What are Digital Payments? Explain Its Types and Advantages 

What is a Digital Payment System? 

The swift progress of technology has drastically changed the worldwide payment landscape, and India is no exception. Digital payments are those that are carried out digitally without requiring hard currency. Numerous payment options are available in these transactions, including credit/debit cards, mobile wallets, online banking, and the Unified Payments Interface (UPI).   

Benefits of Making a Digital Payment 

The government’s initiative for digital payment modes has increasingly strengthened India’s journey towards going cashless. The demonetisation in November 2016 also acted as a stimulus for the shift towards making digital payments. Below are a few benefits of digital payments in India –   

1. Empowering women’s economic participation – The convenience of digital payments is a game-changer for the typical Indian consumer, especially women. With just a few clicks, they can pay bills, transfer money, and make purchases, reducing the need to carry currency and the risk of theft. This empowerment is a significant step towards financial independence and security. 
2. Inclusive growth—Because digital payments are simple to track, they decrease the flow of illicit funds. This openness contributes to the reduction of illegal and corrupt practices. Incentives and subsidies further aid the adoption of digital transactions.  
3. Enhancing transparency and security – Digital payments are crucial in improving tax compliance. Authorities can better track revenue and expenses with electronically recorded transactions, leading to more accurate tax collection. This not only promotes transparency but also enhances security. Small and medium-sized businesses (SMEs) benefit from this transparency, providing them an easier, more secure way to conduct business.  
4. Promoting financial inclusion – Digital payments have opened access to financial services for the unbanked population in India. Programmes like the Pradhan Mantri Jan Dhan Yojana (PMJDY) have opened millions of new bank accounts, and digital payment options provide these account holders a way to engage with the formal economy. 
5. Cost savings – Digital payment adoption strengthens and improves the economy. It minimizes transaction costs, lessens reliance on currency, and improves overall transaction efficiency. This increase has the potential to boost GDP growth.   
6. Climate resilience – With the introduction of mobile wallets, AePS, and UPI, India’s payment environment has significantly improved. These technologies facilitate trade between people and companies, enhancing the state of the economy. The desire for digital payments has fuelled India’s technology developments. The digital payments revolution has led directly to creating safe payment gateways, the growth of fintech companies, and the enhancement of cybersecurity protocols. 

Different Digital Payment Methods 

With the technological advancements, India has seen a vast shift in the payment ecosystem due to the emergence of digital payment methods. Listed below are a few key modes:   

1. Banking Cards are one of the most popular digital payment methods. These cards, which include prepaid, debit, and credit cards, help with online payments, PoS purchases, and ATM withdrawals. They have added security features like EMV chips and OTP (One-Time Password) for transactions.   
2. USSD (Unstructured Supplementary Service Data) allows users to perform basic banking transactions without needing the Internet. This method benefits people in rural areas with limited or no internet access. By dialling *99# from their phones, users can view their account balance and other banking services.  
3. UPI (Unified Payments Interface) allows instant fund transfers between bank accounts via a mobile phone. Apps like BHIM, Google Pay, Paytm, CRED, and others can make phone payments using a Virtual Payment Address, eliminating the need to share bank account details.  
4. Mobile Wallets, like Paytm, Mobikwik, and Amazon Pay, allow users to store their money digitally, which they can use to make online and offline payments. These wallets offer attractive discounts and cashback offers.   
5. Internet Banking allows users to transact anywhere through the bank’s website. It is a convenient and easy-to-use tool for fund transfers, bill payments, account management, and other services.  
6. Banks’ Mobile Banking apps allow users to perform banking transactions like fund transfers, account statements, investment options, loan offers, and others from the convenience of a mobile app.   
7. Micro ATMs are small handheld devices that deliver essential banking services in remote areas. Users can swipe their cards for cash withdrawals, deposits, and fund transfers anywhere.  

These digital payment methods have improved transaction security and efficiency while playing a major role in financial inclusion and developing India’s cashless economy. 

Setting Up Digital Payment Systems for Business 

Setting up a digital payment method for a business in India has many steps like choosing ap appropriate payment gateway, fulfilling the legal and regulatory requirements, and incorporate the system in the business operations. Below is a detailed guide to help you start:   

• The first step is choosing the right payment gateway for your business. Some famous payment gateways in India include Paytm, Razorpay, Instamojo, CCAvenue, PayU, and BillDesk.   
• Once you have selected your pick, set up a merchant account by providing the following documents: your PAN card, business registration certificate, bank account details, and KYC documents like Aadhar Card, Voter ID, Passport, and others.   
• The next important step is integrating the payment gateway into your website and mobile app. You can use the payment gateway’s API to integrate with your website and its SDKs for Android and iOS. You can also set up the physical PoS terminal.   
• To ensure the safety of payments, ensure that the payment system complies with the PCI-DD guidelines. Your website has a secure SSL certificate, and you can also implement 2FA for added security.   
• Since digital payments have gained popularity and UPI is an acceptable mode of payment, you can integrate it for seamless bank transfers through popular apps like BHIM, Google Pay, PhonePe, CRED, etc. You should also enable popular digital wallets such as Paytm, PhonePe, Google Pay, Mobikwik, etc.   
• Once the payment system is set up, you should test it to ensure it works perfectly. You can use the payment gateway’s sandbox environment to test the transactions or even conduct a few live payments to ensure everything is working perfectly.   
• Once you are sure everything is working perfectly, it is time to notify and advertise new payment options to customers and offer them promotions and discounts to help them adapt to the digital payment system.   
• You can constantly monitor the payment gateway using the analytics tools provided by the payment gateway and collect feedback from your customers to improve the payment experience.  
• Ensure that your customer support team is adept at handling payment-related issues. Also, upgrade your systems to keep up with the latest developments in digital payment methods.  

