Description

Digital payments are transactions that occur via digital or online modes. This means both the payer and the payee use electronic mediums to exchange money. The Government of India has taken several measures to promote and encourage digital payments. As part of the Digital India campaign, the government aims to create a digitally empowered economy that is faceless, paperless, and cashless. There are various methods and types of digital. You must note that digital payments can take place through the Internet as well as on physical premises. Here are some examples of digital payments, buying something from e-commerce platforms and paying for it via UPI (unified payments interface) qualifies as a digital payment. Similarly, if you purchase something from your local grocery store and choose to pay via UPI, that also is a digital payment. Now that you clearly understand what is digital payment, let us understand the process of payments.

Have you ever wondered how digital payments really work? Let’s simplify it for you in this section.

1. The Parties Involved

In digital payments, simplicity on the surface masks a complex network of intermediaries, ensuring smooth and successful transactions. Key players in digital payment systems include the merchant (payee) and the consumer (payer), whose interactions initiate the digital payment process. Both parties require a bank account and online banking to engage in digital transactions.Additionally, other key players include the bank and the payment network, which facilitate secure fund transfers.

2. Bank Accounts

For digital payments, merchants and consumers participate as customers, so they need to have bank accounts with online banking features. Bank accounts build up the foundation of conducting e-transactions by storing funds securely and endorsing transfers.

3. Step-by-step Transaction

The consumer starts payment transactions using UPI, mobile wallets or a similar option of his choice. The payment details are transmitted securely into the payment network. The payment network checks for the balance, thereafter, funds are moved from the consumer’s bank account to the payee’s bank account. A confirmation is sent to both the buyer and seller to confirm that the transaction has been completed.

4. Payment Rail

Payment rails serve as the backbone infrastructure that enables the transfer of funds between banks. They function as the pathways through which transactions move, linking institutions and guaranteeing the smooth flow of funds. Payment rails exist in many formats, such as automated clearing house (ACH), card networks and real-time payment systems, each designed for transaction types and processing speeds.

Here are the types of digital payments that are following:

1. Banking Cards

Indians widely use banking cards, debit/credit cards, or prepaid cards as an alternative to cash payments. In 1981, the Andhra Bank launched the first credit card in India. Cards are preferred because of multiple reasons, including, but not limited to, convenience, portability, safety, and security. This is the only mode of digital payment that is popular in online and physical transactions. Many apps are being launched to manage card transactions, like Cred, Square, etc.

2. Unstructured Supplementary Service Data(USSD)

The unstructured supplementary service data (USSD) was launched for those sections of India’s population which do not have access to proper banking and internet facilities. Under the USSD, mobile banking transactions are possible without an internet connection by dialling *99# on any essential feature phone. This number is operational across all telecom service providers (TSPs) and allows customers to avail of services, including interbank account-to-account fund transfer, balance enquiry, and availing of mini statements. Around 51 leading banks in India offer USSD service in 12 languages, including Hindi and English.

3. Aadhaar Enabled Payment System (AEPS)

The Aadhaar Enabled Payment System (AEPS) is a bank-led model for digital payments initiated to leverage the presence and reach of Aadhar. Under this system, customers can use their Aadhaar-linked accounts to transfer money between two Aadhaar-linked bank accounts. According to data from the National Payments Corporation of India (NPCI), the AEPS had crossed transactions over 205 million till February 2020. The AEPS does not require physical activity like visiting a branch, using debit or credit cards or signing a document. This bank-led model allows digital payments at PoS (point of sale / micro ATM) via a business correspondent, known as Bank Mitra, using Aadhaar authentication. The AePS fees for cash withdrawal at Business Correspondent points are around ₹15.

4. Unified Payments Interface (UPI)

The UPI is a payment system that culminates numerous bank accounts into a single application, allowing money transfers between parties. Compared to NEFT(national electronic funds transfer), RTGS (real-time gross settlement), and IMPS (immediate payment service), the UPI is considered a well-defined and standardised process across banks. You can use UPI to initiate a bank transfer anywhere in just a few clicks. The benefit of using UPI is that it allows you to pay directly from your bank account without the need to type in the card or bank details. This method has become one of the most popular digital payment modes in 2020, with October witnessing over 2 billion transactions.

5. Mobile Wallets

As the namesuggests, mobile wallets are a type of wallet where you can carry cash in a digital format. Often, customers link their bank accounts or banking cards to their wallets to facilitate secure digital transactions. Another way to use wallets is to add money to the mobile wallet and use the balance to transfer money. You can also check out the digital wallets guide, for necessary details and clarify confusions, if any. Nowadays, many banks have launched their wallets. Additionally, notable private companies have established their presence in the mobile wallet space. Some popularly used ones include Paytm, Freecharge, Mobikwik, mRupee, Vodafone M-Pesa, Airtel Money, Jio Money, SBI Buddy, Vodafone M-Pesa, Axis Bank Lime, ICICI Pockets ,etc.

6. PoS Terminals

The PoS is the location or segment of a sale. These terminals were considered checkout counters in malls and stores where payments were made for a long time. The most common type of PoS machine is for debit and credit cards, where customers can make payments by simply swiping the card and entering the PIN (personal identification number). With digitisation and the increasing popularity of other online payment methods, new PoS methods have emerged. First is the contactless reader of a PoS machine, which can debit any amount up to ₹2000 by auto-authenticating it without needing a PIN.

