Digital payment methods are frequently simple to use, offer greater convenience, and allow customers the freedom to make payments from any location and at any time. They serve as a viable alternative to conventional payment methods and expedite transaction processes. Following demonetization, there has been a gradual acceptance of digital payments, with even small-scale merchants and shop owners adopting this mode of payment.
The Indian Government has implemented numerous initiatives to support and foster the adoption of digital payments within the country. With the objective of establishing a digitally advanced economy, the government is actively working towards creating an environment that is devoid of physical presence, paper transactions, and cash-based payments. There are several different methods and platforms available for conducting digital payments, such as debit/credit cards, online banking, mobile wallets, digital payment applications, Unified Payments Interface (UPI) service, Unstructured Supplementary Service Data (USSD), Bank prepaid cards, and mobile banking.
Digital Payment
Digital payments refer to transactions that are conducted using digital or online methods, eliminating the need for physical currency. These payments, sometimes referred to as electronic payments (e-payments), involve the transfer of value from one payment account to another, with both the payer and payee utilizing a digital device like a mobile phone, computer, or credit, debit, or prepaid card.
Both businesses and individuals can act as payers or payees in digital payments. Consequently, both parties must possess a bank account, an online banking option, a device capable of facilitating the payment, and a means of transmission. This necessitates either signing up with a payment provider or utilizing an intermediary like a bank or service provider.
What is a Digital Payment?
To put it succinctly, digital payment refers to the act of buying goods or services by utilizing different electronic means. The digital payment method does not involve the physical exchange of cash or checks.
How do Digital Payments work?
Completing a digital payment involves several elements. The key components of a digital payment include the consumer (payer), merchant (payee), the payer’s bank account, and the receiver’s bank account. In order for a digital transaction to be successful, it is essential for both the payee and payer to have a bank account with sufficient funds.
They also need an electronic device to complete the transaction and must have signed up for an intermediary or payment service provider. There are various modes of digital payments available, such as UPI, PoS, NEFT, mobile wallets, BHIM, and AEPS. Among these options, UPI is one of the most popular digital payment methods with transactions worth over $1 trillion.
What is a Cashless Economy?
In an economy without cash, various payment methods are utilized for all transactions, eliminating the need for physical money when purchasing goods and services.
10 Types of Digital Payment Methods in India
1. Banking cards
Payment cards are extensively utilized and offer a range of advantages, including secure transactions and convenience. The primary benefit of debit/credit or prepaid banking cards is their ability to facilitate various forms of digital payments. For instance, individuals can save their card details in digital payment applications or mobile wallets to conduct cashless transactions. Visa, Rupay, and MasterCard are among the most recognized and reputable card payment systems. Banking cards can be employed for online purchases, digital payment applications, point-of-sale machines, online transactions, and more.
How to get Banking cards?
- Apply with your respective bank and provide Know Your Customer (KYC) details
- The card will get activated within a week and you will be allotted a 4-digit pin, which can be used for all transactions
2. USSD
99# is a digital payment method that allows users to carry out mobile transactions without the need to download any app. This payment method does not require mobile data and is supported by USSD and the National Payments Corporation of India (NPCI). The primary objective of this service is to promote financial inclusion among underserved communities and integrate them into the mainstream banking system. Users can utilize this service to initiate fund transfers, view bank statements, and check account balances. Additionally, it is worth noting that this payment system is also accessible in Hindi.
How to Use 99#?
- TTo utilize this service, customers can dial *99# and then navigate an interactive voice menu displayed on their mobile screens.
- To use the service the mobile number of the customer should be the same as the one linked to the bank account
- The next step is to register for USSD, MMID (Mobile Number Identifier) and MPIN
3. AEPS
AEPS, also known as Aadhaar Enabled Payment System, offers a wide range of banking services including balance enquiry, cash withdrawal, cash deposit, payment transactions, and Aadhaar to Aadhaar fund transfers. These transactions are facilitated by a banking correspondent who verifies the customer’s Aadhaar details.
