What are digital payments? Types + Examples (2024)

Getting paid is arguably the most important part of running a business. After all, getting paid for the products you sell is how you can pay your business expenses, increase your revenue, and make a profit.

Digital payments help grow your business wherever you sell. Instead of requiring customers to go to an ATM to withdraw cash and pay in person, digital payments allow you to accept money from anyone, anywhere. All customers need to complete a financial transaction is a smartphone, computer or credit card.

Although the technology behind them may seem complicated, modern digital payment providers allow almost any business owner to accept electronic payments without having extensive knowledge of payment processing. This guide explains how digital payments work, as well as the main methods you should consider if you want to make commerce more accessible to your customers.

What are digital payments?

Digital payments refer to any type of payment made electronically. Instead of taking physical cash from your customers, businesses can accept digital payment when customers pay via smartphone, computer, or their credit or debit card.

Why use digital payments?

Studies estimate that people will spend 16,620 billion dollars via digital payments by 2028. Indeed, digital payments offer the following advantages over cash:

• More security. Digital payment methods have an extra layer of protection to keep money safe. For example, if someone wants to pay through their Apple Pay wallet, they must enter a security password or use biometric verification (such as Face ID) to approve the payment. This protects business owners from fraud.
• Convenience. Digital payments withdraw money from one account to another. There is no need to physically go to the bank to withdraw or deposit money.
• Easier record keeping. If you have $50 in cash in your cash drawer, can you accurately tell who it came from? Digital payments are more traceable than cash payments. It’s easier to track your income and expenses, reconcile your accounts, and file your taxes if you pay digitally.

How digital payments work

1. The customer initiates a payment request

The first step to accepting a digital payment is to collect payment information from your customer using a payment gateway.

If you accept digital payments through your e-commerce website and physical store, for example, you can use Shopify Payments to securely collect customer payment information. This gateway tokenizes the data and transfers the information securely to the payment processor.

2. Digital payment is allowed

The payment processor contacts the customer’s bank for authorization. The processor verifies that there are sufficient funds in the customer’s account and that the digital payment transaction meets security requirements (such as the beneficiary identity matching the bank account holder’s name).

Sometimes this requires additional authentication. The customer may need to verify their identity using biometric data, such as fingerprint or facial recognition, or a one-time password.

3. The payment network transfers the funds

Payment networks are organizations that enable cashless transactions between businesses and individuals. They constitute an ecosystem of entities such as banks, credit card companies, and credit unions to transfer money from one party to another securely.

Once the payment is approved, the payment network acts as an intermediary between the customer’s bank and your merchant account. This completes digital payment: the customer receives their goods and you receive their money.

Main digital payment methods

Credit and debit cards

Credit and debit cards have overtaken cash in popularity. By 2027, it is estimated that 28.44 billion people will have debit, credit or prepaid cards that they use to buy things, perhaps because it allows them to make large purchases without withdrawing money.

Any money processed via a debit or credit card goes directly to your merchant account once the customer enters their PIN into a card reader and the digital payment is approved.

The downside to this digital payment method is the payment processing fees charged by most gateways. You can’t keep all the money you charged (like you would with cash). There is also a delay in the time it takes for funds to arrive in your business bank account.

Contactless payments

A contactless payment works in the same way as a credit or debit card payment. The main difference is that the customer does not need to tap their card into a card reader or enter their PIN. Instead, the card uses near field communication (NFC) technology to encrypt payment details over a low-speed radio connection.

Although contactless payment is convenient for in-store shoppers, most banks have a maximum contactless payment limit of $100. And if someone recovers a contactless card that hasn’t yet been reported lost or stolen, anyone can use it to make fraudulent digital payment transactions.

Mobile wallets

A mobile wallet is a payment application that allows customers to purchase goods from their mobile device, smart watch or tablet. Examples include Apple Pay, Google Pay and Samsung Pay. They are gaining popularity: digital wallets represent about half of all global e-commerce transactions.

The great thing about mobile wallets is that you can process digital payments anywhere. If you sell online, use mobile apps like Buy Pay, which allows customers to securely save their payment information and quickly make a payment. And you accept digital payments in person, customers don’t need their physical bank card to make a purchase, just the smartphone they already have in their pocket.

Cryptocurrency

Cryptocurrencies are a type of digital currency that anyone can use to make a digital payment, as long as the merchant accepts them. Examples include Bitcoin, Ethereum and Litecoin. These payments work through blockchain, a system that records financial transactions that are not controlled by the government or managed by large financial institutions and central banks.

The biggest disadvantage of crypto is that it is more complex than other digital payment methods because not everyone accepts it. In most cases, you must purchase the currency before you can spend it. The receiving retailer must also convert the crypto back into their own currency if they want to spend it elsewhere.

Electronic bank transfer

If someone doesn’t have a physical payment method (like a bank card or a smartphone with a mobile wallet), they can use electronic bank transfer to pay for goods and services digitally. They are most often used for larger or one-off secure transactions.

If you purchased inventory from a wholesaler, for example, you might receive an invoice with the supplier’s payment details at the bottom. To make the digital payment, you need to log into your online banking app and transfer funds from your bank account to the wholesaler’s account using their account number and routing code.

Peer-to-peer payments

Peer-to-peer (P2P) payments occur when friends send each other money over the Internet. This type of digital payment service allows you to link your bank account or card to the payment app so you can send instant payments with minimal fees. Examples include Venmo, PayPal, and Cash App.

How to collect digital payments with Shopify

Shopify Payments supports local currencies so you can get paid wherever you sell, online and in person, worldwide. You can accept your customer’s preferred payment method: physical credit cards, mobile and contactless payment apps included. Customers can also use these electronic payment methods to pay in installments or opt for recurring payments.

The best part? Unlike other payment gateways, you won’t be charged any third-party transaction fees for orders paid through Shopify Payments or Shop Pay, so more profits stay in your pocket.