7. Mobile Banking

Mobile banking refers to conducting transactions and other activities via mobile devices, typically through the bank’s mobile application (app). Today, most banks have mobile banking apps that can be used on handheld devices like mobile phones and tablets and sometimes on computers. Mobile banking is known as the future of banking, thanks to its ease, convenience, and speed. Digital payment methods, such as IMPS, NEFT, RTGS, and other services like investments, bank statements, bill payments, etc., are available on a single platform through mobile banking apps. Banks encourage you to operate digitally as it makes processes easier for them.
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There are several benefits of digital payments. After the launch of Cashless India,(which aims to promote a cashless economy), we currently have ten digital payment methods available in India. Some digital payment methods have been used for over a decade, some have recently gained popularity, while others are relatively new.

1. Faster Payments

Digital payments allow immediate transactions that can be processed immediately, reducing the waiting time that one has to go through with traditional payment methods. This makes transactions seem smooth and efficient.

2. Convenience in the Payment Procedure

Digital payments enable swift and hassle-free transactions from your devices, eliminating the need for physical presence or documents. Whether you’re paying bills, shopping online, or transferring funds, digital payment methods offer a user-friendly experience that saves both time and effort.

3. Better Payment Security

Digital payment systems use encryption and system authentication protocols, which minimise the risk of unauthorised access and effectively prevent fraud. Your financial information is protected, keeping you stress-free throughout the entire process of making digital payments.

4. Improved Efficiency

Automation and digitisation in payment processes have significantly enhanced operational efficiency. By minimising manual intervention, errors are reduced, and financial workflows are streamlined, resulting in a more efficient and error-free system. Digital Record of Transactions: Digital payments provide a traceable account of transactions, thereby guaranteeing safety. Such efficiency and credibility allow individuals and businesses to maintain accurate financial records. It is easy to monitor the payment history and can be referred to when required.

5. Reduced Costs

The digital payment framework eliminates the requirement of physical infrastructure, paperwork, and manual handling. This reduces the cost of transactions for business enterprises and financial institutions. Also, digital transactions usually include a lower cost of transfer as compared to traditional banking methods.

6. Discounts and Savings

Many online platforms provide discounts, cashback, or loyalty programmes. These discounts motivate the customers to go for the digital payment option, which saves them money and provides several benefits.

7. Low Risk of Theft

Digital payments diminish the possibility of the actual loss of money since it’s not physical. Transactions occur in the digital world, therefore rendering the necessity of holding large amounts of currency physically unnecessary. This safeguards payments by preventing direct cash transactions and ensuring their protection.

8. Customer Management

Digital payment systems can frequently oversee and monitor the customers’ transactions, preferences, and feedback, which gives the business more control over these aspects. This improves overall customer management by adjusting service offerings based on customer behaviour.

9. Better Customer Experience

The ease and convenience offered by digital payments enable customers to enjoy superior service, thereby enhancing their experience. Simplified payment processes result in increased customer satisfaction and a greater likelihood of future collaboration with the business.

10. Efficient Record-Keeping Features

Through the digital infrastructure, digital payments for offline businesses are recorded efficiently; thus, the business environment is friendlier than before. Today businesses and individuals can easily track, control, and analyse their financial activities to obtain financial transparency and improve the financial management process.

The Significance of Payment Processing Systems in the Modern World
In an era of rapidly advancing technology and evolving consumer behaviors, payment processing systems have emerged as a cornerstone of the modern global economy. These systems, once perceived as mere tools for facilitating transactions, have now grown to play a pivotal role in shaping the way businesses operate and consumers interact with the financial world. From online shopping to contactless payments, the significance of payment processing systems cannot be overstated.

1.Evolution of Payment Processing Systems

Today, payment processing systems have evolved to encompass a wide array of methods, including mobile wallets, cryptocurrencies, and even biometric authentication. These systems are not only faster and more convenient but also offer enhanced security measures to protect sensitive financial information.

2.Facilitating Global Commerce

One of the most significant contributions of payment processing systems to the modern world is their role in facilitating global commerce. In the past, international transactions were often cumbersome and time-consuming, involving complicated currency conversions and cross-border banking processes. Payment processing systems have eliminated many of these barriers.
3.Empowering Digital Transformation
Payment processing systems enable businesses to create user-friendly online platforms, offer secure payment gateways, and provide seamless checkout experiences. This not only caters to the preferences of modern consumers but also opens up new revenue streams for companies.

4.Enhanced Security and Fraud Prevention

As digital transactions become more prevalent, concerns about security and fraud have also grown. Payment processing systems have responded by implementing advanced security measures to protect sensitive financial data. Encryption, tokenization, and multi-factor authentication are just a few examples of the technologies employed to ensure the safety of transactions.

5.Financial Inclusion and Access

The modern world is characterized by the abundance of data, and payment processing systems contribute to this by generating valuable transactional data.

6.Green Initiatives and Sustainability

As global awareness of environmental issues grows, businesses are under increasing pressure to adopt sustainable practices. Payment processing systems have responded to this trend by offering eco-friendly solutions. Digital payments, which eliminate the need for paper checks and physical receipts, contribute to reducing paper waste. Furthermore, some payment processing systems have integrated carbon offset programs, where a portion of transaction fees goes toward environmental initiatives. This aligns with the growing consumer preference for environmentally conscious businesses.