Like everything else in our world, payment transactions are rapidly shifting towards digitalization. Could we have imagined a decade ago that we would be able to make payments by phone or watch?
Digital payments have undergone a remarkable evolution over the years, evolving from conventional methods to sophisticated, technology-enabled solutions. This article looks at how digital payments work, examines common payment methods used, and highlights the role of key participants in this payment ecosystem.
Table of contents
What are digital payments?
Digital payments refer to electronic transactions conducted over the Internet or other electronic devices, allowing individuals and businesses to send and receive money without the need for physical currency. These transactions are facilitated through various online platforms, mobile apps, and electronic payment systems.
What are the types of digital payments?
- credit/debit cards
- mobile wallets
- online banking
- peer-to-peer (P2P) transfers
- contactless cards
- QR code payments
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The digital payment system: How It works?
The ecosystem of digital payments encompasses various technologies, platforms, and processes that enable individuals and businesses to conduct transactions electronically. To understand how digital payments work, we need to examine the participants of this process.
Key participants in digital payment systems
- The consumer
- The merchant
- The issuer bank (the consumer’s bank that issues their credit or debit card)
- The acquirer bank (the merchant’s bank that receives the funds from digital transactions)
Payment gateways are responsible for the verification of the customer’s balance or credit limit, which is linked to their customer’s bank account, during a digital transaction, such as processing a payment request.
Step-by-step guide on the process of making a digital payment
When making a digital payment, the process typically involves the following steps:
1. Initiation: the payment process begins when a customer initiates a transaction, whether it’s purchasing goods or services online, or selecting a digital payment method, such as credit cards or a mobile device with wallets.
2. Authorization: once the transaction is initiated, the payment information is securely transmitted to the payment processor or acquiring bank for authorization.
3. Processing: upon authorization, the first payment network or processor processes the transaction by debiting the client’s account. This step may involve communication between various parties, including banks, payment networks, and merchant service providers.
4. Settlement: settlement typically involves the transfer of funds from the issuer bank to the merchant’s bank.
5. Confirmation: once the settlement is completed, both parties receive confirmation of the transaction.
The technology behind digital payments
Several technologies play a crucial role in the operation and security of digital payments, including:
Machine Learning and Artificial Intelligence
Machine Learning algorithms allow companies to monitor transaction patterns and potential fraudulent activities, while AI-driven systems enhance user experience by understanding spending behaviors.
NFC (Near Field Communication)
NFC enables secure communication between devices in close proximity, that facilitates contactless transactions, allowing devices to communicate seamlessly.
For example, using NFC, a customer can effortlessly pay for their coffee by simply tapping their smartphone against the cafe’s point-of-sale terminal, securely transmitting payment information and completing the transaction without the need for any physical credit cards or cash.
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MST (Magnetic Secure Transmission)
MST is a technology that emits a magnetic signal to make mobile wallet communicate with traditional card readers. This technology allows digital wallets to be used with both traditional magnetic stripe and modern chip-based card readers, enhancing compatibility.
For instance, MST technology emits a magnetic signal enabling digital wallets to seamlessly interface with conventional magnetic stripe card readers, offering users the flexibility to make secure transactions at both traditional and chip-based card terminals.
Digital payments trends to watch in 2024
Digital payments are constantly changing due to technological advancements like AI and ML, changes in consumer behavior and the FinTech market.
In 2024, we can expect to see the emergence of several key trends that will shape the digital payments landscape, including:
Real-time payments, which allow for immediate fund transfers 24/7, thereby redefining traditional banking norms. This presents an opportunity for businesses to optimize cash flow management, simplify administrative processes, and create a more seamless customer experience.
Cryptocurrencies, such as Bitcoin, Ethereum, and others, continue to gain traction as alternative forms of payment. Businesses and consumers are increasingly accepting and using cryptocurrencies preferred payment method for transactions due to their decentralized nature, lower transaction fees, and potential for faster cross-border payments.
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A2A (account-to-account) payments
The expected increase in A2A payments in 2024 is primarily due to their integration with open banking. They are open banking-enabled, and this synergy, coupled with advances in instant payments and growing merchant adoption, is catapulting these transactions into a new era. As a result, A2A payments are not only becoming faster and cheaper, but also much more resistant to fraud.
Central Bank Digital Currencies (CBDCs)
Central Bank Digital Currencies (CBDCs) have emerged as a significant trend in the realm of digital payments. A CBDC is a digital form of a country’s national currency, issued and regulated by the central bank. Unlike cryptocurrencies such as Bitcoin, CBDCs are centralized and are considered legal tender. CBDCs aim to enhance financial inclusion, reduce transaction costs, and provide greater control over monetary policy.
Biometric authentication methods, including fingerprint scanning, facial recognition, and voice recognition, are becoming more prevalent in digital payments. For example, the global voice-based payment market is going to grow to USD 14.66 billion compared to 6.4 billion by 2030.
These technologies offer enhanced security and convenience by replacing traditional authentication methods like passwords and PINs.
Embedded finance refers to the integration of financial services into non-financial platforms and experiences, such as e-commerce websites, ride-sharing and mobile payment apps,, and social media platforms. This trend enables seamless and contextually relevant payments within existing digital ecosystems, blurring the lines between banking and other industries.
These emerging trends are reshaping the way businesses and consumers engage in digital transactions, driving innovation and transformation across the payments industry.
The journey of digital payments continues to be a fascinating evolution, driven by innovation, technology, and the ever-changing needs of businesses and consumers. As these trends unfold, the digital payments landscape is set to become more secure, efficient, and seamlessly integrated into our daily lives.
What are digital payments?
Digital payments refer to electronic transactions conducted over the internet or electronic devices, allowing individuals and businesses to send and receive money without using physical currency. These transactions occur through online platforms, mobile apps, and electronic payment systems.
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What are the types of digital payments?
Common methods of digital payments include credit/debit cards, mobile wallets, online banking, peer-to-peer (P2P) transfers, contactless cards, cryptocurrencies, and QR code payments.
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How do digital payments work?
Digital payments involve initiation, authorization, processing, settlement, and confirmation. Users initiate transactions, payment information is authorized and processed securely, funds are settled between banks, and both parties receive confirmation of the transaction.
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What technologies are used in digital payments?
Technologies such as Machine Learning, Artificial Intelligence, Near Field Communication (NFC), Magnetic Secure Transmission (MST), biometric verification, electronic trails, and tokenization protocols play crucial roles in the operation and security of digital payments.
What are the key trends in digital payments?
Key trends in digital payments include real-time payments, cryptocurrency adoption, A2A payments, Central Bank Digital Currencies (CBDCs), biometric authentication, and embedded finance.
These trends reflect ongoing advancements in technology, changing consumer behaviors, and the evolving FinTech market.