The wallets are more secure than physical cards, but they are still vulnerable
Chances are that you've heard of services like Apple Pay, Samsung Pay, and Android Pay. But how much do you really know about them?
They're known as digital wallets. Most smartphones—as well as smart watches—now have this feature installed. Paying with a digital wallet is usually faster and easier than paying with a card or cash.
But not everyone is sold on this method of payment. While it certainly isn't perfect, it's a good idea to know as much as possible before rejecting the idea completely.
How Digital Wallets Work
Digital wallets contain a payment app like Apple Pay or Samsung Pay. To make a payment, these apps use technology already present in your smartphone or watch called near field communication (NFC). This technology lets information pass between your device and a compatible payment terminal at the retailer when the device and the terminal are close together (usually a few centimeters apart).
Paying is simple. Either hold the device close to the terminal or tap it at the store's check-out reader. Keep in mind that not every retailer has NFC technology yet, but many major ones have adopted it.
Facts about Digital Wallets
There are a couple of facts you should know about digital wallets before you use them:
- They're more secure than your debit or credit card
- Digital Wallets Can Do More than Pay
Many people hesitate to use a digital wallet because they believe it isn't secure. No one wants hackers to have access to their financial information! The reality, however, is that they are actually more secure than your debit or credit card.
First, anyone who hacks a store's payment system will not be able to access your data if you pay with a digital wallet. Every transaction you make gets a random and unique transaction number rather than your bank account or card number.
In addition, your account information is encrypted using a method called tokenization. This means that a token—a set of random letters and numbers—is created to stand in for your account or card number.
It is the token that is used to complete the transaction. It stays "locked" until it gets to the payment processor, which "unlocks" it to see your account or card information. The retailer never sees anything but the token.
Digital wallets also include other security features. You may have to enter a password or even use a fingerprint in order to approve the transaction. Otherwise, it won't go through.
And if your account or card information is ever somehow stolen or lost, financial institutions can send a new one to your phone right away instead of making you wait days while a new card goes through the mail. You can also lock your digital wallet remotely if your device itself is ever lost or stolen.
However, this does not mean that digital wallets are completely secure. Like debit and credit cards, they are open to fraud. As technology improves, so will hackers trying to get around established security features. If you use a digital wallet, use common sense and take precautions.
Digital wallets include many useful features, including:
- Payments and cards, such as peer-to-peer payments, contactless cards, and services based on electronic payments
- Coupons and loyalty programs
- Tickets and transport items, such as boarding passes and concert tickets
- Access items and keys, such as car keys, hotel access cards, and door keys
- Identity services, such as employee IDs, driver's licenses, and passports
Though they aren't perfect, digital wallets offer a convenient and relatively secure alternative to physical payment cards.
Source: Fidelity Investments: "Three Reasons to Use a Digital Wallet," Due: "Time to Consider a Digital Wallet," Entrepreneur: "Your Concerns About Using Mobile Payment Are Valid," NerdWallet: "Credit Card Tokenization: Here's What You Need to Know"