The convenience of this system eliminates the need for physical visits to a branch, the use of credit or debit cards, or even signing documents. To access this service, it is necessary to have your Aadhaar number registered with the bank where you hold an account. This initiative by the NPCI aims to encourage digital payments across the country.
How to use AEPS?
- It is very simple to use AEPs, all you need to do is to provide the accurate Aadhaar number and the payment will be successfully made to the concerned merchant
4. UPI
UPI is a payment system that allows customers with any bank account to send and receive money through a UPI-based app. This service enables users to link multiple bank accounts to their UPI app on their smartphone, allowing for seamless fund transfers and collect requests at any time, every day of the year. One key advantage of UPI is that it eliminates the need for a bank account or IFSC code when transferring money.
Instead, all that is required is a Virtual Payment Address (VPA). There are numerous UPI apps available on both Android and iOS platforms. To use this service, one must have a valid bank account and a registered mobile number linked to that account. There are no transaction charges associated with using UPI, making it an ideal solution for sending and receiving money as well as checking balances.
How to use UPI?
- Download the app on Android or iOS platform
- Register for the service by providing bank account details
- Create a VPA, get an MPIN
5. Mobile Wallets
A mobile wallet is a virtual wallet service that can be accessed by downloading an app. This digital or mobile wallet securely stores bank account or debit/credit card information in an encrypted format for making safe payments. Additionally, users can add funds to their mobile wallet and use it for making purchases and payments, eliminating the need for carrying credit/debit cards or remembering the CVV or 4-digit pin. Many banks as well as private players offer e-wallet services in the country. Popular mobile wallet apps include Paytm, Mobikwik, Freecharge, etc. The range of services provided by mobile wallets includes transferring and receiving money, making payments to merchants, and online purchases. Some mobile wallets may apply a transaction fee for the services rendered.
How to use a mobile wallet?
- Download the app
- Register for the service by following instructions and providing all details
- Load money
6. Bank pre-paid cards
A prepaid card is a payment instrument that allows you to load money onto it for making purchases. Unlike a debit card issued by the bank, this type of card is not connected to the customer’s bank account.
How to Use a Prepaid Card?
- Apply for the card
- Get pin
- Load money from your bank account/debit card
7. PoS terminals
In the past, PoS terminals were typically found in all retail stores where customers could make purchases using credit or debit cards. These terminals were usually handheld devices designed to read banking cards. However, with the advent of digitization, the scope of PoS has expanded to include mobile platforms and internet browsers.
There are several types of PoS terminals, including physical, mobile, and virtual options. Physical PoS terminals are installed at brick-and-mortar shops and stores. Mobile PoS terminals, on the other hand, operate through tablets or smartphones. This is particularly beneficial for small business owners who can avoid investing in expensive electronic registers. Virtual PoS systems utilize web-based applications for payment processing.
8. Internet Banking:
Internet banking, also known as e-banking or virtual banking, is the process of conducting various banking transactions online. These transactions may include transferring funds, initiating new fixed or recurring deposits, closing accounts, and more. Internet banking allows customers to access a wide range of banking services through their bank’s website using a unique username and password.
It also enables customers to make online fund transfers through NEFT, RTGS, or IMPS. One of the advantages of internet banking is that it offers round-the-clock availability without any time restrictions, making it convenient for customers to use the services at any time throughout the year. Overall, internet banking provides a vast array of services and has a significant potential for growth.
9. Mobile Banking:
Mobile banking, also known as smartphone banking, involves conducting financial transactions through a mobile device. The realm of mobile banking is continuously growing due to the emergence of various mobile wallets, digital payment applications, and services such as UPI. Numerous banks offer their own apps, allowing customers to easily perform banking transactions with just a tap. Mobile banking encompasses a wide range of services that can be accessed through this convenient platform.
