A digital wallet refers to an electronic device that allows an individual to make electronic transactions. This can include purchasing items on-line with a computer or using a smartphone to purchase something at a store. An individual's bank account can also be linked to the digital wallet. They might also have their driver’s license, health card, loyalty card(s) and other ID documents stored on the phone. The credentials can be passed to a merchant’s terminal wirelessly via near field communication (NFC). Increasingly, digital wallets are being made not just for basic financial transactions but to also authenticate the holder's credentials. For example, a digital wallet could verify the age of the buyer to the store while purchasing alcohol. The system has already gained popularity in Japan, where digital wallets are known as "wallet mobiles". A cryptocurrency wallet is a digital wallet where private keys are stored for cryptocurrencies like bitcoin.
A digital wallet has both a software and information component. The software provides security and encryption for the personal information and for the actual transaction. Typically, digital wallets are stored on the client side and are easily self-maintained and fully compatible with most e-commerce Web sites. A server-side digital wallet, also known as a thin wallet, is one that an organization creates for and about you and maintains on its servers. Server-side digital wallets are gaining popularity among major retailers due to the security, efficiency, and added utility it provides to the end-user, which increases their satisfaction of their overall purchase. The information component is basically a database of user-input information. This information consists of your shipping address, billing address, payment methods (including credit card numbers, expiry dates, and security numbers), and other information.
Digital wallets are composed of both digital wallet devices and digital wallet systems. There are dedicated digital wallet devices such as the biometric wallet by Dunhill, where it's a physical device holding someone's cash and cards along with a Bluetooth mobile connection. Presently there are further explorations for smartphones with NFC digital wallet capabilities, such as the Samsung Galaxy series and the Google Nexus smartphones utilizing the Google's Android operating system and the Apple Inc. iPhone 6 and iPhone 6 Plus utilizing Apple Pay.
Digital wallet systems enable the widespread use of digital wallet transactions among various retail vendors in the form of mobile payments systems and digital wallet applications. The M-PESA mobile payments system and microfinancing service has widespread use in Kenya and Tanzania, while the MasterCard PayPass application has been adopted by a number of vendors in the U.S. and worldwide.
Digital wallet is being used more and more in Asian countries as well. One in five consumers in Asia are now using digital wallet representing twofold increase from two years ago. A recent survey by MasterCard’s mobile shopping survey shows on 8500 adults aged 18–64 across 14 markets showed, 45% users in China, 36.7% users in India and 23.3% users in Singapore are the biggest adopters of digital wallet. The survey was conducted on between October and December 2015. Also analysis showed (48.5%) consumers in these regions made purchase using smartphones. Indian consumers are leading the way with 76.4% using a smartphone to make purchase which is a drastic increase of 29.3% from previous year. This has made companies like Reliance and Amazon India to come out with its own digital wallet. Flipkart has already introduced its own digital wallet.
The trade off is that the third party is responsible for maintaining the integrity of your wallet and keeping secret the private keys – you need to trust them as they could just run off with the money – and typically there is no Government-based insurance like the FDIC scheme to guarantee deposits, though Robinhood and Coinbase are two exceptions.
Online web wallet providers are creating their own ecosystem – they are vertically integrated sometimes and offer both trading and storage options – such as Coinbase. This raises the issue of anonymity as wallet holders and exchanges generally are being pushed to hold documentation about users to combat AML and KYC (know your customer) financial regulations – especially in America. This can mean that at the simple request of the US Government a full list of personal information can be obtained – cryptocurrency expenditures on these platforms are not anonymous.
There have been numerous cases where certain online hosted wallets or cloud wallets have been compromised – the most famous example being Mt. Gox followed by Bitstamp and Mintpal amongst others. These generally come about through security flaws which can either be through technological problems or through mis-management and internal issues. Examples of this is where third party contractors have used their internal knowledge of exchanges to leach funds and where external coders have managed to breach internal systems crediting their balances, which were subsequently sold off and removed.
The advantages of web wallets – apart from the general simplicity – is the ability to bundle transactions together before pushing them onto the blockchain and therefore lowering transaction fees. They can also perform internal transfers for zero fees as an attraction to pull in customers and increase their user base – a bitcoin ecosystem within the bitcoin ecosystem – again coinbase is the perfect example of this, whilst offering wallet, exchange and Point of Sale services – they have garnered a very large market share pushing other payment services such as Bitpay to adopt the same strategy and vertically integrate into wallet services from Point of Sales and exchange provision. 
Payments for goods and services purchased online
A client-side digital wallet requires minimal setup and is relatively easy to use. Once the software is installed, the user begins by entering all the pertinent information. The digital wallet is now set up. At the purchase or check-out page of an e-commerce site, the digital wallet software has the ability to automatically enter the user information in the online form. By default, most digital wallets prompt when the software recognizes a form in which it can fill out; if one chooses to fill out the form automatically, the user will be prompted for a password. This keeps unauthorized users away from viewing personal information stored on a particular computer.
Digital wallets are designed to be accurate when transferring data to retail checkout forms; however, if a particular e-commerce site has a peculiar checkout system, the digital wallet may fail to properly recognize the form's fields. This problem has been eliminated by sites and wallet software that use Electronic Commerce Modeling Language (ECML) technology. Electronic Commerce Modeling Language is a protocol that dictates how online retailers structure and set up their checkout forms. Participating e-commerce vendors who incorporate both digital wallet technology and ECML include: Microsoft, Discover, IBM, Omaha Steaks and Dell Computers.
Application of digital wallets
Consumers are not required to fill out order forms on each site when they purchase an item because the information has already been stored and is automatically updated and entered into the order fields across merchant sites when using a digital wallet. Consumers also benefit when using digital wallets because their information is encrypted or protected by a private software code; merchants benefit by receiving protection against fraud.
Digital wallets are available to consumers free of charge, and they're fairly easy to obtain. For example, when a consumer makes a purchase at a merchant site that's set up to handle server-side digital wallets, he types his name and payment and shipping information into the merchant's own form. At the end of the purchase, the consumer is asked to sign up for a wallet of his choice by entering a user name and password for future purchases. Users can also acquire wallets at a wallet vendor's site.
Although a wallet is free for consumers, vendors charge merchants for wallets. Some wallet vendors make arrangements for merchants to pay them a percentage of every successful purchase directed through their wallets. In other cases, digital wallet vendors process the transactions between cardholders and participating merchants and charge merchants a flat fee.
Advantages for e-commerce sites
Upwards of 25% of online shoppers abandon their order due to frustration in filling in forms. The digital wallet combats this problem by giving users the option to transfer their information securely and accurately. This simplified approach to completing transactions results in better usability and ultimately more utility for the customer.
Digital Wallets can also increase the security of the transaction since the wallet typically does not pass payment card details to the website (a unique transaction identifier or token is shared instead). Increasingly this approach is a feature of online payment gateways, especially if the payment gateway offers a "hosted payment page" integration approach.