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  • Writer's pictureSANJANA JEVRANI

Digital Payments: Definitions, Methods, and Benefits in India


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What are digital payments?


Digital payments refer to transactions conducted through digital or online channels, where money is exchanged electronically without any physical currency involved. In such transactions, both parties utilize electronic means to transfer funds.


Please note that digital transactions can take place both online and in person. For example, purchasing an item from Flipkart and using UPI for payment qualifies as a digital transaction. Likewise, opting to pay via UPI rather than cash at your nearby Kirana store also falls under the category of digital payments.


 

Digital payments method in India


Since the introduction of Cashless India, there are now eight digital payment methods accessible in India. Some methods are long-standing, others recently popular, and a few are new.

  1. UPI (Unified Payments Interface): UPI streamlines money transfers between bank accounts via a single app, facilitating seamless transactions. It permits instant transfers without the need for card or bank details, enhancing convenience for users.

  2. Banking Cards: Banking cards, including debit/credit or prepaid, gained popularity in India since Andhra Bank's first credit card in 1981. They provide convenience, and safety, and are utilized in online and physical transactions. Apps like Cred streamline card transactions efficiently.

  3. Unstructured Supplementary Service Data: USSD provides mobile banking without internet access via *99#, serving India's population with limited connectivity. Usable across Telecom Service Providers, it facilitates interbank transfers and balance inquiries, offered by over 51 banks in 12 languages.

  4. Aadhaar Enabled Payment System: AEPS, utilizing Aadhaar, enables transfers between linked bank accounts, surpassing 205 million transactions by February 2020. It allows cardless payments at PoS or Micro ATMs via Aadhaar authentication, often with a Rs.15 withdrawal fee, eliminating physical visits or card usage.

  5. Mobile Wallets: Mobile Wallets provide secure digital platforms for cashless transactions, linked to bank accounts or cards. Users fund wallets for transfers, with options from banks and private firms like Paytm and Freecharge. Wallets also support mobile recharges and bill payments for user convenience.

  6. Point of Sale Terminals: Point of Sale (PoS) facilitates transactions at checkout counters in malls and stores. Terminals accept Debit and Credit cards, allowing payment via swipe and PIN. Contactless PoS readers enable PIN-less transactions up to Rs. 2000, showcasing digitalization's impact on payments.

  7. Internet Banking: Internet Banking, or e-banking, facilitates online transactions and financial management via bank websites, requiring a stable Internet connection. Widely adopted in India, it supports NEFT, RTGS, and IMPS transactions, often offered by payment gateways.

  8. Mobile Banking: Mobile banking via bank-provided apps offers convenience, speed, and access to various digital payment methods like IMPS, NEFT, and RTGS. It includes features such as investments, bank statements, and bill payments, fostering digital adoption.

 

What are the benefits of digital payments?


In India, promoting a cashless economy and Digital India aims to address financial disparities and improve access to resources, offering multiple benefits.


  1. Ease & Convenience: Digital payments offer seamless experiences, reducing reliance on cash with fast transfer speeds. They surpass traditional methods by eliminating risks, steps, and physical presence, allowing global transactions instantly.

  2. Accessibility: Digital payments are accessible to anyone with a bank account and internet connection, regardless of location. This improves financial inclusion by providing access to banking services to underserved populations.

  3. Record & Tracking: Dealing with cash poses risks and inconveniences. Digital payments offer secure transactions, eliminating the need to carry cash. Mobile phones enable payments through UPI, net banking, and mobile wallets, with regular updates for tracking funds.

  4. Security: Digital payments provide enhanced security features such as encryption and authentication, reducing the risk of theft or fraud associated with carrying physical cash.

  5. Innovation: Digital payment technologies continue to evolve, introducing new features and capabilities such as contactless payments, biometric authentication, and integration with other services, enhancing the overall payment experience.

 

How does a digital payment system work?


A digital payment system works by electronically facilitating the transfer of funds between parties.


  1. Initiation: A user initiates a payment through a digital platform, providing details like the recipient's information and transaction amount.

  2. Authentication: The system verifies the user's identity through secure authentication methods, ensuring the legitimacy of the transaction.

  3. Authorization: Once authenticated, the transaction is authorized, and the system checks for the availability of funds or credit.

  4. Encryption: The payment details are encrypted to secure the sensitive information during transmission, safeguarding it from unauthorized access.

  5. Transmission: Encrypted payment instructions are transmitted through a secure network, often the internet, to the payment gateway.

  6. Payment Gateway: The payment gateway acts as an intermediary, forwarding the transaction details to the respective financial institutions involved.

  7. Financial Institution Processing: The recipient's bank or financial institution processes the transaction, confirming the availability of funds and facilitating the transfer.

  8. Notification: Both the payer and payee receive real-time notifications confirming the successful completion of the transaction.

  9. Record Keeping: Electronic records of the transaction are generated, providing a digital trail for both parties involved.

  10. Settlement: The funds are transferred between the respective accounts, completing the digital payment process.


 
Is electronic payment safe to use?

Yes, electronic payments are generally safe to use due to advanced encryption technologies, secure authentication methods, and stringent regulations. These measures protect user information, prevent fraud, and ensure the security of financial transactions in the digital realm.


However, users should also practice good cybersecurity habits, such as using secure networks and keeping passwords confidential, to enhance the overall safety of electronic payments.




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