Digital Payments: Trends and Innovations Shaping the Industry
Senior Research Analyst
April 24, 2023
Digital payment technologies have fundamentally revolutionized the way we perform financial transactions today. Both individuals and businesses have seen significant advances in convenience, efficiency, security, trust, and accessibility of electronic payments made. In addition, the data collected by digital payment systems also enables enterprises to make much more informed decisions about their business.
What are digital payments?
Digital payments refer to various digital solutions and systems that facilitate electronic financial transactions between parties. These solutions cover everything from the underlying infrastructure to the tools used for the electronic payment itself.
The term digital payments can often invoke thoughts of mobile wallets or peer-to-peer (P2P) money transfers. However, the concept of digital payments extends far beyond a strictly consumer lens; many types of services, systems, and offerings can include B2B and B2C customers. Why are digital payments important today?
Paying, sending, exchanging, moving, and managing money globally has been more challenging than it is today. This is due to the fact, among other things, that digital payments have ushered in an unprecedented level of transactional speed and efficiency. Most digital payment systems enable transactions at a click of a mouse or a tap of a finger.
In addition to efficiency, digital payments have increased transaction security, data availability, cash management, and the ease of decision-making for financial institutions. This same digital revolution has facilitated cross-border business and opened new international opportunities for companies to transact seamlessly.
Another crucial advantage afforded by digital payments is financial inclusion. As most people in developing countries and economies rely primarily on mobile devices, access to digital payments has allowed them to be part of a more extensive and interconnected financial system.
What are the latest trends in the digital payments industry
Meanwhile, we are seeing digital adoption of several technologies powering this shift. For example, finance companies are quickly adopting the cloud to create more seamless and efficient processes for their customers.
Blockchain represents an emerging technology that is increasingly being adopted to enable quick and secure transactional activities. While typically associated with cryptocurrencies, blockchain, and distributed ledger solutions play an important role in securing, recording, and monitoring transactions and supporting the legal processes behind digital payments.
Biometrics are also taking center stage as an emerging technological trend within the digital payment ecosystem. Users are adopting various biometric solutions, such as fingerprint and facial recognition, to conduct secure digital transactions. Although biometrics introduce certain security and privacy considerations, the technology will likely continue an upward trending trajectory.
Regarding services and service providers, the enablement of real-time payment and settlement has surged in use and demand. Users and companies seek to conduct faster, near-real-time payment requests and transactions rather than rely on traditional and relatively inefficient batch processing. Consumers have been a driving force behind the push for instantaneous transaction capabilities, particularly regarding cross-border transactions and remittances. However, the proliferation of such technologies and capabilities will likely continue to generate and lead to risks, concerns, and considerations, such as privacy and anti-fraud protections.
The Evolution of Digital Payments
A brief history of digital payments
In 1994, the Stanford Federal Credit Union was the first organization to offer an early online payment system. After that, larger banks, financial institutions, and several start-ups quickly launched their own online payment systems, latching on to the growing momentum behind online transactions and e-money.
One of the next major milestones and watershed moments within digital and online payments was the advent of PayPal. The platform debuted in 1998 and continues to be one of the most prominent and reputable players in the online payment services vertical.
The evolution of digital payment naturally occurred alongside the confluence of various technological factors, one of the most impactful and important being the increasing penetration of Internet services, e-commerce, and mobile devices. These three factors served as a symbiotic accelerant to digital payment growth, given the subsequent accessible ecosystem of increasingly integrated online shopping and transacting.
Then, in the early 2000s, Asia emerged as a global digital payment epicenter for digital payments. Tech giants within China, such as Alibaba and Tencent, started launching their own mobile wallets, payment platforms, and transaction systems. As a result, adoption and utilization of these new solutions have soared among consumers and have become the go-to payment method across much of the region.
Now, the global West is quickly catching up with mobile apps and wallets like Apple and Google Pay and popular peer-to-peer (P2P) payment platforms such as Venmo and Square Cash.
The role of mobile devices in the rise of digital payments
Although the underlying technical infrastructure is critical for processing digital payments, mobile devices are the end-user tool that has enabled widespread adoption. The popularity and benefits of digital wallets have led to fewer and fewer people using cash or cards for transactions around the globe.
This is primarily thanks to the rapid adoption of smartphones after the transition to 4G/LTE networks. These improved networks offer enhanced data transmission and communication and have equipped users with increasingly faster networks and functionality. This trend is likely to maintain, if not gain, strength alongside economic growth and the continued global adoption of 5G network infrastructure.
