What Is A Digital Payment and How Does It Work?

In the era of technology, we are gradually transitioning into a cashless world. And digital payment solutions have emerged as one of the seamless ways of transferring money. This payment method became more relevant after the COVID-19 pandemic as it eliminated the use of hard cash. 

Today from settling electricity bills and groceries to transferring money and paying school fees, for everything we use this payment option. But have you ever wondered what exactly is a digital payment and how does it work? This blog covers all of it.

What is a Digital Payment?

A digital payment is a method of making money transactions electronically. This method eradicates the use of physical cash, allowing payers to pay for goods or services via digital or online methods. These transitions can take place through digital devices like mobile phones, computers, credit, debit or prepaid cards. To leverage this technology, both payers and payees must have a bank account, an online banking method and a device to carry out the payment.

The digital payment can be done in person as well as online. For example: if you buy something from any e-commerce website, you can pay through your UPI. And if you purchase something from a local shop, you can choose to pay via UPI.

How Does a Digital Payment System Work?    

The digital payment system might take just a few seconds to work on the top. But it involves many components. Let us explore in detail how these elements work.

Payment Initiation

The process begins when the buyer decides to acquire a commodity or service through digital payment. The payment method can be anything: mobile wallet, credit card or UPI.

Gateway

The payment gateway acts as a mediator that securely transmits the transaction data between the consumer and the business. This step ensures that sensitive data like credit card numbers, remains guarded.

Processing

Once the payment gateway receives the transaction details, payment processing starts. This step involves verifying the buyer’s account to ensure sufficient funds are available. The payment processor communicates with the bank or the card issuer to confirm the authenticity of the transaction.

Authorisation 

Here, the payment processor sends an authorisation request to the buyer’s bank. If the transaction is valid and funds are available then the bank responds with an approval code. If in case the transaction is declined then the buyer gets the notification indicating the issue.

Transaction Completion

Once the authorisation is completed, the payment is done. The gateway sends a confirmation to the seller about the received payment. And the buyer gets a notification about the debited funds. Usually, the payment is received within a few minutes or days.

Types of Digital Payments

Now let’s discuss some of the digital payment methods that have been ruling the digital payment platforms lately.

Mobile Wallets

The mobile wallets have been very popular nowadays. These include apps like Google Pay, Apple Pay and PayPal. The mobile wallets allow their users to store payment information securely in their smartphones.

Credit and Debit Cards

Another common form of digital payment is the digital cards. Here users can swipe their cards at the physical venue or enter their card details online to purchase any goods or services. 

Online Banking

The online banking facilities let the user transfer the funds from one bank to another just sitting at their comfort. This payment method is often used for large transactions like paying EMIs or sending money to friends or family.

Cryptocurrency 

This is still an emerging digital currency, which is gaining traction because of its decentralised nature and low fees. Cryptocurrencies like Bitcoin and Ethereum facilitate transactions without involving the banks.

E-commerce Platforms

Recently, e-commerce platforms have come up with a strategy where they offer integrated payment options for the users. The perk of this option is that the customer can check out seamlessly without having to redirect to an external payment gateway.

Conclusion 

Digital payment has completely overturned the way we perform our financial transactions. By understanding the mechanism of its working and its types, we can make a better and more informed decision to elevate our money transactions. Whether you are shopping online, sending money to nearby ones or paying bills. A digital payment can efficiently simplify your money transfer and connect you to the global markets.