What Are Digital Payments and How Do They Work? (2024)

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As the world continues to embrace electronic solutions, digital payments now outnumber cash-based exchanges by four to one in the US. Not only is it faster and more convenient for consumers to pay digitally, e-transactions also open up valuable opportunities for businesses by allowing them to track and manage their cashflow in real-time.

However, the digital payment landscape has evolved a lot since the days when wire transfers and chip and pin ruled. So before you invest in one of the best point of sale (POS) systems to digitize your payment processes, you'll need to understand which cash free options are currently out there, and which will best serve the needs of your business.

As we inch our way towards a cashless society, this guide explains what digital payments are, how they work, and why now is the right time to harness digital solutions. Read on to learn more about cashless payments, or jump to a specific section using the links below.

What Are Digital Payments?

Also known as electronic payments, digital payments refer to any type of financial transaction that takes place using digital channels. They include more traditional payment options bank transfers and wire transfers, as well as contactless payments through bank cards and digital payment apps like Google Pay and Apple Pay.

How Do Digital Payments Work?

Digital payments are seamless, quick processes that are prompted a tap, click or swipe. However, while digital transactions may seem simple, there's a lot more going on under the hood.

Digital payments involve several intermediaries: the payer, (in-person or digital consumers), payee (merchants or service providers), and the payment network. For every e-transaction to be successful, the payer needs to have an account with an issuer bank – with enough funds to cover the transaction – and the payee needs an acquirer bank account to receive the payment.

When a customer makes a digital transaction, payment information is relayed through a payment gateway, often prompting the user to verify their identity through passcodes or OTP/PIN codes. After the verification process is complete, and information is successfully relayed through the network, the payment is processed through a conduit platform known as a “payment rail”, making funds accessible to the payee.

6 Digital Payment Methods

The digital payments ecosystem is developing fast, with new methods popping out of the woodwork regularly. We highlight a few major digital payment types below:

1. Electronic payment systems

Electronic payment systems are platforms that assist with online, keyed-in sales.They include more traditional payment options like wire transfers, bank transfers, eChecks, as well as modern financing solutions like Buy now, pay later (BNPL).

As the ecommerce market continues to boom in the US, electronic payment systems are critical in facilitating secure online payments, whether customers choose to pay with physical credit or debit cards, or digital wallets.

2. Digital wallets

Digital wallets, or e-wallets, is a software program that facilitates online payments and in-person contactless transactions. Digital wallets work in a similar way to physical wallets, by storing user payment information and passwords in the cloud.

They're typically used on mobile devices but can also be stored on computers and laptop, and some of the most notable platforms include Apple Pay, Google Pay, and Samsung Pay.

3. Mobile payment apps

Also known as peer-to-peer payment apps, platforms like PayPal and Venmo allow regular users to send payments to each other, in a similar way to traditional bank transfers.

However, mobile payment apps are more streamlined than many traditional bank transfer services, removing the need to enter clunkily bank details, and letting users send and request funds simply by entering a recipients' name, username, email or mobile number instead.

Mobile payment apps also allow for business transactions. These tend to charge transaction fees, but they're still a useful for vendors who don't have the existing infrastructure to handle other forms of digital payments.

4. Credit or debit card

Credit or debit cards are physical payment cards that are primarily used for in-person transactions. Users can use credit or debit card devices to carry out payments in multiple different ways.

Chip and pin payments utilize the Europay, Mastercard and Visa (EMV) chip found in cards, and requires to authenticate the transaction by entering their personal identification number (PIN) into the card terminal.

Contactless, or ‘tap' payments can also be carried out by most credit or debit cards, through the use of EMV and near field communications (NFC) technology, while swipe payments relay cardholder information through the magnetic stripe on the back of the device.

5. Biometric payments

Biometric payment technology uses biometric verification, like a fingerprint, facial pattern or iris scan to authenticate a payers identity, authorizing the deduction of funds from their account.

Lot's of contactless payment platforms are already harnessing some form of biometrics to authenticate payments. However, in increasingly common cases the technology is being used to support the full process, with Amazon Go stores across the US already accepting payments through the hand, face, or fingerprints of consumers.

6. Cryptocurrency payments

Cryptocurrency is a decentralized currency that's not managed by mainstream financial institutions. While the payment method isn't as commonplace as other options on this list, it's been rising in popularity in recent years due to it's quick payment delivery and comparatively low transaction fees.

Crypto-curious merchants can accept decentralized payments by setting up their own crypto-wallet, or even selecting a POS that facilitates cryptocurrency transactions.

How to Accept Digital Payments in Hospitality

Digital payments support the needs of fast-paced service businesses by helping servers to take payments quickly and securely. If you're interested in digitizing your payment processes in 2024, we'd recommend setting up a POS system, if you haven't already.

POSs are dynamic business devices that let users log, track and process digital payments. They facilitate a wide range of digital payment methods, and business owners are ablemix and match their POS hardware package depending on what payment options they wish to accept. For example, if you want to accept chip and pin or swipe payments, you'll require a traditional card terminal, whereas contactless card readers should suffice for businesses that are only interested in accepting tap payments.

Vendors can also accept payments through QR payments and BNPL services like Afterpay and Clearpay through POS providers like Square. So it's always wise to consider how you'd like to accept payments before landing on a POS system.

Learn more about the best restaurant POS systems.

Benefits of Digital Payments for Business Owners

Digital payments bring spades of benefits for business owners looking to modernize their processes. We discuss just a few of it's upshots below.

Enhanced security – The untraceable nature of cash makes it vulnerable to instances of fraud or theft. Digital payments, on the other hand, offer in-built security and verification mechanisms to protect users against these pitfalls, making it a more secure option overall.
Greater cashflow visibility – Digital payments give business owners a granular overview of their income and expenditures, making it easier for them to make quick business decisions and plan for the future.
Faster service times – By reducing the time spent fumbling for change, research from Timetric reveals that digital payments help staff serve customers three times faster than cash transactions, on average. Not only does this result in more satisfied buyers, it also benefits business profit margins by upping customer turnaround.
Improved paymentaccessibility – Consumers aren't using cash much anymore, with 41% of Americans claiming to have ditched all physical currency in 2024. Therefore, by offering basic digital payment methods, as well as more niche options like crypto payments and BNPN services, you're able to make your business more accessible to larger segments of the population.
Greater business agility – Dropping cash-based transactions also makes it easier for businesses to scale, by lifting restrictions on mobility and facilitating faster payments.

Are Digital Payments the Future?

With nine in 10 Americans currently using some form of digital payments, and cash free purchases expected to increase by more than 80% between 2020 and 2025, businesses that refuse to digitize their payment practices risk being outpaced by their competition.

However, this doesn't mean that business owners need to implement every e-transaction method under the sun. Basic contactless payment options should be more than enough for smaller retailers and fast-casual service businesses, while card terminals remain a safe bet for larger stores and restaurants.

The digital payments landscape is fast moving though, so cluing yourself on emerging solutions will only put you in good stead going forward.