Digital payments are those made online or through digital channels without requiring the transfer of actual currency. The transfer of value from one payment account to another in which both the payer and the payee utilize a digital device, such as a computer, smartphone, or credit, debit, or prepaid card, is known as an electronic payment (e-payment).
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A firm or an individual may be the payer and payee. The payer and the payee must therefore have a bank account, an online banking method, a device from which they can make the payment, and a medium of transmission in order for digital payments to occur. This means that they must have registered with a payment provider or an intermediary like a bank or a service provider.
Both online and in-person interactions with the payee are possible for digital payment transactions. Digital payment transactions include, for instance, when a customer pays with UPI on an online store or when he purchases from his neighborhood grocer and pays him with UPI in-store.
Digital payments may be made using a number of methods, such as mobile wallets, PoS terminals, NEFT, AEPS, and UPI. The most popular method is UPI, which has achieved a transaction value of $1 trillion.
Why Make Digital Payments?
There are several obvious advantages to switching to digital payments and receipts, particularly for Indian small enterprises. Businesses and consumers increasingly anticipate that digital payments will be made available for quicker, safer, and fee-free transactions. In order to reduce risk, the payer possesses a mobile phone that offers further identification by fingerprint or other biometric or verification methods.
Going cashless has various advantages for commercial transactions as well.
Eliminating cash management lowers the danger of theft and lowers storage and security expenses.
Digital payments frequently result in faster transactions, which shorten lines and improve the in-store experience for customers. Sales are therefore being driven by customer convenience.
There is a clear trail for simple accounting, which makes operations and tax compliance easier.
Additionally, the payee can get consumer data for analytics and market segmentation through mobile-based digital payments. This makes it possible for issuing banks and merchants to employ digital payments in conjunction with loyalty and reward schemes to increase customer acquisition and retention through tailored incentives and focused marketing. Customers can obtain credit through the use of credit cards, which are among the most traditional forms of payment, and the more recent Buy Now Pay Later model, which is facilitated by digital payments.
How Do Electronic Payments Operate?
Participants
Although making a digital payment could appear to simply need a few clicks, the digital payments ecosystem includes a number of intermediaries that smoothly support a successful transaction.
The merchant (payee), the customer (payer), the bank, and the payment network are the parties that handle a digital payment transaction from beginning to end. Local Kirana stores, shopping centers, retail establishments, e-commerce platforms, and service providers who offer the ability to conduct business or pay bills online are all considered “merchants” in this sense.
The issuing bank is the one that takes money out of the payer’s account. The acquirer bank, often known as the payee’s bank, is on the other side and credits the amount on the receipt. Therefore, in order to transact digitally, both parties need to have a bank account and an online banking method.
How the Digital Payments System Operates
Let’s look at an example to better grasp how digital payments operate.
Anjali Singh buys clothing from Rupesh Garments, a store on Mumbai’s bustling Kalbadevi Road, for INR 5,500. She can choose to pay with UPI for any app (QR Code) in the store or digitally with her debit card at the Point of Sale (PoS) machine.
Before the payment is made, a number of procedures must be completed by the merchant when they swipe their card on the PoS machine. The PoS provider verifies that Anjali’s bank account has a sufficient amount because the payment is being made using her debit card. Only once Anjali inputs the transaction PIN and it has been validated will the digital payment be performed, deducting funds from her account and crediting Rupesh Garments’ business account if there is a sufficient amount. Before the transaction is processed further, the available credit limit is confirmed with the payer’s card issuer if a credit card is being used for digital payments.
If Anjali purchases from an eCommerce portal, the eCommerce player sends a payment request to the payment gateway it has connected with in order to process the digital payment. Following that, the payment gateway asks Anjali for permission via an OTP or PIN, receives the money from her bank, and deposits it with the bank that the e-commerce platform has an account with. In order to proceed with authentication, the gateway must first verify Anjali’s bank account balance. If she enters wrong payment information or has an insufficient amount, it must deny the request.