Following these steps, you can set up a comprehensive digital payment system for your business in India, providing customers with a convenient and secure payment experience. 

Fees Associated with Digital Payment Systems  

Digital payment methods in India have numerous fees, depending on the transaction type, service provider, and payment method. Listed below are some associated standard fees:    

• Unified Payments Interface (UPI)—Individuals making person-to-person transfers pay no fees. Merchants accepting UPI payments might have to pay a small fee.   
• Credit and Debit Cards – A charge, ranging from 0.25% to 3%, is charged to merchants who accept payments from credit or debit cards, depending on the card type and the transaction amount. Some credit cards also have an annual fee, which they charge from the customer.   
• Mobile Wallets (e.g., Paytm, PhonePe)—There are some fees when adding money to a mobile wallet from a credit card. Also, a few merchants might have to pay a transaction fee when accepting mobile wallet payments.   
• Net Banking – While most transactions are free, some banks may charge a fee for certain transactions.    
• Aadhaar Enabled Payment System (AePS) – Although these vary from bank to bank, some banks charge a small fee for AePS transactions like balance enquiries, cash withdrawals, and deposits.    
• Payment Gateway Fees—Companies that use payment gateways to conduct online transactions are charged a fee (typically between 1% and 3% of the transaction value). Specific payment gateways may also have setup and yearly maintenance fees. 

The Reserve Bank of India (RBI) and the government regularly examine and alter fee structures to encourage digital payments and financial inclusion. The fees affect the service provider, special offers, and regulation changes. 

Protection from Fraud in Digital Payments 

One must implement various security procedures and policies to safeguard oneself against fraud when using digital payments in India. The following are some strategies to prevent fraud:  

1. Use Strong PINs and Passwords: Use a mix of alphanumeric, special, and letter characters. Refrain from utilizing information that can be guessed, such as names or birthdays. Passwords should be updated often to improve security.   
2. Turn on Two-Factor Authentication (2FA): Activate 2FA in your online payment and banking applications. This requires a second verification form, such as a one-time password (OTP) sent to your mobile phone.   
3. Be Cautious with Public Wi-Fi—Be cautious when using public Wi-Fi, as it may be less secure, making it simpler for scammers to obtain your data. For financial transactions, use a secure private network. VPNs, or virtual private networks, can offer extra security while accessing private information on the Internet.   
4. Monitor Account Activity Frequently: Check your credit card and bank statements for unauthorized purchases. Use email or SMS transaction notifications to be informed of any activity on your accounts.   
5. Safeguard Your gadgets: Use antivirus and anti-malware software to keep your gadgets safe. Update your operating system and apps frequently to guard against security flaws. Enable locks like PINs, patterns, or biometric authentication on your devices.   
6. Be Wary of Phishing Schemes: Exercise caution when responding to unsolicited emails, calls, or messages requesting personal or financial information. Check with the source before answering. Links in unwanted emails or texts should never be clicked since they could take you to phishing websites.   
7. Utilise Official Websites and Apps: Only download payment and banking apps from official websites or payment services offered by your bank or from official app stores like the Google Play Store and Apple App Store. Before inputting sensitive information, ensure the website’s URL is valid and begins with https.  
8. Preserve Confidentiality of Information – Never divulge confidential details to third parties, including account numbers, passwords, or one-time passwords. Fraudsters could attempt to coerce you into disclosing personal information. Be suspicious of unforeseen requests.   
9. Teach Others and Yourself—Stay current on the newest security procedures and typical con games. Inform family members, especially older people and those with limited technological know-how, of the value of digital payment security.   
10. Report Suspicious Activity Right Away: Notify your bank immediately if you catch unauthorised transactions or questionable activities. In India, you can use the National Cyber Crime Reporting Portal or submit a report to the Cyber Crime Cell.   

A significant step in promoting digital payments and moving towards a cashless economy is its convenience, speed, and security. For India, digital payment methods have played an essential role in encouraging financial inclusion, overhauling the payments ecosystem, and assisting small and medium enterprises. While some obstacles have yet to be overcome, the benefits of digital payments override everything else to become an essential part of India’s economy. As the nation continues to welcome technological advancements and digital solutions, the future of digital payment modes in India looks optimistic. The efforts of the government, financial institutions, and technology providers will be important to achieve a fully digital payment environment that will contribute to the nation’s overall growth and prosperity.