Digital payments have been on an upward trend ever since their introduction to the business landscape. As more types of digital payments emerge, businesses and customers worldwide can do business more conveniently and efficiently.
Essentially, a digital payment is an online transaction involving money transfer in exchange for goods for services. A digital payment is basically any payment that’s not done in cash.
Let’s take a closer look.
Understanding digital payments
A digital payment is an electronic transfer of money from a customer to a business in exchange for goods or services. These online payments can be made via various platforms, apps, or systems and typically involve the use of devices like smartphones, computers, or payment terminals. Essentially, it involves a payment with anything other than physical cash.
What are the different types of digital payments?
Digital payments started out as traditional credit or debit card transactions. But there are many digital payment examples available today, including:
- Credit/debit card payments: Payments made using a card, either online or in physical stores, are processed through a secure payment gateway.
- Mobile payments: Payments made through mobile apps or wallets (e.g., Apple Pay, Google Pay) by scanning QR codes, tapping phones, or using NFC technology.
- Bank transfers: Direct transfers from one bank account to another through online banking platforms.
- E-wallets: Virtual wallets (like PayPal, Venmo, or Paytm) where users can store money and make digital transactions.
- Cryptocurrency: Payments made using digital cryptocurrencies like Bitcoin, Ethereum, or others. According to Statista, crypto payments are forecasted to grow at a CAGR of 17% from 2023 to 2030.
- Buy now, pay later (BNPL): Payment services that allow users to purchase goods or services and pay for them in installments (e.g., Afterpay, Klarna).
- Contactless payments: Payments are made by tapping a card or device equipped with NFC technology at a POS terminal.
How does a digital payment work?
Digital payments involve multiple steps and entities working together to ensure money is securely transferred from a payer (the person making the payment) to a recipient (the person or business receiving the payment).
So, how does online payment work? Let’s take a look:
Step 1: Payment is initiated
The first step is when the business or customer initiates the payment through a digital platform. This can happen via online checkout, an in-store transaction, or a peer-to-peer (P2P) payment through an app like Venmo or PayPal.
Step 2: Payment is authenticated
The digital payment system must authenticate the payer’s identity to verify that the transaction is legitimate. This step involves security checks, which may include entering a password or PIN code, fingerprint or facial biometric authentication, OTP (One-Time Password) sent via SMS, or two-factor authentication (2FA).
Step 3: Payment is authorized
Now, the payer and their bank have to authorize the payment. The payment platform or gateway sends the payment request to the payer’s financial institution (e.g., bank or credit card company) for authorization. The institution checks for sufficient funds and fraud.
Step 4: Transaction is processed
Once authorized, the digital payment system makes the actual transfer of funds from the payer’s account to the recipient’s account. This involves a payment gateway that captures and transmits payment details to the appropriate financial institution and a payment processor that processes the transaction and communicates with both the customer’s and the business’s banks.
Step 5: Funds are settled and transferred
The payer’s bank or financial institution deducts the payment amount and settles it with the recipient’s bank. This process might take anywhere from a few seconds (in the case of instant transfers) to a few days (in traditional banking systems).
Step 6: Payment is confirmed
Once the funds are transferred, both the payer and the recipient receive confirmation. This could be a digital receipt or notification.
Why go digital? Five benefits of digital payments
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Drive more sales
Digital payments can significantly increase sales for businesses by making the payment process faster, more convenient, and more accessible. Consumers want to use digital payments, so businesses that cater to these preferences can count on sales from those shoppers. Mobile wallets, for example, are expected to double in use between 2020 and 2025, according to Statista.
By offering diverse digital payment methods (credit cards, e-wallets, BNPL, etc.), businesses cater to different customer preferences, driving sales from customers who might have otherwise not completed the purchase.
Plus, convenience helps boost sales. Customers can complete transactions with just a few taps or clicks, reducing friction at checkout. Whether through mobile wallets, contactless payments, or online methods, the ease of digital payments encourages customers to make purchases.
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Faster checkout
Abandoned carts are a major challenge in e-commerce, in particular. By offering quick and seamless payment options (like one-click payment), you can reduce abandonment rates and convert more visitors into paying customers.
Storing payment information in digital wallets or platforms makes it easy for customers to make repeat purchases. When checkout requires no extra effort, customers are more likely to add extra items or select premium options.
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Increase average order value
Digital payments can encourage customers to spend more per transaction, increasing the average order value (AOV).
BNPL payment options like Afterpay or Klarna, for example, allow customers to break down payments into smaller, interest-free installments. This encourages customers to make larger purchases because they don’t necessarily need all the money right now.
Digital payment systems also allow you to offer subscription models, auto-renewals, and upsell opportunities at checkout. For example, during the payment process, you can suggest complementary products or services, driving up the value of each transaction.
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Security
Digital payments have a variety of security benefits. To start, there’s less physical handling of cash, which means fewer mistakes and less susceptibility to theft.
Plus, payment data is encrypted during the transfer to protect sensitive information during digital payments. This mitigates the risk of data breaches, boosting customer trust and ensuring legal compliance.
And instead of transmitting the actual card details, tokenization reduces the risk of data theft. Even if intercepted, these tokens are useless without the actual decryption key.
Banks and payment processors also use algorithms to detect fraudulent transactions. And PCI-compliant technology also features its own set of security measures.
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Tracking
Going digital tends to help tracking across the board, including payment technology.
With digital payments, you can monitor real-time transactions, allowing for immediate confirmation and transparency. This can be especially useful for managing cash flow, inventory, and customer demand.
Payment gateways and processors provide detailed transaction histories, analytics, and insights. This includes sales volume, customer preferences, peak sales times, and more.
Digital payments also simplify account reconciliation of sales data with bank statements, reducing the time and effort required to handle accounts.
Many digital payment platforms also integrate with loyalty programs or offer incentives for larger transactions, encouraging customers to add more items to their shopping carts. This can increase the AOV by offering cashback, discounts, or loyalty points on higher-value purchases.
Should digital payment replace all cash?
The matter of going completely cashless is certainly subjective. Looking at it from a purely business standpoint, businesses that can accept both digital payments and cash payments stand to benefit the most.
Though a cashless society has been the trend for a while, there’s still a core group of consumers who prefer cash. In fact, cash is even making a comeback in some circles.
So the long and short of it is this: No, digital payments don’t need to replace all cash, but your business should definitely embrace all different types of digital payments if you want to drive sales and retention.
