Basically, digital payment is an online transaction that involves the transfer of money in exchange for goods in exchange for services. A digital payment is basically any payment that is not made in cash.
Let’s take a closer look.
Understanding Digital Payments
A digital payment is the electronic transfer of money from a consumer to a business in exchange for goods or services. This Online payment Can be made through various platforms, apps, or systems and typically involves the use of devices such as smartphones, computers, or payment terminals. Basically, it involves paying with anything other than physical cash.
What are the different types of digital payments?
Digital payments started as traditional credit or debit card transactions. But many examples of digital payments are available today, including:
- Credit/Debit Card Payment: Card payments made online or in physical stores are processed through a secure payment gateway.
- Mobile Payment: Payments made through Mobile apps or wallets (eg, Apple Pay, Google Pay) by scanning QR codes, tapping the phone, or using NFC technology.
- Bank Transfer: Direct transfer from one bank account to another through an online banking platform
- E-wallets: Virtual wallets (such as PayPal, Venmo, or Paytm) where users can store money and conduct digital transactions.
- Cryptocurrency: Payments made using digital cryptocurrencies such as Bitcoin, Ethereum, or others. According to Statista.crypto payments are predicted 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 (eg, Afterpay, Klarna).
- Contactless Payments: Payments are made by tapping a card or device equipped with NFC technology at the POS terminal.
How does digital payment work?
Digital payments involve multiple initiatives and institutions that work together to ensure that money is securely transferred from the payer (the person making the payment) to the recipient (the person or business receiving the payment). goes
So, how does online payment work? Let’s take a look:
Step 1: Payment is initiated.
The first step is when a business or consumer initiates a payment through a digital platform. This can be through an online checkout, an in-store transaction, or a peer-to-peer (P2P) payment through an app like Venmo or PayPal.
Step 2: Payment is verified.
A digital payment system must verify the identity of the payee to verify that the transaction is legitimate. This step includes security checks, which may include 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 forwards the payment request to the payer’s financial institution (eg, a bank or credit card company) for authorization. The organization checks for substantial funds and fraud.
Step 4: The transaction is processed.
Once authorized, the digital payment system performs the actual transfer of funds from the payer’s account to the recipient’s account. It includes a payment gateway that receives and transmits payment details to the appropriate financial institution and a payment processor that processes the transaction and communicates with both the consumer’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 can take anywhere from a few seconds (in the case of an instant transfer) to a few days (in a traditional banking system).
Step 6: Payment Confirmed
After the funds are transferred, both the payer and the recipient get confirmation. This can 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 meet these preferences can count on selling to these shoppers. For example, mobile wallets are expected to double in usage between 2020 and 2025, according to Statista..
By offering different digital payment methods (credit cards, e-wallets, BNPL, etc.), businesses cater to different customer preferences, increasing sales from customers who might not have otherwise completed purchases. .
In addition, convenience helps increase 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 vehicles are a major challenge, especially in e-commerce. By offering quick and seamless payment options (like one-click payments), you can reduce abandonment rates and convert more visitors into paying customers.
Storing payment information in digital wallets or platforms makes it easier for consumers to make repeat purchases. When checkout requires no extra effort, customers are more likely to add additional items or select premium options.
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Increase the average order price.
Digital payments can encourage consumers to spend more per transaction, increasing average order value (AOV).
BNPL payment options like Afterpay or Klarna, for example, allow customers to split payments into smaller, interest-free installments. This encourages consumers to make larger purchases because they don’t necessarily need all the money right away.
Digital payment systems also allow you to offer subscription models, automatic renewals, and sales opportunities at checkout. For example, during the checkout process, you can recommend complementary products or services, adding value to each transaction.
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Security
Digital payments have various security benefits. To begin with, there is less physical handling of cash, which means fewer errors and less susceptibility to theft.
In addition, payment data is encrypted in transit to protect sensitive information during digital payments. This reduces the risk of data breaches, increases customer confidence and ensures legal compliance.
And instead of transferring the actual card details, tokenization reduces the risk of data theft. Even if intercepted, these tokens are worthless without the original decryption key.
Banks and payment processors also use algorithms to detect fraudulent transactions. And PCI-compliant technology includes its own set of security measures.
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Tracking
Going digital helps with tracking across the board, including payment technology.
With digital payments, you can monitor real-time transactions, allowing instant verification and transparency. This can be particularly useful for managing cash flow, inventory, and customer demand.
Payment gateways and processors provide detailed transaction history, analytics and insights. This includes sales volume, customer preferences, peak sales hours and more.
Digital payments simplify accounting of sales data with bank statements, reducing the time and effort required to manage accounts.
Many digital payment platforms also integrate with loyalty programs or offer incentives for larger transactions, encouraging consumers to add more items to their shopping carts. It can increase AOV by offering cashback, discounts, or loyalty points on higher value purchases.
Will digital payments replace all cash?
The case for going completely cashless is of course subjective. Looking at it from a purely business perspective, businesses that can accept both digital payments and cash payments stand to benefit the most.
Although a Cashless society While this has been the trend for some time, there is still a core group of consumers who prefer cash. In fact, cash is even making a comeback in some quarters.
So the long and short of it is this: No, digital payments don’t have to replace all cash, but if you want sales and retention, your business should definitely accept all different types of digital payments. Should do.