Digital payments have improved people’s lives. Transactions are now completed in a matter of seconds. It only takes a few seconds to send money to someone, whereas it used to take days, or even weeks.
Digital payments are the stepping stone for “cashless economies.” This includes using ATMs, MICR, debit cards, and credit cards. Government of several countries promote digital payments over hard cash.
Digital payment powers an economy that is faceless, paperless, and cashless because anyone can conduct a transaction at any time or location.
There’s no denying the power of digital payments.
Introduction to Digital Payments
Digital payments are carried out through digital or online channels without the exchange of actual, hard currency between the payer and the payee.
In order to complete a transaction, both the payer and the payee must have:
- Bank account
- Online banking method
- Device for making the payment
- Medium of transmission
How Do Digital Payments Work?
Digital payments, however, might only require a few clicks. Still, in this case, a number of middlemen are needed to complete a transaction successfully.
It is important to understand how digital payments operate before continuing. Let’s examine the principal players in this system:
- Merchant: The term “merchant” refers to neighborhood Kirana shops, malls, e-commerce sites, and service providers who offer the ability to conduct business or settle accounts using electronic payments.
- Consumer: The person making the payment is referred to as the consumer.
- Bank: The bank wires funds from the customer’s account to the retailer.
- Payment network: Payment systems like MasterCard or VISA. It guarantees that a transaction has been properly verified and authenticated.
How Do Digital Payment Systems Work?
To comprehend how digital payments work. We’ll use two examples:
- Making Payments Using a Card
Tom uses a card to buy a new phone from the Mobile Store for $500. He decides to pay online. To complete the transaction, the shopkeeper swipes a card on a POS device. The payment is made in several steps.
The POS provider first makes sure that his bank account has a sufficient balance. To approve the payment, Tom has to enter the card PIN. If there’s balance in the account and the PIN is right, the transaction will go through.
The digital payment is then completed, debiting Tom’s account and crediting the Mobile Store’s business account.
- Making Payments Using Online Banking
When buying something from an eCommerce website, the payment gateway sends the payment request to the user.
The user (in this case, TOM), will receive an authentication code via an OTP. The payment gateway accepts the funds from his bank. The payment will be debited from Tom’s account and will be credited to the online seller’s account.
The transaction will not go through unless until there’s enough balance in the account.
Common Digital Payment Methods
The most common methods are:
- Credit and Debit Cards: This is one of the most popular methods of digital transactions. People use their cards for online shopping, grocery shopping, online bill payments, and a lot more.
- Mobile Payments: Mobile payments is using mobile payment apps for making payments. They use the bank’s online services to make purchases, either by scanning a business’s QR code or using NFC technology to use virtual credit or debit cards to make purchases. Additionally, they can be used to transfer funds using services like Google Pay or Apple Pay.
- QR Payments: It would be accurate to say that it is the quickest, easiest, and safest method of processing digital payments. All a user has to do to make a payment is scan a QR code with any digital payment app.
Pros of Using Digital Payments
- Promotes a Safe and Clean Economy
Compared to digital payments, handling, storing, and transacting with physical payments takes time. Digital payments leave a money trail, which makes it simple to track, and bank and payment networks make it safe and support a clean economy.
Additionally, it aids in cleaning up dirty money. Using digital payment, it is easy to obtain safe and secure information about each of our transactions.
- Faster, More efficient handling of money
Physical currency requires more time and effort to handle and store than digital currency. Not hiring additional staff to handle money is beneficial for small, newly established businesses.
- Makes International Payments Easier
If you have to send someone money around the globe, it becomes a time consuming and expensive process. It is incredibly tough to complete the transaction using physical currency.
With digital payments, you can send money to other countries almost immediately. The amount will be credited to the account within minutes, or hours.
- Reduced Risk of Theft
In terms of the safety, digital payments are 100% secure, except for human error. Keeping a lot of hard cash on your person can be risky because it can be stolen. With digital payment system, people can conduct transactions without worrying about losing their money.
But users need to be more vigilant too so they can keep themselves safe while making online payments. It’s crucial to understand the basics of online payment safety.
Cons of Using Digital Payments
- Puts Financial Data at Risk of Breach
Although we have talked about how secure digital money is, there is still a risk. Financial data leaks due to hacking incidents may occur. If a website where your account information is stored is breached, it puts your data at risk.
It can be risky to make online transactions and payments on websites that don’t have robust safeguards in place.
- Transaction Fees
When it comes to physical payments, there’s no transaction fees. For digital payments, you may need to pay additional fees in order to use the payment provider’s services.
- Impulse Buying
Simply put, impulse buying is when you buy something without thinking it through. It’s the outcome of an impulse. Therefore, it is more common to buy some goods on impulse when using a digital payment method.
- Downtimes Can Affect Access to Funds
Making the same transaction repeatedly can sometimes slow it down and cause downtimes. If you need to make an urgent or emergency digital payment and you have no other options, this could be a problem.
Digital payments have made our lives incredibly convenient. Payments today take less time then they used to. You can send money across the globe within minutes. If you’re looking to get started with digital payments, having an understanding of how the entire process works may be helpful.