As a result of digital device proliferation and network accessibility, an estimated 5.22 billion people worldwide are now smartphone users — representing 66% of the world’s population. The growing accessibility to easy-to-use handheld devices that continue to gain in sophistication and functionality has been one of the most prominent drivers in the meteoric rise of digital payments.
What are the types of digital payment systems?
Digital payments comprise much more than just digital wallets, debit cards or online money transfers. They also encompass a wide range of additional services and offerings designed for consumers and businesses, some of which have been summarized below:
B2C Digital Payments
Nearly everyone with a smartphone likely has some form of a mobile wallet available on their phone. In North America and much of Europe, phone makers provide some of the most prominent and popular mobile wallets — Apple Pay, Google Pay, and Samsung Pay. In other regions, the most prominent providers include tech giants such as Alipay, WeChat Pay, and Paytm.
With a mobile wallet, an individual can link their bank account or credit card with their mobile phone, and use their mobile device to pay for purchases directly. This can be accomplished by various technologically enabled approaches, including QR code scanning, tapping, or contactless payment.
Beyond the clear benefits and significant convenience afforded by digital wallets, they also can contribute to enhanced security and accessibility and include other benefits such as loyalty and reward programs.
Despite all of this, mobile wallets do introduce a new set of risks and considerations. For example, some markets worldwide may not accept payments from mobile wallets. Additionally, if a payment account is reliant on a mobile wallet, a lost or dead device can limit or eliminate an individual's ability to pay.
Contactless payments and Near Field Communication (NFC)
Contactless payments go hand in hand with mobile wallets, enabling users to quickly pay for services by placing their phone, debit card, or another device near a point-of-sale terminal. These transactions are enabled by technologies like Near Field Communication (NFC), Radio Frequency Identification (RFID), and QR codes.
In conducting a contactless payment, a mobile wallet creates a token containing pertinent personal payment information, which is then transmitted to the recipient. This process can serve as a more secure means of transacting when compared to traditional credit or debit or card payments, given that every token is unique and largely private. Contactless payments are also much faster than a card or cash transaction, improving transactional efficiency and reducing wait times for end users.
Peer-to-peer (P2P) payment apps
P2P payment apps eliminate the need for an intermediary when transferring money to another person. Instead, they enable individuals to easily and conveniently send money to family, friends, or even a vendor or merchant. Some popular P2P platforms include PayPal, Venmo, and Square Cash. However, some digital wallets - Apple, Alipay, and WeChat Pay – have P2P as a built-in function, positioning them as multi-functional platforms.
Analogous to other digital mobile payment apps and technologies, P2P payment systems offer individuals a new degree of transactional convenience. For example, users can instantly send and receive money without the hassle of setting up online bank transfers or sending time-consuming wires.
P2P transfers don't come without their own set of drawbacks. For one, some platform operators will charge substantial fees for transfers, particularly one that involves multiple currencies. Many platforms can also lack meaningful refund policies or protections, introducing the potential for human error risks.
Cryptocurrency and blockchain-based payments
One of the most recent technological trends and innovations within FinTech and digital payments is blockchain technology, which underpins the headline-grabbing and popular consumer asset class of cryptocurrencies. Blockchain technology, also known as distributed ledger technology, facilitates the ability to conduct immutable transactions and activities recorded and stored on a decentralized global network, preventing tampering. Crypto is not managed by any one central bank, financial authority or institution, nor is it a tangible currency. Instead, cryptocurrency is a digital asset generated through a computer- and an algorithm-driven process called “mining.”
Bitcoin stands as the largest and most popular cryptocurrency today, having made headlines following its rapid rise (and equally swift fall) in value over the past few years. Following Bitcoin, Ethereum, and Ripple represent almost two thirds of the more established and widely used cryptocurrencies, although thousands of different coins and variations can be found across the market.
Although individuals can complete transactions with crypto and send crypto to others on various digital currency platforms, the technology remains nascent and lacks widespread traction and acceptance relative to fiat currency. Many of those that engage in cryptocurrency activities do so from an investment perspective, albeit risky.
Two of the most considerable advantages of cryptocurrencies and blockchain-based transactions is that they are non-fungible — that is, they are immutably recorded on a decentralized ledger and can’t be tampered with. Alongside this, the lack of any central authority or intermediary financial institution has been characterized as both a benefit (democratization) and a drawback (lack of oversight and monetary control).
B2B Digital Payment Systems
As the adoption of digital payments has been driven mainly by consumer end users, the B2B segment of the market has been quickly making up the ground and is not far behind. Digital technologies facilitate all-new ways for businesses to process transactions, move money, and offer payment services.
