Digital Wallet Fraud: What It Is and How to Prevent It

Digital wallets, also known as e-wallets, are virtual vaults where users can store payment details, such as credit or debit card information, on devices like smartphones, tablets, or computers. They eliminate the need for physical cash or cards, which allows for swift, tap-and-go transactions. Beyond payments, these wallets can also hold digital ID cards, travel tickets, and even loyalty rewards.  

The world has embraced digital wallets at an astonishing rate. As of 2024, around 4.3 billion people use them, with projections soaring to 5.8 billion by 2029. (Juniper Research) This underscores a deep shift in how people handle money; one that is digital-first, fast, and frictionless.

While e-wallets come fortified with encryption and tokenization, they remain a prime target for fraudsters. Cybercriminals continuously probe for loopholes whether through phishing, malware, or social engineering tactics.

What is Digital Wallet Fraud?

Digital wallet fraud happens when someone gains unauthorized access to a person's digital wallet and uses it to steal money or personal information.

Different countries have different regulations for digital wallets. Fraudsters may exploit regions with weaker regulations, making it easier for them to commit fraud.

How is digital wallet fraud different from traditional banking fraud?

Unlike traditional fraud, which often involves physical theft (like stolen credit cards or forged checks), digital wallet fraud is entirely digital. Criminals don’t need physical access to a card or cash—they manipulate digital systems instead. For example:

• In traditional banking fraud, a fraudster might forge a check or use a stolen card at a store.

• In digital wallet fraud, they might steal login credentials through phishing emails or bypass weak authentication systems to access the wallet remotely.

Because digital transactions happen instantly, financial institutions have less time to detect and stop fraud compared to traditional banking fraud.

Digital Banking Fraud Vs Digital Wallet Fraud

Both types of fraud target digital systems, but digital banking fraud focuses on unauthorized access to bank accounts and financial data, whereas digital wallet fraud revolves around exploiting vulnerabilities in mobile wallets and payment services to make fraudulent transactions.

Key Traits of Digital Wallet Fraud

Digital wallet fraud happens quickly, anonymously, and on a large scale. Here’s why it’s different from traditional fraud and why it requires a proactive approach.

1. Transactions in digital wallets happen instantly, leaving little time to flag fraud before the money is gone.

2. Criminals can hide behind fake accounts, stolen identities, and VPNs, making it difficult to trace their activities.

3. Fraud isn’t limited to one person or one bank. Cybercriminals use automated tools to attack thousands of wallets at once.

The Most Common Digital Wallet Fraud Tactics

Criminals look for weak points in security, especially in authentication and verification systems. One of the biggest risks is during wallet setup and card linking. If a bank doesn’t have strong identity verification, fraudsters can link stolen credit cards to digital wallets and start spending before detection.

1. Phishing Attacks: Fraudsters send fraudulent emails or messages that mimic trusted sources, convincing individuals to disclose their login details or personal data.

2. Account Takeover: By obtaining stolen credentials through data breaches or phishing, fraudsters can gain unauthorized access to digital wallets, allowing them to conduct fraudulent transactions.

3. Use of Fake Wallets: Fraudsters create counterfeit digital wallet applications to deceive users into entering their sensitive information, which is then used for fraudulent purposes.

4. Exploiting Security Loopholes: Attackers identify and exploit vulnerabilities within digital wallet systems, such as weak authentication protocols or outdated software, to gain unauthorized access.

How Does Digital Wallet Fraud Happen?

If your onboarding process doesn’t fully verify customers, fraudsters can create fake accounts using false information. Fraudsters also take advantage of any inconsistencies in onboarding. If the process differs across platforms or regions, it opens the door for fraud. Not only that but payment credentials are also often compromised during data breaches. If hackers access sensitive customer information, they can use those credentials to steal from digital wallets.

Fraudsters may use malware or phishing scams to steal payment details from customers. Once they have the payment information, they can access the digital wallet and carry out fraudulent transactions. Relying only on passwords makes it easy for fraudsters to gain access to digital wallets.

How fraudsters typically gain access to digital wallets

1. Vulnerabilities in onboarding & KYC processes

2. Compromised payment credentials

3. Weak authentication & poor security measures

4. Exploitation of regulatory differences across jurisdictions

Read more: What Is Know Your Customer Risk Rating?

How to Prevent Digital Wallet Fraud

Fraudsters are constantly looking for vulnerabilities in systems. If your security measures are outdated or not regularly updated, they can exploit these weaknesses.

1. Implement Multi-Factor Authentication (MFA) & Strong Customer Authentication (SCA)

2. Adopt Risk-Based Authentication & Behavioral Biometrics

3. Leverage AI & Machine Learning for Fraud Detection

4. Set Transaction Limits & Geofencing

5. Establish Real-Time Fraud Monitoring & Anomaly Detection

6. Conduct Regular Security Audits & Threat Intelligence Sharing

7. Educate Customers & Raise Awareness

Prevent Fraud with FOCAL Platform

FOCAL offers a dynamic, comprehensive suite of fraud prevention solutions tailored for financial institutions to protect both your operations and customer assets. FOCAL proactively eliminates high-risk connections, blocking VPNs and hosting services commonly used by fraudsters to mask their identities and activity. , blocking VPNs and hosting services commonly used by fraudsters to mask their identities and activity.

With FOCAL, you can enhance device security through advanced fingerprinting and behavior analysis, which allows for the detection of irregular patterns, like a device acting out of the ordinary or multiple accounts tied to a single device. This technology offers instant identification of suspicious behavior, preventing fraudulent actions before they impact your business.

Real-time data processing provides accurate fraud scores, delivering an uninterrupted security net. FOCAL also integrates with comprehensive global databases, enabling automatic blocking of suspicious IP addresses and identifying coordinated fraud rings targeting vulnerable customers. The platform's interactive map highlights areas with heightened fraud risks, allowing you to direct resources where they’re needed most.

Frequently Asked Questions (FAQs) on Digital Wallet Fraud

Q1. Are digital wallets safe?

Yes, they are. Digital wallets are generally secure when used correctly but this does not negate the fact that financial institutions must emphasize the importance of strong passwords, multi-factor authentication (MFA), and regular monitoring of transactions to further enhance security.

Q2. Can someone steal a digital wallet?

The digital wallet application itself cannot be stolen but the information or the data within the app (like credit card details or and login credentials) can be stolen.

Q3. What is the most secure digital wallet?

The security of digital wallets depends on both the wallet's built-in features (like encryption and multi-factor authentication) and how users protect their accounts. While leading wallets offer strong protection, the login stage is the most vulnerable point. Financial institutions should encourage clients to use wallets with strong login security, such as two-factor authentication (2FA), multi-factor authentication (MFA), or biometrics, to minimize risks and protect sensitive data.