Digital Payment Services in 2022: Benefits, Methods, & Tech
– Digital Payment –
With technology advancing at a tremendous speed, the method we make payments and transactions is changing at a tremendous speed as well.
Traditional payment methods such as cash-on-delivery are becoming less popular, and some e-commerce shops still accept bank transfers. However, because it is less reliable than other methods accessible today, it is also becoming uncommon.
More payment platforms are modifying their services to enable smooth mobile transfers, mobile banking, contactless, and in-app purchasing possibilities as digital payment methods become more popular.
This article will teach you everything you need to know about digital payments, including their techniques, technology, and advantages.
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What are Digital Payments?
Digital payment is the transfer of money or digital currency from one account to another using digital payment technologies, such as mobile wallets or mobile payment apps. Digital payments can also be referred to as electronic payments.
Alternatively, we could say a digital payment, sometimes called an electronic payment, is the transfer of value from one payment account to another.
This is done by using a digital device such as a mobile phone, POS (Point of Sales), or computer, digital channel communication such as mobile wireless data, or SWIFT (Society for the Worldwide Interbank Financial Telecommunication).
This definition includes payments made with bank transfers, mobile money, and payment cards including credit, debit, and prepaid cards.
1. Online Electronic Payments
An electronic payment, or e-commerce payment system, digitally facilitates financial transactions between two parties.
The shift to online shopping continuing to speed up electronic payment methods is forcing stakeholders to reevaluate their strategies. Online electronic payments include:
- Bank transfers
- Buy now, pay later (BNPL) solutions
2. Mobile Digital Payment Apps
Mobile digital payment apps enable users to transfer funds to an individual or company via a mobile device including smartphones and tablets.
Top P2P providers saw double-digit growth in monthly app downloads in April and May 2020, a trend that continued through the year—30% of US adults signed up for new P2P platforms in H2 2020.
Some of the most popular mobile payment apps include:
- Cash App
- Google Pay
3. Mobile Wallets
A mobile wallet is literally a virtual wallet that holds card information for a user directly on their mobile device. It can manage everything from credit cards, rewards cards, and memberships.
Consumers are increasingly turning to mobile wallets due to their convenience and ability to reduce fraud.
By September 2020, 76% of consumers reported increased use of this payment method, with 43% of that group doing so “significantly.”
Some of the most popular options include:
- Apple Pay
- Google Pay
- Samsung Pay
Gen Z shows strong usage of digital payments, including Apple Pay, Google Pay, PayPal, and other P2P services.
Gen Zers use Apple Pay significantly more than other generations to make digital payments and are quickly closing the gap with older consumers in their use of other digital payment services.
4. Contactless Payments
The adoption of contactless payment methods, touch-free digital payment methods that use radio-frequency identification or near field communication for making transactions, rose during the pandemic due to health restrictions and safety precautions.
Contactless payments can be made via:
- Credit and debit cards that have near-field communication (NFC) technology
- Mobile wallets, like Apple and Samsung Pay
Digital Payment Technologies
Technologies that make these digital payment services possible involve machine learning and artificial intelligence.
As consumers continue making purchases with their cards, mobile wallets, or applications, machine learning technology is able to study these experiences and improve them over time.
This improved experience ensures greater fraud protection and security.
Additionally, contactless digital payments rely on NFC and magnetic secure transmission (MST) technology. NFC technology enables a connection between two electronic devices over a small distance.
It enables consumers to pay with their mobile wallets via tablets, smartphones, or smartwatches.
Comparatively, MST technology uses a magnetic signal from the mobile device to a card reader—because it emulates a magnetic stripe like one found on a credit or debit card, MST tech is compatible with most payment processors.
Other tech used for digital payment and transactions includes:
Open Banking APIs
This is one technology used for digital payment. Application programming interfaces (APIs) allow legacy banks to share data and information amongst one another through a third-party application.
APIs are used for any company (B2B, B2B2C, BaaS) to embed its products into a nonfinancial company’s platform.
For example, in December 2020 Stripe partnered with Goldman Sachs and Citi to offer an API that would allow Stripe clients to offer bank accounts to their own merchant and vendor customers.
Shopify will be the first to integrate the offering under the name Shopify Balance, where it will offer bank accounts to its hundreds of thousands of merchants.
Open banking providers can unlock new revenue streams by charging fees based on the services clients use; they can ink data-sharing deals with partners in lieu of or in addition to those fees.
And they can gain insights from working with clients that can be used to improve their own offerings.
Biometric verification is anyway a person can be uniquely identified by a device, where it evaluates one or more distinguishing biological traits such as fingerprints, retina patterns, voice recognition, and signatures.