Business transactions: The technologies facilitating digital business transactions can include automatic payments, invoicing, and subscription billing. These are often offered as Software as a Service (SaaS), helping companies increase efficiency and security in their financial transactions. Important players in this space include Chargebee, Square, and Ramp.
Payment security: These solutions serve to promote, enforce, and maintain security and integrity across the entire payment process. They use the latest technologies to enable fraud prevention, transaction monitoring, and compliance. For example, Netguardians protect you from financial crimes using AI, while Corlyitics offers regulatory risk intelligence analytics.
Payment support tools: Based primarily on the cloud, payment support solutions represent a set of tools that streamline and optimize digital payments and related activities. These tools can include SaaS systems for online payment checkout, payment orchestration, and monetization optimization. For example, GR4VY offers a cloud-native payment orchestration system, while Stripe helps businesses reduce instances of cart abandonment.
Payment infrastructure: This type of infrastructure enables any business to integrate and offer digital payment functionality within and across its platform. It lies at the very cornerstone of online transactions, serving as the foundational pillar of support for the vertical. Alipay, Payoneer, Bolt, and Arcus represent just a handful of the many big players within the payment infrastructure space.
Point of sale systems: As a bridge to end users, point of sale systems refer to the hardware and software through which transactions are completed. They sometimes offer additional supportive services like real-time inventory tracking, sales reporting, and customer data management. Companies in this field include Clover, Pine Labs, and Zettle.
Benefits of Digital Payment Technologies
Convenience and Speed
One of the foremost benefits digital payments provides is their inherent speed and convenience. Instant transactions, contactless payments, and abandoning traditional cash and cards have made payments much quicker and easier for consumers and businesses.
Not only that, but they have also enabled the rise of e-commerce, revolutionizing the way we shop altogether. As a result, customers have greater global access to goods and services, while small vendors are afforded the opportunity to compete in international markets.
Security and fraud prevention
Nearly all digital payments incorporate some form of authentication technology, which positions them as being relatively more secure when compared to cash or credit cards. For example, mobile payments are protected by the user having to enter their password or provide biometrics to unlock their phone and access mobile wallets. Users will often be required to provide additional verification information for larger transactions, further strengthening transactional security over cash payments.
In addition, many companies use artificial intelligence, big data, and, most recently, blockchain to identify, prevent, mitigate, and stop fraud. These uniquely trained models and emerging technologies have revolutionized orchestrating transactional security. They have also helped reduce the inconvenience of slow or erroneous fault prevention processes.
Financial Inclusion and Accessibility
One overlooked advantage of digital payments is their innate power to increase financial inclusion and accessibility. They create unique opportunities for consumers that are unbanked or underbanked, as well as opportunities for younger or smaller enterprises.
From the consumer perspective, many people in developing economies lack access to bank accounts and traditional financial services. However, digital payment systems can provide them with access to the formal economy and financial offerings, such as global transactions and remittances.
For younger or smaller businesses, digital payments increase reach and access to previously untapped and inaccessible markets. For example, small rural sellers can leverage large e-commerce platforms and online payment systems to sell their goods globally.
Concerns Around Digital Payments
Data Privacy and Security Issues
Although digital payments equip consumers and businesses with new tools and advantages, they come with risks and considerations. One of the significant concerns in recent years has been centered on the idea of data privacy and security. As countries and regions roll out new data protection policies — such as the EU’s GDPR — digital payment providers and systems will face pressure and scrutiny regarding safe data sharing and storage.
Within this context, governments, regulators, tech companies, and financial institutions are racing to develop more robust authentication and data protection solutions to guarantee user privacy and safety.
As global transactions are further democratized, how can regulators protect users, prevent fraud, and ensure legitimate exchanges of money and data? How can companies ensure they remain compliant while using new methods of digital payments?
To respond to these and other regulatory questions, policymakers are attempting to quickly develop and implement laws and guidelines to respond effectively to the evolving financial services market.
What’s Next in Digital Payments?
Digital payments are here to stay, supported by many relative advantages compared to traditional payment methods, such as ease and convenience. The staying power and continued pervasiveness of digital payments will be accompanied by continued advances in technologies underpinning digital payments— including AI, big data, networks, SaaS, and more.
We will also see an ongoing institutional push to adjust and expand regulatory frameworks responsible for governing and overseeing digital payments, data governance, and privacy requirements. With some of the risks accompanying digital payments, such as fraud or money laundering, public institutions and governing bodies will likely continue their push to improve and ensure transactional security.
The wave of digitalization will also facilitate further digital inclusion, bringing more and more people online regarding financial transactions. At the same time, existing users will see a higher degree of collaboration among their payment systems and an increasingly seamless and efficient payment experience.
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