Wallets are applications on top of accounts, so called smart contracts, which manage your Ether. There are simple savings wallets or multisignature wallets.
Suppose that Alice wants to keep her funds safe, but is worried that she will lose or someone will hack her private key. She puts ether into a contract with Bob, a bank, as follows:
- Alice alone can withdraw a maximum of 1% of the funds per day.
- Bob alone can withdraw a maximum of 1% of the funds per day, but Alice has the ability to make a transaction with her key shutting off this ability.
- Alice and Bob together can withdraw anything.
Normally, 1% per day is enough for Alice, and if Alice wants to withdraw more she can contact Bob for help. If Alice's key gets hacked, she runs to Bob to move the funds to a new contract. If she loses her key, Bob will get the funds out eventually. If Bob turns out to be malicious, then she can turn off his ability to withdraw.
Edit: To add on to it, generally wallets are digital medium to store money (crypto currency-Ether) and documents (Smart contracts) which are designed using different programming codes. This edit is mainly for Non- Techies who are willing to work on Ethereum Platform