Computer users have a very large amount of data to manage, some of which is sensitive. In particular, you will typically have many passwords to manage. Remembering them is difficult, writing them down on paper or in a text file is insecure, and using tools such at PGP is tedious and inconvenient.
KWallet saves this sensitive data for you in a strongly encrypted file, accessible by all applications, and protected with a master password.
For most secure operation, you should use one wallet for local passwords, and another for network passwords and form data. You can configure this behavior in the KWallet KDE Control Center module, however the default setting is to store everything in one wallet.