You may wonder why certain companies only prefer specific digital payment methods when selling goods/services in the market. Some require bank transfers, a few are satisfied with electronic payments, 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. The types of digital payment vary in its process and the charges it incurs. Here, we look at several kinds of digital payments trends:
A mobile wallet is a virtual storage system where you can keep your credit and debit card details. It closely resembles a physical wallet. Many smartphones already have mobile wallets embedded. You can use mobile wallets to send and receive money, and you can also use them for daily expenses and bills. Many people confuse the terms "digital wallet" and "mobile wallet." Even while both systems save credit card information, they operate in distinct ways. For the most part, digital wallets are reserved for online transactions and do not necessitate mobile access. Some of the most common examples of digital wallets are Apple pay and Google Pay and it's characteristics overlap with most cloud based payments. In-store shoppers who prefer not to carry cash in their wallets can do so using a mobile wallet instead. Therefore, these wallets must be used on portable devices that are easy to carry.
Paying with a mobile wallet requires the user to be present at the time of the transaction. This is known as Near Field Communication relying on radio frequencies to exchange data between two devices. Transactions are protected by multiple levels of encryption and security in mobile wallets. This data is linked to a personal identifying format, like biometric login, for each stored card when the programme is launched and the user inputs their payment information.
Because of the obvious advantages of using mobile wallets, the number of users is steadily rising. By 2024, it is expected that the number of people using digital mobile wallets will rise by 16%. The following are some obvious benefits of mobile & e-wallets:
Connectivity and device compatibility are required for mobile and e-wallets. Because it can't be utilised offline and it cannot be used on devices that are not smartphones, mobile and e-wallets may end up being useless in places with poor internet access.
Mobile and e-wallets can charge exorbitant transaction fees and these fees can be higher than bank transfers. Companies can increase their fees whenever they want without thinking twice about the reprecussions on the users.
Mobile and e-wallets store sensitive financial data, so if your device is broken or your wallet is accessed without your consent, your financial information is at risk. Users of mobile wallets are also prone to risks of scams. Unauthorised parties may pretend to be your friend or family and claim that they unintentionally sent you money intended for another individual and are expecting you to refund them. Many do not fall for these scams, but many do and there is no resolution process for the victims who have been scammed.
Real time payment is an instantaneous payment line that enables instantaneous transfers of money. It works 24/7 throughout the year, including on weekends and holidays, so that transfers can be completed at any time. They are not the same as "fast payments", although they are used interchangeably. Contrary to faster payments, which settle payments faster than traditional payments, real time payments settles transfer in real time instantaneously.
RTP additionally delivers real-time alerts for every transaction, like account statements, payment invoices and requests and confirmation messages for all involved parties. The system has these built in to ensure that both parties are kept in the loop. Additionally, RTP systems have built-in capabilities such as in-app shopping, split bills, P2P payments, cash management that are available to customers.
Real-time payments are quickly becoming the new norm for electronic payments, as seen by the existence of 54 national real-time payment systems around the world, in addition to numerous others that are in the planning or development stages. SEPA Credit Transfer Instant, the Eurozone system, is already in use in 20 countries. The United Kingdom and the Nordic region has implemented their own system alongside the existing ones for real time payment. The UK implemented Faster Payments System and New Payments Architecture, meanwhile the Nordic region implemented the P27.
For their clients' benefit, banks all across the world have begun accepting real-time payments. The advantages of real-time payments are numerous:
Real time payments itself does not have any disadvantages, but it is challenging for companies to implement. It requires a lot of resources and effort to be able to set it up. New real-time payment methods must coexist with existing setups, adding to the strain of maintaining numerous IT infrastructures with the resulting impact on costs, controls, upkeep, risks, and security.
Real time payments require system availability at all times to allow transactions within and outside business hours. Instant payments rely on individual transaction clearance by the banks. As there will be multiple single transactions in a day, companies will need a lot of data servers to be able to process the payments.
