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Understanding Digital Wallets: Safety and Risks

Using a digital wallet can streamline and speed up payments by including payment methods on your smart device or computer. But is it safe to make payments with a digital wallet? If used correctly, a digital wallet can be just as safe—or safer—than a physical wallet. Here’s what you need to know.

What Is a Digital Wallet?

A digital wallet, or mobile payment service, can store a wide range of payment options, including credit cards, debit cards, gift cards, and bank accounts. By storing your payment information electronically, they offer a convenient—and generally safe—way to pay for purchases with a mobile phone. Common digital wallet options include Apple Pay, CashApp, Google Pay, PayPal, Samsung Pay, WeChat Pay, and Venmo.

What Are the Risks of Using a Digital Wallet?

According to a 2022 Experian survey, 62% of respondents have used mobile wallets. Digital wallets offer fast and easy payment options, but are they safe? While using your phone to make purchases can be safer and more convenient than carrying around your wallet, cash, or credit cards, using a digital wallet still comes with some risks.

Your Identity May Be Stolen

When you use your digital wallet to make a purchase, the app creates a token, or random identification number, that’s used instead of your actual account number. This helps protect sensitive data, such as your credit card number. Digital wallets also use encryption technology to help safeguard your personal information from hackers.

According to the Federal Trade Commission (FTC), most apps offer secure protection and Wi-Fi networks aren’t as risky as they used to be. But the FTC also reports that identity theft more than doubled from 2019 to 2020, up 650,572 instances to 1,387,615. So, if you’re using an unreliable network or someone happens to peer over your shoulder while you’re entering your password, the information in your digital wallet could be compromised.

You Could Lose Your Phone

Keeping your credit cards and cash safely stored at home can keep your physical financial assets safe. But what happens to your digital wallet if you lose your phone while you’re on the go, or worse, your phone is stolen?

Because digital wallets are typically stored on your mobile phone as an app, you could lose access to your payment apps if your phone goes missing—especially if you can’t access your accounts from another source, such as a computer. And if you don’t have adequate password protection and your phone gets into the wrong hands, your digital wallet could be used to make fraudulent purchases.

Your Money Might Not Be Insured

In light of recent bank failures, the Consumer Finance Protection Bureau (CFPB) has raised growing concerns about the lack of regulations on the funds people store in some types of digital wallets. While bank accounts and the funds held in them are subject to strict federal regulation by the Federal Deposit Insurance Corp. (FDIC) and insured by the FDIC up to $250,000 per account holder, not all accounts offer the same protections.

Popular digital wallet apps that allow users to keep a balance in the app, like PayPal and CashApp, are also usually protected by their partner banks’ FDIC insurance. But other payment apps, such as WeChat Pay, are instead categorized as money transmitters, which are commonly used for international remittance payments. These apps don’t come with insurance or regulations like traditional banks, so any funds that are stored in these accounts could be lost if something goes wrong.

How to Make Payments Safely With a Digital Wallet

Digital wallets can provide a convenient payment option for people who don’t want to carry cash or cards. While some protection is built into the app, it’s still a good idea to take some extra precautions to keep your money safe and protect your personal information.

• Use strong, unique passwords: Using long passwords that mix symbols, letters, and numbers can help protect your digital wallet. Consider using a password manager to store and create strong passwords.
• Enable multifactor authentication: Depending on the app you’re using, you may be able to use multifactor authentication, a two-step login process that requires you to take a second step to prove your identity, such as entering a code that’s texted to your phone.
• Put a password on your phone: Locking your phone with a password helps protect important data if your phone gets lost or stolen. And if your phone has biometric protection, such as facial recognition or fingerprint, this can help keep your mobile device even more secure.
• Install extra security on your mobile device: Depending on the type of phone you have, you may be able to use your computer to locate, lock, or even wipe your phone if it goes missing. This can help protect your data from getting into the wrong hands.
• Be careful in public: When using your device for online shopping, try to avoid using public Wi-Fi networks and be aware of shoulder surfers who may try to observe you entering a password.
• Keep an eye on your accounts: Checking your account statements regularly for unknown charges can help you stay a step ahead of fraudulent activity. If you find payments you don’t recognize, be sure to report them immediately to your bank, credit card issuer, or payment servicer.
• Monitor your credit: While checking your credit report regularly can’t stop identity theft or fraudulent charges, it can alert you if someone manages to open a new account in your name, such as a credit card.
• Store funds in insured accounts: While it may not be risky to use apps that aren’t regulated by the federal government or insured, try not to store any money in these accounts. Instead, transfer any funds into a traditional bank account or credit union where your money is insured by the FDIC or National Credit Union Association up to $250,000 per account holder.

The Bottom Line

The best way to keep your digital wallet safe is to be vigilant with your mobile device and take precautions to protect your personal information. If you’re worried that your information has been compromised or used for fraudulent purposes, Experian offers resources that can help you learn how to take back control of your digital identity.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. Our team is ready to assist you with confidence and expertise.

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