Digital payments – how they work, importance and methods

Digital payments make people’s lives better. The transaction is completed within seconds. It only takes a few seconds to send someone money. While it used to take days or weeks

Digital payments are an important step forward for A “cashless economy” which includes the use of ATMs, MICRs, debit cards and credit cards. Many countries’ governments heavily promote digital payments over cash.

Digital payments drive a formless, paperless, and cashless economy because anyone can transact at any time or location.

There is no denying the power of digital payments.

Basics of digital payments

Digital payments are made through digital or online channels without the exchange of physical currency between the payer and recipient.

to complete the transaction Both the payer and the payee must have:

  • bank account
  • How to bank online
  • payment equipment
  • medium of transmission

How do digital payments work?

However, digital payments may only require a few clicks, however, in this case a number of middlemen are required to complete the transaction.

It is important to understand how digital payments work before proceeding. Let’s examine the main players in this system:

  • merchant: The term “seller” refers to Kirana stores, department stores. ecommerce website and service providers that offer the ability to conduct business or settle accounts using electronic payments.
  • Consumers: The person who pays is called the consumer.
  • bank: The bank transfers money from the customer’s account to the retailer.
  • Payment network: Payment systems such as MasterCard or VISA guarantee that transactions are properly verified and authenticated.

How does the digital payment system work?

To understand how digital payments work We will use two examples:

  1. Payment using a card

Tom uses his card to buy a new phone from a mobile phone store for $500. He decides to pay online. To complete the transaction The store owner swipes the card on the POS device. Payment is made in several steps.

The POS service provider must first ensure that his bank account has sufficient balance. To authorize the payment, Tom must enter his card’s PIN. If there is an account balance and the PIN is correct, the transaction will proceed.

The digital payment will then be completed. By debiting Tom’s account and crediting it to the Mobile Store’s business account.

  1. Payment using online banking

When purchasing products from e-commerce websites The payment gateway sends a payment request to the user.

The user (in this case, TOM) receives an authentication code via OTP. The payment gateway accepts the money from his bank. Payment will be deducted from Tom’s account and credited to the online seller’s account.

The transaction will not go through until there is sufficient balance in the account.

Common digital payment methods

The most common methods are:

  • Credit and debit cards: This is one of the most popular methods of digital transactions. People use their cards to shop online, buy groceries, pay bills online, and much more.
  • Mobile payment: Mobile payments use mobile payment apps to make payments. They use their bank’s online services to make purchases. By scanning a business’s QR code or using NFC technology to use a virtual credit or debit card to make purchases. It can also be used to transfer money using services such as Google Pay or Apple Pay.
  • Payment by QR: It would be accurate to say that this is the fastest, easiest and most secure way to process digital payments. All users have to do to pay is scan a QR code with a digital payment app.

Advantages of using digital payments

  1. Promote a safe and clean economy

Compared to digital payments, managing, storing, and transacting with physical payments takes time. Digital payments leave a trace of money. which makes it easy to follow Banks and payment networks keep them safe and support a clean economy.

It also helps in cleaning dirty money. Using digital payments makes it easy to receive secure information about each of our transactions.

  1. Faster and more efficient money management

Physical currencies require more time and effort to manage and store than cryptocurrencies. Not hiring additional employees to manage money can be beneficial for newly established small businesses.

  1. Make international payments easier

If you need to send money to someone around the world That process will be time consuming and expensive. Completing transactions using real currency is incredibly difficult.

with digital payments You can send money to another country almost instantly. The amount will be credited to your account within minutes or hours.

  1. Reduce the risk of theft

In terms of safety Digital payments are 100% secure, barring human error. Keeping large amounts of cash can be risky as it can be stolen. with digital payment system People can transact without worrying about losing money.

But users also need to be more careful so that they can stay safe while paying online. Understanding the basics of online payment security is important.

Disadvantages of using digital payments

  1. This makes financial data vulnerable to breaches.

Although we have discussed how safe cryptocurrencies are, But there are still risks. Financial data leaks due to hacking may occur. If the website that stores your account information is compromised It will put your data at risk.

Online transactions and payments on websites that do not have strict protection measures can be risky.

  1. Transaction fees

When it comes to physical payments No transaction fees for digital payments You may be required to pay additional fees to use the services of the payment service provider.

  1. impulse purchase

Simply put, impulse buying is when you buy something without thinking about it first. It is the result of impulse. Therefore, it is more common to purchase something on impulse when using digital payment methods.

  1. Downtime may affect access to funds.

Repeating the same transactions This can sometimes slow down transactions and cause the system to crash. If you need to make an urgent or emergency digital payment And there is no other choice. This can be a problem.


Digital payments have made our lives incredibly convenient. Payments today take less time than ever before. You can send money across the world in minutes. If you want to start making digital payments It can be helpful to understand how the entire process works.

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