10. Bharat Interface for Money (BHIM) app:
Users can utilize the BHIM app to conveniently make payments through the UPI application. This app is compatible with UPI and enables transactions using a VPA. It is simple to link one’s bank account to the BHIM interface, and multiple accounts can also be linked. The BHIM app is accessible to anyone with a mobile number, debit card, and valid bank account. Users can transfer funds to various bank accounts, virtual addresses, or an Aadhaar number. Additionally, numerous banks have partnered with NPCI and BHIM to provide customers with access to this interface.
How to Use BHIM App?
- Download and install the BHIM app
- Choose a language
- Register for the service by providing mobile number linked to bank account
- Add bank-related information and set up a UPI PIN by following the given instructions
Benefits of Digital Payments
- Quicker, simpler, and more convenient: One of the major benefits of cashless payments is their ability to expedite the payment process without the need for extensive information input. There is no longer a requirement to wait in line at an ATM to withdraw money or carry cards in one’s wallet. Furthermore, with the shift to digital, banking services will be accessible to customers around the clock and every day of the year, even on bank holidays. Various services such as digital wallets and UPI operate on this principle.
- Cost-effective and reduced transaction fees: Numerous payment apps and mobile wallets are available that do not impose any service or processing fees for their services. The UPI interface is a prime illustration of this, as customers can utilize its services without incurring any charges. Different digital payment systems are actively reducing costs.
- Customers using digital payment apps and mobile wallets are provided with a range of incentives, including waivers, discounts, and cashbacks. Numerous digital payment banks offer appealing cashback offers, which not only benefit customers but also serve as an incentive to transition towards a cashless approach.
- Digital record of transactions: One of the other benefits of going digital is that all transaction records can be maintained. Customers can track each and every transaction that is made, no matter how small the transaction amount this.
- A convenient solution for bill payments: Various digital wallets and payment apps have emerged as a one-stop platform for paying utility bills. Whether it’s mobile phone bills, internet charges, or electricity bills, all these types of utility bills can be easily paid through a single app without any inconvenience.
- Rephrased: Digital transactions aid in the government’s efforts to monitor financial activities, ultimately leading to the reduction of black money and counterfeit currency. Additionally, this can have a positive impact on the economy by reducing the costs associated with minting physical currency.
- Digital payments are slowly gaining popularity in India and there are many apps that are being launched in this sector. It has become a hassle-free and secure way to make payments.
Why Pay Digitally?
There are numerous advantages to transitioning to digital payments and receipts, particularly for small businesses in India. Presently, both consumers and businesses anticipate the availability of digital payment options for quicker and more secure transactions without any risks or fees. The payer can utilize their mobile phone, which offers additional authentication through fingerprint or other biometric methods, thus reducing the level of risk involved. Additionally, conducting business transactions without the need for cash also comes with several benefits.
- Cash management is eliminated resulting in a lower risk of theft and reducing the cost of security and storage.
- Digital payments are often quicker transactions, thereby resulting in shorter queues and enhancing the customer’s in-shop experience. Customer convenience is thus driving sales.
- A clear trail is available for easy accounting, helping simplify operations and tax compliance.
Mobile-driven digital payments offer the recipient the opportunity to gather customer data for analysis and market segmentation as well. This empowers retailers and issuing banks to employ digital payments, in combination with loyalty and incentive programs, to enhance customer acquisition and retention through focused marketing efforts and personalized promotions. Credit cards, a long-standing payment method, and the contemporary Buy Now Pay Later Model, facilitated by digital payments, grant customers access to credit.
How Do Digital Payments Work?
Parties Involved
Although it may appear simple to make a digital payment with just a few clicks, there are actually several intermediaries involved in the process that work together smoothly to ensure a successful transaction.
The entities responsible for handling the entire digital payment transaction include the payee (merchant), the payer (consumer), the bank, and the payment network. In this context, “merchant” refers to various establishments such as local Kirana stores, shopping malls, retail outlets, e-commerce portals, and service providers that offer the option to transact or settle payments using digital methods.
The bank that deducts funds from the payer’s account is known as the issuer bank. On the other hand, the acquirer bank or payee’s bank is responsible for crediting the funds received. Therefore, both parties must have a bank account and access to online banking in order to engage in digital transactions.
