UNIT V
Part A
1.0 Introduction to digital payments
A digital payment, also called an electronic payment, involves the transfer of value from one
payment account to another using a digital device or channel.
The digital payment framework eliminates the need for physical infrastructure, paperwork, and
manual handling, reducing transaction costs for businesses and financial institutions .
1.1 Pros and Cons of Digital Payment
Advantages
Online Payments Are Faster: Compared to traditional ways such as cash and cheques, online
payments seem almost immediate
Convenience: Online payment methods are used to transfer money at any time
Low Cost: Online payment methods allow you to complete utility bill payments from the comfort of
your home, saving on travelling costs. The processing fees or transaction costs the banks charge for
online payment methods are quite low.
Multiple Payment Methods: There are plenty of digital payment methods to choose from, i.e., net
banking, online payment apps, digital wallets, or even through your debit and credit cards
International Payments: Digital payments have made international payments simple and hassle-free.
Automated Payments: Automate rent, utility bill payments, credit card bills
Disadvantages
Risk of Fraud: Most online payment methods use state-of-the-art payment security features, but
scammers have come up with ways to surpass some of them. There are many types of digital fraud
such as phishing scams, ransomware attacks, and information stealing
Technical Issues: Sometimes users face issues while making online payments due to technical issues
like server outages and glitches.
Transaction Limits: Digital payments are convenient, but banks often set up limitations on them.
Dependency on Internet: Digital payment methods are not effective without having a good internet
connection.
Identity Theft: Fraudsters may steal financial information and use digital payment methods for
impersonation
Unfamiliarity with Technology
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Password Threats: Most of us save our passwords on our Smartphones or browsers to avoid
remembering them. These applications have access to the passwords, and if their system gets hacked,
passwords could be compromised.
Difficulties with Refund
Transaction Costs: Banks charge transaction costs, especially for international payments and debit
or credit cards. For other modes like UPI apps, the processing fees and service charges are low. But
there are additional costs nonetheless.
1.2 Components of digital payment & Stake holders
Public and Business - Need Payment System - Payers and Payees
Banks and NBFCs (Payment Companies):
Payment Gateway Service Provider
Telecommunication Companies (IT support for payment)
Government: Regulations - Regulation for Payment System - Formal
The merchant: The online business that accepts card payments operates in any vertical (e.g., travel,
retail, eCommerce, gaming, forex, etc.) and delivers digital or physical products or services to
consumers.
The customer (The cardholder): The individual who accesses the goods and services that the
merchant is selling and initiates the transaction.
The issuing bank or the issuer: The bank, financial institution, company, or credit union that issues
or helps issue payment cards to customers on behalf of the card schemes.
The acquiring bank or the acquirer: The financial institution that processes card payments on
behalf of merchants while maintaining the merchant account. One of its main roles is to securely
route the card payment data onto the card schemes (more of this below)
The payment gateway: The technology used by merchants to authenticate and securely
transfer payment data between the various parties involved in the transaction process. Once
the payment is approved or declined by the parties involved, the payment gateway sends
back the relevant message to the merchant.
Card schemes: The entities that enable payments between merchants and card issuers. Some
major international credit card schemes include MasterCard, Visa, American Express,
Discover, and UnionPay.
Telecommunications in India: Third-generation (3G) technology allowed video calling and
offered faster data transmission rates. As a result of this technology, the mobile internet
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developed, since it enabled users to access the internet from their mobile devices, the number
of mobile applications skyrocketed. The fourth generation (4G) of technology allowing faster
data transfer rates, improved call quality, and internet connectivity. Fifth-generation (5G)
offers faster data transfer speeds than 4G and allows for the creation of advanced applications
like virtual and augmented reality, connected vehicles, and the Internet of Things (IoT).
2.0 Modes of digital payments
2.1 Banking Cards
Bank cards include Prepaid, Debit, or Business or Commercial Credit Cards as alternatives to
cash payments.
2.2 Unified Payment Interface (UPI)
United Payments Interface (UPI) (launched in 2016) is a digital payments system that brings
various bank accounts under a single application. This feature allows easy money transfers
between parties with just a few clicks. Customers do not need a card or bank details, making it a
popular digital payment method.
2.3 e- Wallets
E-wallet is a type of electronic card which is used for transactions made online through a
computer or a Smartphone. Its utility is same as a credit or debit card. An E-wallet needs to be
linked with the individual’s bank account to make payments. E-wallet is a type of pre-paid
account in which a user can store his/her money for any future online transaction. An E-wallet is
protected with a password. With the help of an E-wallet, one can make payments for groceries,
online purchases, and flight tickets, among others.
Mobile wallets enable customers to carry cash digitally. Users can link their bank accounts to
the wallet and enjoy secure digital transactions or use the balance to transfer money.
2.4 Unstructured Supplementary Service Data (USSD)
Unstructured Supplementary Service Data (USSD) (August 2014) is designed to include
sections of Indian society that do not have access to proper banking facilities. Customers can use
USSD to execute mobile banking transactions without an internet-enabled Smartphone. They can
simply dial *99# using any phone to utilize banking services such as interbank fund transfers,
balance inquiries, etc.
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2.5 Aadhar enabled payments
Aadhaar Enabled Payment System (AEPS) (2016): The National Payments Corporation of
India (NPCI) launched AEPS to leverage Aadhaar authentication for banking purposes.
Customers can use their Aadhaar-enabled bank accounts to transfer funds without any physical
activity. Customers can also use AEPS to initiate digital payments at PoS (Point of Sale)
terminals and micro ATMs using biometric and Aadhaar Card information.
2.6 Internet and mobile banking
Internet and mobile banking: Internet banking has allowed customers to avail themselves of
modern banking and financial services via a bank’s website. Similarly, Mobile Banking enables
users to access a bank’s services via apps downloaded on mobile devices.
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