In the financial services industry, mobile apps and other digital payment agents use biometric verification to authenticate a transaction.
For example, smartphones can send information with a payment request including behavioral biometric information.
These additional signals will make authentication more robust and fraud detection better by identifying inconsistencies in biometric information and payment behavior.
This is one of the technologies used for digital payment.
Distributed Ledger Technology (Blockchain)
A distributed ledger is a database that exists across several locations. Most companies use a centralized database that exists in a fixed location; but a distributed ledger removes third parties from the process.
Perhaps one of the most popular and widely used forms of distributed ledger is blockchain. Blockchain technology offers a way to securely and efficiently create a tamper-proof log of sensitive activity.
Distributed ledgers like blockchain are particularly useful in the finance industry because they cut down on operational inefficiencies (saving incumbents both time and money).
Digital Payment Trends
Digitization became a top priority for financial institutions in 2020, and this transformation is giving rise to digital payment companies across the world.
Consumers are digitizing the payments they make in-store and online—bringing new tech like contactless digital payments to the mainstream.
Apps like Venmo, Zelle, and Square Cash have grown in popularity, with volume hitting $393.87 billion on the back of massive user growth in 2020, according to Insider Intelligence estimates.
Maturing mobile P2P will enhance the opportunity—and need—for providers to monetize their product, since a bump in volume has put the industry in a better position than ever to begin capturing revenues from the services.
And the growth trends of cross-border payments and real-time non-card payments are increasingly becoming a barometer for overall industry changes
Other trends that will continue to shape the digital payment landscape include:
- Leveraging new forms of fraud prevention
- Developing digital Payments as a Service (PaaS) experiences for unlikely entrants to the payments space
- Managing the impact of cost pressure on the merchant-provider relationship
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Why are Digital Payments Important?
As world economies become increasingly interconnected, the need for businesses to pay vendors, partners, workers and organizations in other countries will only grow.
Unfortunately, there are still obstacles that make it difficult to move money across borders. Digital payments solve many of the physical barriers associated with global payments, including:
‣ Currency exchange. Local currencies make it difficult for companies to pay and get paid quickly. Do you make a payment in your local currency or their local currency? Do you convert funds before sending payment or do they convert after the payment lands?
‣ Transfer rate. Digital payments are much faster than traditional payments-especially mailed checks or money orders. In an age when business happens in real-time, digital payments bring cash flow up to speed for international companies.
‣ Lower costs. The cost of global payments through traditional networks can be quite high–wire transfers especially. There are also currency conversion costs to consider. Digital payments offer a low-cost alternative, without sacrificing capability or security.
‣ Security. Emphasis on end-to-end security for digital payments makes them secure through various methods of encryption as well as making payments without the need to know the bank details of the counterparty.
‣ Convenience. Despite modern online banking interfaces, transferring funds across borders is still a cumbersome task through traditional channels. Digital payments simplify UI and UX: clicking a few buttons and sending payment with basic recipient info.
The bottom line is that businesses are going digital, and they need a payments solution that matches the technologies they’re already using.
In the same way, they might share a digital file through the cloud or jump on a videoconference with someone across the globe, businesses want the ability to send and receive money with fewer barriers.
Benefits of Digital Payment
Regardless of the definition, some things we know for sure: Digital payment offers significant benefits to individuals, companies, governments, or international development organizations. The benefits of going digital include:
1. Ease and Convenience
One of the most significant advantages of digital payment is the seamless experience they provide to customers.
Reduced dependency on cash, fast transfer speed, and the ease of transacting make online payments a preferred option.
Traditional payment methods like cash and cheques add to factors like risk, steps, and physical presence.
With digital payment, you can send and receive funds from anywhere in the world at the click of a button.
2. Economic Progress
This is one of the advantages of digital payment. Customers transact more online when they see the ease, convenience, and security of online payments.
This means that more and more people feel comfortable buying online, investing digitally, and transferring funds via electronic mediums.
The increase in money movement and online business contributes to the progress of the economy. This is why online ventures are being launched every day and even more are making profits daily.
3. Safety and Efficient Tracking
This is one of the advantages of digital payment. Handling and dealing in cash is a cumbersome and tedious task. Along with the risk of losing money, there is the hassle of carrying cash everywhere you go and keeping it safe.
With digital payments, one can keep their funds secured in an online format effortlessly. Nowadays, your mobile phone alone is enough to make and receive payments.
Additionally, most digital payment channels provide regular updates, notifications, and statements for a customer to track his funds.