Working of Digital Payments System
In order to comprehend the workings of digital payments, let’s elucidate it with an instance. Anjali Singh buys apparel valued at INR 5,500 from Rupesh Garments, a store situated on bustling Kalbadevi Road in Mumbai. She chooses to make a digital payment for this sum by employing her debit card on the Point of Sale (PoS) machine or by using UPI to pay through any app (QR Code) available in the store.
When the shopkeeper swipes the card on the Point of Sale (PoS) machine, there are several steps that occur before the payment is completed. In the case of Anjali’s debit card, the PoS provider verifies if she has enough funds in her bank account. This verification happens only after Anjali enters her transaction PIN, which is then authenticated. If there are sufficient funds, the digital payment is processed, and the money is deducted from her account and transferred to Rupesh Garments’ business account. However, if a credit card is used for digital payments, the payer’s available credit limit is first confirmed with their card provider before proceeding with the transaction.
When Anjali makes a purchase on an eCommerce website, the eCommerce platform sends a payment request to the payment gateway it is partnered with for digital payments. The payment gateway then seeks authorization from Anjali through an OTP or PIN, accepts the payment amount from her bank, and settles the transaction with the bank associated with the e-commerce portal. Before proceeding with authentication, the gateway verifies the balance in Anjali’s bank account and either approves or rejects the request based on whether she has enough funds or inputs incorrect payment information.
FAQs on Digital Payments
Why do we use digital payments in India?
Digital payments are gaining popularity in India because they are convenient, hassle-free and safer than the traditional payment method.
What are the 3 methods of payment?
The three most common types of payment are credit card, debit card and cash.
Which country has the most used digital payments?
According to a report, India had recorded around 89.5 million online transactions in 2022 and has the most used digital payments system.
When was digital payment launched in India?
The digital payment system was launched in the year 2016 in India.
How do digital payments work?
Payments that are done over mobile channels and the internet are digital payments. Digital payments can also be defined as any payments that are done online via the internet or mobile-enabled services.
What is the rank of India in digital payments?
India ranks first in digital payments with a record of maximum transactions.
How are digital payments better than cash?
Digital payments are much easier and safer than cash payments. They are much more convenient than cash payments as well. Since they are digital, you do not have to carry cash as well.
Who regulates the digital payments in India?
The Reserve Bank of India regulates the digital payments in India.
Which is the first digital payment bank in India?
Airtel Payments Bank is India’s first digital payments bank in India.
Which ministry looks after digital payments in India?
The Ministry of Electronics and Information Technology, Communications looks after digital payments in India.
Which country adopted India’s UPI system?
India’s UPI system was adopted by Singapore.
What are the objectives of digital transactions?
The main objectives of digital transactions are to reduce the costs and risks of handling cash and to increase the ease of conducting transactions.
How are digital payments important?
Since digital payments reduce the costs of providing poor people with financial services, they have become a vital tool in improving financial inclusion. The convenience and safety of using insurance, payments, and savings products also increase by using digital payments.
What are the different security requirements of digital payments?
The different security requirements of digital payments are mentioned below:
What are the different security requirements of digital payments?
- Confidentiality
- Integrity
- Authentication
- Availability
- Authorization
- Non-repudiation
Bottom Line
The payments sector is consistently developing new ways to simplify and expedite digital payments for users. By providing a variety of choices and ensuring that the payment process is convenient and secure, businesses can foster user loyalty and improve their overall experience. Digital payments have become an integral part of our daily lives, providing convenience, security, and efficiency. With the step-by-step guide provided in this blog, you can easily navigate the world of digital payments and make transactions with confidence.
From setting up a digital wallet to understanding different payment methods, this guide has covered all the essential information you need to know. Embracing digital payment options not only streamlines your financial transactions but also contributes to a more sustainable and cashless society. So, why wait? Start exploring the world of digital payments today and experience the ease and convenience it offers.