The liquidity of a business is also important for real time payments. Banks and other financial institutions must not only ensure that all instant payments are processed without hurting the businesses' ability to store capital for further business endeavours.
Almost all banks and businesses are required to carry out anti-money laundering for the transactions their customers make, and real time payments may interrupt the legal mandate. AML checks take time, and such checks for every transaction will eventually impact the time of execution. It is up to businesses to ensure a fine balance between security and convenience for their customers.
A cloud-based payment system means you can send or accept payments on virtually any digital device. It doesn't matter whether it's a contactless credit card purchase, an online order, or anything else. Additionally, clients can get digital receipts as well as access to detailed sales information with this omnichannel solution.
It is built on cloud computing technology, which stores and manages data on the "cloud". Unlike with traditional hosting, a corporation is responsible for purchasing, keeping up-to-date, and maintaining its own hardware. Cloud computing enables companies and people to access, store, and manage their data without owning the premises/infrastructure required for this. In exchange for a monthly fee, businesses can store all of their database servers, tools, and other software in the cloud at no additional cost to themselves. The Cloud Services Provider will store all of this information in a data centre that is under their control. If a business wants to grow and needs more space in the cloud to accommodate new technology, it only has to pay for it.
Cloud-based payment solutions offer a range of benefits, such as flexibility and more payment options. The following explains some of the advantages:
Many financial institutions can profit from cloud-based payment processing, but first we need to address a few issues that stand in the way of a full deployment. Trusting a third-party cloud provider with sensitive customer payment information is a risky proposition, both in terms of storage and access. When a massive security breach occurs and personal privacy is violated on a large scale, the true consequences of this kind of risk is fully realised. While correcting risk failures is critical, it is also necessary to continually strengthen the cyber defences in order to prevent future security breaches.
Many payment companies are hesitant to move their core payment operations to the cloud in light of the recent AWS cloud outage, which affected significant sites and services all across country. Thus, in order to avoid service interruptions, several financial institutions have turned to multi cloud strategies, which have resulted in significant technical debt. This strategy may be effective in the short term, but it cannot be sustained over the long term for business expansion. Using a single, dedicated cloud provider and a hybrid cloud architecture, many on-premise and cloud-based payment platforms can share the same IT infrastructure and maximise resource utilisation.
Until then, the general speed and performance of various payment kinds may vary depending on each sender's and recipient's location. Cloud payments for point of sale transactions have been developed and tested with NFC mobile wallet devices, but their general acceptance will primarily depend on how the payment infrastructure improves over time.
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 Transfers done within the SEPA zone.
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.
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 transfers as an example:
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.
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:
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). Any receiver can return the money to the sender's EMI account through bank transfer (SEPA transfer between a bank and a Wise account, for, e.g.).
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 of 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:
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.
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.
The pandemic has taught merchants and customers alike to adapt rapidly to new situations as they arise. Consumers reacted enthusiastically to new ways of interacting with companies. Paying is already easier than ever, and this trend will continue in 2022, as payments become more frictionless and contextual.
Some of the most common forms of digital payments discussed in this article are mobile/digital wallets, real-time payments, cloud-based payments, bank and non-bank wire transfers, and card payments. Each has its own characteristics, advantages, and disadvantages.
We explored mobile and e-wallets and how they are convenient and secured but can be open to scams. Real-time payments are a game changer for everyone, which has some big challenges since it relies on larger resources. Cloud-based payments are seamless, but they are prone to cloud outages and leaks. Bank transfers are the most traditional way to transfer money, and more companies have tried to innovate with bank transfers by offering online banking and other avenues of payment gateway. Meanwhile, non-bank wire transfers were established to innovate on the slowness of traditional bank transfers. Card payments are convenient; however, the merchant will incur significant costs in order to pay for the services.
Some digital payments solutions 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 people how digital payments work so they can better approach their payments.
Last update: 06/05/2021
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