More Benefits of Digital Payment
1. Cost savings through greater efficiency and speed. For example, a recent report by the Better Than Cash Alliance and the Inter-American Development Bank shows that the Government of Peru could save US$96 million.
This could happen by shifting all government payments to more efficient digital options currently available in the market.
2. Transparency and security by enhancing traceability and accountability, reducing corruption and theft as a result.
For example, a recent report analyzes risks incurred by individual purchasing clerks in cocoa value chains (including assault), due to the prevalence of cash.
As of March 2019, the Government of India has saved almost $14 billion in social protection payments through electronic Debit Benefits Transfers.
3. Financial inclusion by increasing access to a range of financial services, including savings accounts, credit and insurance products.
The Committee on Payments and Market Infrastructure and the World Bank published the flagship report ‘Payment Aspects of Financial Inclusion (PAFI)’, outlining how digital payments help advance financial inclusion.
4. Women’s economic participation by giving women more control over their financial lives and providing them greater economic opportunities.
A G20 GPFI report highlights how digital payments contribute to women’s economic participation.
5. Inclusive growth. Cumulatively, the benefits outlined above help unlock economic opportunity for the financially excluded, and enable a more efficient flow of resources in the economy.
There is robust academic evidence about the impact of the widespread adoption of digital payments on poverty reduction (see Jack and Suri, 2016) and on SDG progress.
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How does Digital Payment Work?
The way digital payment work varies from provider to provider. Generally, providers rely on payment networks to leverage payment rails, and users send money from a straightforward, intuitive payment platform.
Payment rails are the different processing modes for cashless payments. Different rails can include cards, bank accounts, the SWIFT network, blockchain, and more.
The process is simple and straightforward. After you sign up with a digital payment provider, you’ll choose the mode of payment you want to use.
You’ll also need information for the recipient. Often, this is as simple as entering an email. The digital payment provider handles the rest.
After you send funds, the digital payment provider executes the transfer through the applicable rail. Because everything happens digitally, you have the ability to see the status of the transaction in real-time.
When the transfer is complete and funds have landed, the recipient can manage their funds however they want–whether that means to transfer to a bank account or into a digital wallet.
Digital Innovations in the Payment Sector
The pace of digital innovation in payment is driving a reduction in costs projected double compound annual growth rate.
It is resulting in new business models and a more competitive environment as new players emerge. These are some of the innovations:
1. Contactless Payments
A secure payment method using a debit, credit, or smartcard enabled by Radiofrequency Identification (RFID) or near-field communication (NFC).
This digital payment method is growing in popularity due to its speed and seamless experience.
2. Open Application Programming Interfaces (API)
A publicly available API that provides developers with programmatic access to a proprietary software application or web service.
Open APIs allow new providers to build services on top of existing infrastructure.
The relevance of these approaches is that it lower barriers to entry for new financial technology players, encouraging innovation and enabling the rise of seamless digital payment services for the end-user.
3. Distributed ledger technology (DLT)
A database that is consensually shared and synchronized across multiple sites, institutions, or geographies.
This database architecture solves the problem of trust among multiple stakeholders and the so-called “double-spend”, which refers to the dilemma of ensuring a digital asset is not spent twice.
Since all members of the network hold a copy of the ledger at all times, DLT allows for decentralized digital payment systems that do not rely on a single central authority, such as a bank or a public institution (see our full series on DLT and digital payments here).
4. QR codes
A two-dimensional Quick Response bar code or square-shaped code that contains data.
It has become popular as it is a quick and easy way to exchange information and has the potential of substantially reducing payment acceptance costs.
All that is needed for the payment to take place is a digital device with a camera linked to an account.
5. Biometric Payments
Biometric digital payments use Biometric ID as a means of verification and authorization of payments.
This is any means by which a person can be uniquely identified by evaluating one or more distinguishing biological traits.
Unique identifiers include fingerprints, hand geometry, earlobe geometry, retina and iris patterns, voice waves, DNA, and signatures.
6. Central Bank Digital Currencies (CBDC)
Globally, emerging market economies are moving from conceptual research to intensive practical development. Central banks representing a fifth of the world’s population say they are likely to issue the first CBDCs in the next few years.
Most Common Digital Payment Methods
Some of the most common digital payment methods are:
1. Credit/Debit Cards
This is one of the most common digital payment methods. Credit and debit cards are still the most commonly used method for payment worldwide.
As every country has its own issuers, it can sometimes be difficult to make purchases internationally as not all cards are accepted in different regions!
Not to mention the difference in transaction fees and conversion fees.
