With technology advancing at a tremendous speed, the method we make payments and transactions is changing at a tremendous speed as well.
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
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.
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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.
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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.
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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.
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