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How to define digital payments?
A digital payment, sometimes called an electronic payment, is the transfer of value from one payment account to another using a digital device such as a mobile phone, POS (Point of Sales) or computer, a digital channel communications such as mobile wireless data or SWIFT (Society for the Worldwide Interbank Financial Telecommunication). This definition includes payments made with bank transfers, mobile money, and payment cards including credit, debit and prepaid cards.
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There is no single, universally accepted definition of digital payments because digital payments can be partially digital, primarily digital, or fully digital. For example, a partially digital payment is one in which both payer and payee use cash via third party agents, with providers making digital bank transfers in the backend. A primarily digital payment might be one in which the payer initiates the payment digitally to an agent who receives it digitally but the payee receives the payment in cash from that agent.
So, the definition must be fit-for-purpose. One definition emphasizes the payer-payee interface as the defining element. Another defines digital payments based on the payment instrument, or some other variable. These definitional choices become particularly relevant when the objective is to estimate the number or share of digital payments in a specific use-case, organization, company, country, or region. The definition of digital payments determines how they are measured. For more details about definition and measurement Box 1 further down.
Benefits of Digital Payments
Regardless of the definition, some things we know for sure: Digital payments offer significant benefits to individuals, companies, governments, or international development organizations. The benefits of going digital include:
Cost savings through greater efficiency and speed. For example, a recent report by the Better Than Cash Alliance and the Inter-American Development Bank shows that the Government of Peru could save US$96 million by shifting all government payments to more efficient digital options currently available in the market.
Transparency and security by enhancing traceability and accountability, reducing corruption and theft as a result. For example, a recent report analyzes risks incurred by individual purchasing clerks in cocoa value chains (including assault), due to the prevalence of cash. As of March 2019, the Government of India has saved almost $14 billion in social protection payments through electronic Debit Benefits Transfers.
Financial inclusion by increasing access to a range of financial services, including savings accounts, credit and insurance products. The Committee on Payments and Market Infrastructure and the World Bank published the flagship report ‘Payment Aspects of Financial Inclusion (PAFI)’, outlining how digital payments help advance financial inclusion.
Women’s economic participation by giving women more control over their financial lives and providing them greater economic opportunities. A G20 GPFI report highlights how digital payments contribute to women’s economic participation.
Inclusive growth Cumulatively, the benefits outlined above help unlock economic opportunity for the financially excluded, and enable a more efficient flow of resources in the economy. There is robust academic evidence about the impact of the widespread adoption of digital payments on poverty reduction (see Jack and Suri, 2016) and on SDG progress.
Not all digital payments are equal
To realize the benefits of digital payments, they must be done responsibly and in ways that protect and promote the well-being of the end-user. The Better Than Cash Alliance’s Responsible Digital Payment Guidelines (RDPG) help define responsible digital payments. The Guidelines identify eight good practices for engaging with clients who are sending or receiving digital payments and who have previously been financially excluded or underserved.
These eight guidelines specifically address the challenges of shifting from cash to digital. Digital payments can raise security and privacy concerns, therefore, the guidelines recommend measures to ensure the confidentiality and security of client data.
The resilience or reliability of the digital payment system and infrastructure is equally crucial. System outages might unreasonably prevent users from accessing their funds, therefore, it is imperative that providers keeping funds safe – that robust steps are taken to ensure network reliability and system capacity, as well as a payments channel secure from fraud, hacking, and any other form of unauthorized use.
Furthermore, costs and other ongoing fees for payees need to be transparent. Ultimately, affordability is key for sustainability and long-term usage – and the solutions need to remain so over time. It is also important for products and services to be gender intentional, by designing solutions that take into account the needs of women and to ensure that women are not excluded due to lack of digital access or confidence.
Finally, the recourse mechanism needs to be clear and be designed with a “client-centric” approach in order to raise trust amongst users.
Digital innovations will continue to improve and grow the payments sector
The pace of digital innovation in payments is driving a reduction in costs projected double compound annual growth rate. It is resulting in new business models and a more competitive environment as new players emerge. These are some of the innovations:
- Contactless payments – a secure payment method using a debit, credit or smartcard enabled by Radiofrequency Identification (RFID) or near-field communication (NFC). This digital payment method is growing in popularity due to its speed and seamless experience.
- Open Application Programming Interfaces (API) - a publicly available API that provides developers with programmatic access to a proprietary software application or web service. Open APIs allow new providers to build services on top of existing infrastructure. The relevance of these approaches is that it lowers barriers to entry for new financial technology players, encouraging innovation and enabling the rise of seamless digital payment services for the end-user.
- Distributed ledger technology (DLT) - A database that is consensually shared and synchronized across multiple sites, institutions or geographies. This database architecture solves the problem of trust among multiple stakeholders and the so-called “double spend”, which refers to the dilemma of ensuring a digital asset is not spent twice. Since all members of the network hold a copy of the ledger at all times, DLT allows for decentralized digital payment systems that do not rely on a single central authority, such as a bank or a public institution (see our full series on DLT and digital payments here).
- QR codes - a two-dimensional Quick Response bar code or square-shaped code that contains data. It has become popular as it is a quick and easy way to exchange information and has the potential of substantially reducing payment acceptance costs. All that is needed for the payment to take place is a digital device with a camera linked to an account.
- Biometric Payments – Biometric digital payments use Biometric ID as a means of verification and authorization of payments. Biometric ID is any means by which a person can be uniquely identified by evaluating one or more distinguishing biological traits. Unique identifiers include fingerprints, hand geometry, earlobe geometry, retina and iris patterns, voice waves, DNA, and signatures.
- Central Bank Digital Currencies (CBDC) - Globally, emerging market economies are moving from conceptual research to intensive practical development. Central banks representing a fifth of the world’s population say they are likely to issue the first CBDCs in the next few years.
