Digital Payments

---

Digital Payments

A payment is defined as the transfer of one form of good, service or financial asset in exchange for another form of good, service or financial asset in proportions that have been previously agreed upon by all parties involved. Payments can be made in various forms including funds, goods, assets or services. These methods of transactions have evolved through time from barter (-1200 BC) to digital payments since the early 2010s.

1. History

Throughout history, payments as a mode of economical transaction has not experienced a large amount of disruptions. Overall, only a handful of revolutions occurred in the ecosystem of payments (c.f. picture) . As previously mentioned, around 1200 BC, most economical interactions were done via bartering that is, the exchange of one commodity for another. In other words, trading goods or services in exchange for other goods or services. Later on, around 1100 BC with the Chinese civilization, signs of circular objects appeared as testimony of a new monetary system: coins. Close to five centuries later, these coins evolved onto a new format with metallurgy. Indeed, minted coins were found in the kingdom of western Anatolia (Europe). This type of monetary system took precedence until the year 800 (in China) and 1600 (in Europe) with the arrival of paper bank notes. This was the birth of cash.

The arrival of digital within the payment industry occurred way later with the emergence of modern technologies. First, the credit card was introduced in the late 1960s by Barclays. This innovative mode of payment was gradually adopted by other financial institutions and gradually improved until 2002, date at which the chip and pin technologies surfaced. Passed the millenium, the democratization of internet and the e-commerce revolution boosted the use of online payments. Finally, passed 2010 and with the improvement of smartphone services, an increasing amount of transactions is taking place through mobile platforms. The future of payments remain unknown, however, multiple technologies could arise as new modes broadly used by customers.

2. Factors contributing to the emergence of digital payments

The effect of the digital wave on the payment industry is non-negligeable. In 2015 the volume growth for non-cash transactions reached $426.3 billions (USD) which corresponded to a 10.1% increase compared to the previous year. In addition, according to a study made by the Boston Consulting Group and Google, digitalization will accelerate in the next five years and non- cash transactions – today amounting to 22% of all consumer payments – will overtake cash transactions by 2023.

This revolution is due to four main factors:

• The increased connectivity and mobility of our daily lives shifting consumer expectations towards dematerialized modes of payments.
• The consumer shift towards digital urging retailers to change marketplaces towards e-commerce and m-commerce.
• The arrival of numerous innovative solutions disrupting the very value chain of payments.
• The favorable regulatory leniance fostering innovation and opening competition.

3. New payment habits and channels

Historically, there were two main use cases for payments: retail shopping and peer-to-peer exchanges. However, the digital wave has triggered the arrival of a new type of purchasing habit: online shopping. Wether it is via computer (e-commerce) or mobile phones (m-commerce) the trend has entirely redefined the model upon which the payment industry is based. In 2016, 1.61 billion people purchased goods online for a total of $1.9 trillions (USD) Nonetheless, the emergence of online commerce does not imply the death of traditional retailing. According to the Boston Consulting Group, retail and wholesale distributors will continue to hold a large share of payment volumes in the future and will even grow by 4% in Europe and 8% in North America by 2025.

Overall, digital technologies has impacted all of the payment scenarios by changing both the way these payments are made (channel of payment) and their instrument. In 2016, Capgemini Consulting identified six main categories of payment channels:

1. POS (Point-Of-Sales),
2. ATM (Automated Teller Machine),
3. PIP & AIPs (Third party providers),
4. Mobile,
5. Online,
6. Bank branches.

as well as 6 payment instruments:

1. Digital wallets (mobile phone)
2. Credit
3. Debit
4. Stored Value Cards/e-money
5. Checks/drafts
6. Virtual currencies

4. Focus on the mobile phone

At a current state of evolution, the mobile phone is the mode of payment most likely to prevail. The main reason underlying this phenomenon is the fact that it has taken an integrated part within our daily lives and, with a prospective 2 billion smartphone holders in 2022, it makes it the tool with the highest prospect for success. However, the underlying reason is that mobile phones offer the highest access to shopping and payment channels. Indeed, it can be used to shop online, in-apps, as well as in retail stores (with NFC or QR Code technologies connected to digital wallets); but can also be used for banking transactions and sending money in peer-to-peer. In addition, mobile phones offer the potential for value adding services like personal banking tools (account status analytics, portfolio management, etc.) and dematerialized cards (promotion tools, coupons, etc.)

5. Examples of technologies disrupting the payment process

Multiple technologies have empowered the digitalization of the payment process. These technologies intervene at all levels of the value chain and have/will reshape the way payments take place.

• NFC: Near Field Communication defined as a form of contactless communication process that connects two devices when they are close to each other. The connection enables the two devices to share information with each other via radio-frequency. From a payment perspective, this technology has been used to connect credit/debit cards with a POS device. In addition, it is now gradually incremented into phones in which the information shared is encrypted and dynamic. Mobile wallet solutions like Stripe, Apple Pay, Samsung Pay or Android Pay use this technology.
• QR Coding: Quick Response Coding is also a form of contactless communication process connecting two devices. However in this case, the information is encrypted in the form of a two-dimensional bar-code decrypted by the other device via camera or infra-red scanning. PayPal or MasterCard are among the solutions that have integrated such type of solution.
• BLE: Bluetooth Low Energy is also a form of wireless communication. Closely related to the NFC technology, the BLE relies on radio waves to transmit information. When two sensors are close to each other, they recognize their personal information. However, the BLE payment process appears to be way quicker (0.003 seconds for BLE versus 0.1 second for NFC).
• IoT: Directly correlated with NFC, QR Coding and BLE, Internet of Things is a form a machine-to-machine communication composing a network of devices of all kinds, in such industries as automotive, consumer goods, and utilities, that exchange information and perform functions without the physical assistance of humans. In 2010, this network composed 12.5 billion devices, a number expected to grow up to 50 billion in 2020. From a payment perspective however, very few have jumped on the IoT bandwagon.
• Tokens: Tokenization is the process by which sensitive data is protected by transforming it into an algorithmically generated number and is used mainly for safety purposes as a security enabler for credit card payments online or by phone.
• Biometrics: Biometry is the process of automated recognition of individuals on the basis of their physiological or behavioral characteristics such as fingerprints, face, iris, voice, pulse, handwriting, signatures, etc. From a payment perspective it is used in order to authenticate the payment.
• Blockchain: Blockchain is basically a digital distributed transaction ledger in which transactions are grouped into blocks that are linked to one another to form a ‘chain of blocks’ and for which all parties have access to review past entries. The chain, is later protected by cryptography so previously recorded transactions can be preserved. The advantage of this technology is that it has the potential to provide faster transactions at a cheaper rate. if on average transactions are processed within 24 hours, with blockchain, they could be processed within 0.1 second and for one-eight of the traditional cost. In addition, on average, it could lead to $20 billion savings in costs associated with financial transactions.
• Cryptocurrencies: Closely related to block-chain (technology upon which they are built), cryptocurrencies could affect the monetary ecosystem and the balance of indexes. Nevertheless, the lack of legal framework continues to define the boundaries of their application.
• AI and machine learning: AI finds its use in risk detection and in assisting humans to quickly understand very large amounts of changing information. With an increasing amount of digitally-powered transactions, this technology could offer multiple opportunities to reshape the payment sector. In particular, it could contribute to the detection and reduction of frauds.

This article "Digital Payments" is from Wikipedia. The list of its authors can be seen in its historical and/or the page Edithistory:Digital Payments. Articles copied from Draft Namespace on Wikipedia could be seen on the Draft Namespace of Wikipedia and not main one.

---