What is a digital payment?


Note and Coin holding a massive credit card in front of a more massive phone, like this Note and Coin holding a massive credit card in front of a more massive phone, like this

55-year old Ramu lives with his family in a remote village in India. He has spent the better part of his life working hard on his farmland. Now, technology has made things slightly easier for him. And his children have joined the family business too, which has given him more leisure time during the day. Enough, at least, to have a quick chat with the locals or with travellers when he feels like it. 


On one such day, he recalls how much his life has transformed in the last decade. His work has gotten easier. He now has a new mobile phone. And he can connect with his family members merely with the click of a button. But for Ramu, the biggest change, perhaps, is the fact that he does not need to make the tiresome walk to pay his electricity bill at the government office located some 10 odd kilometres away. 


Today, all he needs to do is open an app on his phone, click the right options and make the payment. Simple, he says. And he’s glad he allowed his sons to teach him the art of making payments online. 


Ramu is only one of the many, many people in India - and in the world - whose lives have been transformed by the digital payments industry. In this module, we will take a closer look at this extremely utilitarian process that has made every walk of life easier.


What is a digital payment?

A digital payment or a digital transaction is simply a transaction that occurs via a digital or an online channel. There is no physical exchange of money involved in a digital payment. So, both the parties involved in the transaction use digital or electronic media to send and receive the money. 


Since electronic channels are used, digital payments are also sometimes called electronic payments. Typically, digital payments can be made using various channels or devices such as your own mobile phone, a computer, or even a Point of Sales (POS) machine. 


You can make a digital payment for just about anything today, right from paying for your purchase online or in a physical store to making an investment online. 


How do digital transactions work?

Since there are several ways to initial a digital transaction, the exact manner of working varies slightly from one method of digital payment to another. That said, it is possible to go over a broad overview of how digital transactions typically work. 


When you wish to pay for a service or a product digitally, you will typically use a mode such as UPI payments, a debit or credit card, or a mobile wallet. These channels are all connected to your bank account. So, when you initiate a transaction via a digital channel, the payment processor acts as the intermediary between the digital payment mode and your bank.


Upon checking if the required funds are available in your bank, the said amount is debited and transferred to the account of the beneficiary via the digital channel chosen by you. Simply put, this is how a digital transaction works.


You can make payments, transfer funds and even invest without ever handling cash at all. All you need to do is ensure that the bank account linked to your digital payment channels has sufficient funds.


Different methods of digital payments in India

Making digital payments in India is now very simple, thanks to the rapid development of the cashless ecosystem in the country. Here is a closer look at the most common methods of digital payments available in India today.



  • Credit and debit cards


Credit cards and debit cards have been used for years now, and even today, they are among the most preferred modes of digital payments in India. You can use a debit card to pay for transactions at brick and mortar stores or online by simply entering the card details like the card number and the PIN. The caveat is that the funds should be present in your bank account before you make the payment. 


Credit cards, on the other hand, come with a set credit limit that you can utilize to make digital payments. You cannot pay for goods or services after your credit limit is exhausted.



  • Unified Payments Interface (UPI)


A Unified Payments Interface, as its name signifies, brings together different bank accounts in one common application. So, it is easier to use UPI to standardize digital payments across the many different banks in India. With a UPI application, you can directly make your digital payment without having to enter your card details. 



  • Mobile Wallets


Mobile wallets are also very common in India. Perhaps you use a mobile wallet too, already. Some common examples of mobile wallets include Mobikwik, Paytm, Jio Money, Airtel Money and the like. These wallets are directly linked to your bank account, and you can initiate a transaction that will be facilitated with the funds in that bank account. You can also add money to your wallet to make the payments faster.



  • Internet banking


NEFT, RTGS and IMPS are all modes of internet banking that are very frequently used in India. Today, all the leading banks in the country have their own working internet banking platforms. You need an internet connection to use this solution. All you need to do is log into the internet banking portal, enter the beneficiary details and transfer the funds to them. 



  • Mobile banking 


Smartphone penetration has been on a steep rise in the country, and it is only natural that mobile banking has also grown simultaneously in India. With this channel, it is possible to carry out your digital transactions right from the comfort of your mobile phone. All it takes is a few clicks to pay your bills, transfer funds or make any other digital payments that may be due. 



  • POS terminals


If you have owned a debit or a credit card, chances are that you may have used a POS machine at the payment counter in a physical store. It is simply the machine where you swipe your card and enter the PIN to make a payment. Today, POS terminals like these make use of NFC technology to facilitate contactless payments.


Wrapping up

This brings the chapter on the fundamentals of digital payments to a close. But to truly appreciate how far we have come in this space, it is essential to travel back in time and understand the origin of digital payments in India. And that is precisely what you will find in the next chapter. 


A quick recap

  • A digital payment or a digital transaction is simply a transaction that occurs via a digital or an online channel. 
  • There is no physical exchange of money involved in a digital payment. 
  • There are many modes of digital payments such as credit and debit cards, mobile and internet banking, POS terminals, mobile wallets and UPI.


Frequently Asked Questions (FAQs)



  • Is UPI a kind of digital payment?


Yes. UPI or Unified Payments Interface is one of the most used digital payment modes in India. It allows a user to send and receive money through a virtual payment address (VPA). 



  • Why are digital payments better than cash?


Digital payments have several advantages over cash payments. For instance, digital transactions are more secure, more convenient and remove the barrier of distance. Furthermore, you can also track your payments easily and enjoy offers and discounts.



  • Is digital payment safe and secure? And how?


Yes, digital payments in India are very safe and secure these days. Many technologies such as biometrics, customer ID, customer authentication, tokenization and end-to-end encryption are used to secure digital transactions.

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