However, digital-only/challenger banks are on the rise and gaining in popularity because of their flexibility, efficiency, and ease.
Most challenger banks offer free international transactions with the best conversion rates, cryptocurrency options, increased security with instant spending notifications, budgeting features, and are generally an easier experience when transferring money or making payments abroad.
Ruling the market for payment methods in e-commerce are eWallets, and more important to note, their growth has just begun!
This is one of the most common digital payment methods. E-wallets offer another alternative option to make online purchases, essentially through the use of a prepaid credit account.
Google Pay, Apple Pay, Venmo, M-Pesa, and Alipay are some examples of popular companies that offer e-wallets used worldwide.
It is easy to set up an account, and many of these companies now use biometric authentication for increased security as you make a payment or transfer money online, such as a fingerprint or facial/iris recognition.
This method of payment is often preferred as you don’t need to enter your credit/debit card details each time you make a payment, so the process is quicker and easier.
3. Payment Gateways
This is one of the most common digital payment methods. When making online payments, there is often the option to use a payment gateway.
This refers to a trusted third-party company that processes the payment, which often provides increased security, speed, and efficiency.
Common gateways that are used internationally include Paypal, WePay, Stripe, WorldPay, and Dwolla.
Each company varies when it comes to transaction fees, cross-border fees, and other monthly fees, so it’s good to check which has the best option suited to your specific needs.
This is one of the most common digital payment methods. Peer-to-peer payments allow users to easily transfer money to another person or company without using a third party.
Platforms such as CirclePay, Facebook Messenger, and Zelle offer P2P payments.
Although this payment process is not typically meant for commercial use, some independent sellers in online marketplaces do opt for this option as it is a quick and direct method.
It is important to be extra vigilant when making or agreeing to accept a P2P transfer and to only use this method with people you know, in order to minimize the risk of fraud.
5. Digital Cryptocurrencies
This is one of the most common digital payment methods. Cryptocurrencies are slowly being introduced as a mainstream means of making transactions.
Widely used e-wallet and gateway companies like Skrill and Samsung Pay are now accepting cryptocurrencies!
While dedicated platforms such as Coinbase and Bitpay work alongside e-commerce companies to allow customers the option of using cryptocurrencies to make transactions.
Although not every company accepts this payment method yet, the use of blockchain and cryptocurrencies is thought to be the next best step for the evolution of e-commerce.
This is due to speed, convenience, low-cost transactions, as well as a reduction in data storage and handling costs, and finally increased security.
Cryptocurrencies can be used to make purchases and transfer by means of methods previously mentioned, such as through a third-party gateway processor or e-wallet.
6. QR Payments
This is one of the most common digital payment methods. This payment alternative is fast, convenient, and secure.
All we have to do is open our bank’s app and scan the establishment’s QR code. Then, we can choose a digital payment method and confirm our purchase.
This is one of the most common digital payment methods. These apps have features that include payment methods.
For instance, they can let us reserve a particular item at an establishment to pick up later and show our points card and payment QR code when staff scans its bar code.
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Frequently Asked Questions
1. What are Digital Payment Services?
Digital payment services are the entities that provide transactions via digital or online modes, with no physical exchange of money involved.
This means that both parties, the payer and the payee, use electronic mediums to exchange money.
2. Why is a Cashless Society Good?
Cashless payments eliminate several business risks such as theft of cash, counterfeiting money, and robbery of cash.
Moreover, it also reduces costs of security, and it allows you to buy whatever you want and whenever you want without the need of withdrawing cash.
3. How does a Digital Payment System Work?
A digital payment system usually converts a traditional cash-operational society to a cashless one.
It can be anything from paying for goods and services at a brick-and-mortar store, transferring money to other individuals online, to making investment trades.
4. How do I Get Digital Payments?
There is no universally accepted way of getting access to digital payments. The method of going digital varies for different payment methods like cards, UPI, mobile banking, micro ATMs, etc.
5. Is Electronic Payment Safe to use?
Thanks to advancements in digital payments technology, demographic shifts, and the evolving cyber-security landscape, online transactions are more popular and secure than ever before.
6. What is the Purpose of Digital Payments?
The main objectives of digital transactions are to reduce the costs and risks of handling cash, increase the ease of conducting online transactions, and increase transparency among monetary transactions among people.
Digital payment is the future. In the coming years, we will see payment methods transitioning from physical cash to digital payment methods.
With so many options, it is important to check coverage in your area, what features are on offer, what payment methods your customers most prefer to use, the cost, and most importantly the security of the platform you wish to use.
If this was helpful, do well to share with your family and friends, and also, leave your opinions in the comment below.