you. 

Do you feel comfortable with a virtual wallet?

While virtual wallets are growing in use, there is still a segment of Americans that don’t trust them. If you feel uncomfortable or unsafe using a virtual wallet then you shouldn’t. While virtual wallets are arguably safer than using a physical credit card or debit card, you should stick to using what you feel most comfortable with. 

Are you very concerned with your privacy?

While a virtual wallet can add some additional security over a plastic credit or debit card, it also introduces some new privacy concerns. When you use your virtual wallet, retailers and financial institutions can potentially collect data on the types of purchases you are making. This can then be used to help retailers develop targeted marketing. I mean, this is already happening if you are using social media, but it’s something to be aware of. 

Do you continually forget to charge your mobile device?

If you are notorious for walking around with a dead smartphone then maybe you should skip the virtual wallet. Bottom line, if your phone is dead you can’t pay for things. 

Summary

Like any technology available for use, virtual wallets come with pros and cons. You will have to decide if the added security features and convenience outweigh any trust or privacy concerns that you might have. 

It took me some time to become comfortable with the idea of using a virtual wallet. I was not one of the early adopters. I’m an old Millennial and I’ve been using physical debit and credit cards for decades. As a result, it took a lot of research and just trying it before I saw the perks. For me, the benefits outweigh the risks. But, it’s up to you to decide if a virtual wallet is right for you.

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