Top digital payment trends and methods you should understand in 2021

You may wonder why certain companies only prefer specific digital payment methods when selling goods/services in the market. Some require bank transfer, a few are satisfied with electronic payment, and several entities also accept card payments. However, many businesses avoid specific payment systems altogether. For, e.g. not accepting card payments. Why though? Aren't some of them faster and more convenient? Turns out, digital payment is a lot more complicated than you think, and there are a number of reasons why many may opt-out of using them.

Clients often confuse the implications of different digital payment systems. Each type of digital payment varies in their process and the charges they incur. Here, we look at three kinds of digital payments:

1. Bank Transfer

A bank transfer is a one-time money transfer from bank to bank. It is also known as a credit transfer or wire transfer done between banks. It sends out money (debiting) from one bank account to another (crediting). Each country has its own domestic system of bank transfer. International wire transfers are called SWIFT transfers that can be done through multiple currencies. For Euro payments, it is known as the SEPA (Credit) Transfer done within the SEPA zone in Euros.

The process of a bank transfer starts with the payer ordering a bank to send out money (online or in a branch). The payer gives out the details needed based on the type of transfer. For SEPA, the payer needs to give the European IBAN (international bank account number), and for SWIFT, the payer needs to give the BIC code along with some extra details. The payer bank then sends the information to the recipient bank with payment instructions. The receiving bank gets the information and puts the money in the bank account from its own reserves. After that, the two banks settle the payment between themselves in the background.

Advantages of bank transfer

Bank transfers have a number of pros and cons, depending on the type of transfer. Domestic transfer carries most of the advantages because it is done locally. We will be using SEPA bank transfer as an example:

  • Cost: SEPA transfers are free like most domestic transfers are in other countries. There are no charges for domestic transfers since it is done in local currency. In SEPA, there may be a conversion fee if the transfer comes from a state that does not operate in Euros (e.g. the United Kingdom or Romania);
  • Returns and payouts: Returning and paying out money is simpler, and it will be treated as a regular transfer rather than a chargeback. This is because when the payer sends out the money, the receiver gets the account information of the payer. Therefore, if he has to return the money, the receiver can simply send it back without asking the payer's information separately. This is especially helpful if a business has to pay out regularly (known as Direct Debit/deposit). It can simply automate the payment every month without wasting time on gathering the bank information every time. Hence, many businesses opt to bank transfer because automatic returning and paying money is easier and less time consuming;
  • Time: While international bank transfers take time, domestic transfers are instant. For SEPA, cross-border transfers are treated as a domestic one; hence they are quick within the Eurozone.

Disadvantages of bank transfer

Disadvantages are often tied to international transfers, like SWIFT. This is because it generally takes a few days to transfer the money and it incurs several costs, such as transfer and a conversion cost. These costs are significant if done through traditional banks. Hence, several fintech-based digital banks have been established to fill some of the gaps that international bank transfers posed. These include challenger banks or neo-banks like N26 and e-money institutions like Wise and Revolut, all of which offer IBANs for free Euro transfer domestically and cheaper transactions for international transfer. There are non-Europe equivalent institutions operating globally that provide the same service (e.g. Skrill). Neo-banks also enable returns and direct debit/deposit cheaply without needing additional stringent requirements. Therefore, an employee in the USA can receive his salary from Europe every month in Euros through Wise account (for e.g.), which the employee can convert into dollars cheaply and withdraw from his local bank.

2. Non-Bank Wire Transfer

A non-bank wire transfer is a method of sending money electronically from one financial entity to another or to an individual. These financial institutions are often called Electronic Money Institutions (EMI), where the funds are transferred electronically, which is faster, cheaper, and more convenient than traditional banks.

Non-bank wire transfer has different forms of procedure depending on the financial institution:

  • No Top-up EMI, such as Western Union or MoneyGram - a financial institution that transfers money from the payer to the receiver. They can do the wire transfer from one bank account to another at a cheaper rather than transfer done directly through traditional banks. They can also transfer the funds in cash without requiring the payer and the receiver to have a bank account. In this case, the payer simply needs to bring cash to the office. The institution will send the money to their agent office in the receiver's location. The receiver needs to present himself in the agent office to receive the funds in cash;
  • Top-up EMI, for example, Paypal, Wise, Revolut and etc. - EMIs that transfer money from one party to another electronically provided that they have digital accounts with the EMI and bank accounts or cards to to-up money from into their EMI account. Similarly, money can be withdrawn by assigning the funds to the bank account or card. Most of these EMIs are used to pay bills or receive regular payments. All intra-EMI account transfers are free unless there's no currency conversion. Withdrawing through an assigned bank or card is also free. Some EMIs also provide personal accounts (e.g. Wise Multicurrency account, Revolut and many other) to use it locally in specific countries without needing to open a bank account.

Advantages of non-bank wire transfer

  • Cost: Domestic transfer is free, similar to a regular bank transfer. However, EMIs were primarily established to provide low-cost international money transfers to individuals who otherwise have to face high transaction costs in traditional banks. Some EMIs, like Wise and Revolut, do not charge users for sending money within the SEPA region with the exception of currency conversion (Romanian RON to EUR, for, e.g.). Others may charge a transaction fee based on the location of the receiver and payer or method of payment (whether through bank or card). Overall, the fees are relatively lower for international transactions than banks;
  • Convenient: EMIs are generally suitable for every transaction due to their flexible options of fund transfer. Since transactions are done digitally, they can offer multiple secured methods of payments, such as online banking, cards, apps or e-wallets. All they require from users is to become their customers. For services like Western Union, one may not need an online account; however, they also offer one for individuals to transfer money online by themselves;
  • Time: EMIs are known to be very time-efficient, some transferring the money instantly (e.g. Paypal and SEPA payments through EMI). Others can take 3 business days depending on the location and the method of transaction.

Disadvantages of non-bank wire transfer

While making payments between the EMI account is doable, paying to an external institution or getting paid by an external body is difficult and often costly. For example, a transaction between Paypal accounts is free and instant. However, when the receiver does not have Paypal and only accepts bank transfer, the sender has to send money through an integrated 3rd party service called Xoom. While the receiver does not need a Paypal or Xoom to receive money, if he wants to return the money, he either needs the payer's bank account information or he creates a Paypal account to return the money. The same goes for Western Union - returning the money is difficult because the bank information is often missing (unless provided otherwise). This is why certain companies do not accept Western Union payments or Paypal payments because they are only operating their revenues through bank transactions. Some EMIs have taken a different approach to resolve this issue by providing personal bank accounts to customers to make transactions easier (e.g. Wise Multicurrency and Revolut). Any receiver can return the money to the sender's EMI account through bank transfer (SEPA transfer between a bank and a Revolut account, for, e.g.).

3. Card payment

Card payment is a financial transaction where withdrawal or payment of funds is made through a payment gateway. It is done through a debit card or a credit card, and it is the most popular form of payment because of its time efficiency and convenience. Withdrawals are made through ATMs, and payments are made either online or in-person through the payment terminal. While withdrawals require a PIN, payments may or may not need one. Here, we will only be focusing on payments. The process of card payments consists a person ordering a product/service online from a merchant who has integrated the payment gateway (Gateway) in its system to process the transaction.

Once the customer provides the card details and submits the order to buy, the following steps take place in just a few seconds:

  • The merchant website forwards the details of the transaction to their Gateway
  • The Gateway forwards the information to the payment processor of their bank
  • The Payment Processor sends the information to the Card Association (Visa for, e.g.)
  • The Card Association connects the transaction to the customer's bank (where the card was issued from - Issuing bank)
  • The issuing bank receives the request to permit the payment. It then verifies the card and responds back to the Payment Processor with either approval or refusal
  • If it is approved, the Payment processor passes the approval to the Gateway
  • The Gateway receives the response and passes it to the merchant website
  • The merchant fulfils the transaction, clearing the authorisation and allowing the issuing bank to settle the payment with the merchant, which usually takes 3 days

Advantages of card payments

Card payments, both debit, and credit have several benefits aside from the ones already mentioned. Card payments are also secure, and card association companies ensure that their customers are protected at all times. They limit their payments to prevent overspending, put security measures on the merchant websites to protect them from fraud, and settle refunds and charges under dispute. Some banks offer rewards for card use, such as cashback and bonus points. They may also provide discounts on services depending on the company the user is taking the service from. Credit cards also offer the same benefits in addition to their primary purpose of borrowing money. The cost of debit card payment is low and flat, meaning it is a monthly charge the user needs to pay anyway for using it.

Disadvantages of card payments

Users cannot transfer money to individual bank accounts or receive money in their accounts through cards as they can do with a wire transfer. Since the transaction goes through a Gateway, the bank information is not passed to the final receiver. Returning money (Chargeback) is a highly complex process issued by the Issuing bank, and it can take up to 2 weeks to go through. Apart from the procedural delay, there are also the costs that businesses have to pay to receive the money through card payments. Each time a customer pays by card, an interchange fee is paid by the business's bank to the Issuing bank. Although the fees depend on the card association and the banks themselves, the companies may feel overwhelmed and compensate the cost from the customer, which will strain their relationship. Hence, many companies prefer bank transfer because it is instant, cheaper, or free, and returning is much easier.

Despite the issues, payers still prefer card payments. As a result, EMIs are also offering cards for their users to may payments and withdraw money. Companies include Paypal, Wise, and Revolut who are offering physical cards to their customers to make swift retail purchases.

Some digital payments are swifter and more suitable for certain types of businesses. Card payments are more ideal for retail purchases, and bank transfers are more convenient for acquiring services (e.g. investment platforms). Each has its own complexities, which the final customer may not even know or understand. Here, the aim is to inform how digital payments work to better approach their payments.

Last update: 06/05/2021