Digital Payments: What are they and how do they work?

Digital payments are everywhere. But using them effectively to support business growth? That’s more complex. With a growing list of platforms, features, and industry jargon, it’s easy to feel uncertain about where to start. 

This guide simplifies the process by explaining what digital payments are, how they function, and how to choose the right solution for your business.

What are digital payments?

Digital payments involve the transfer of funds through digital channels without the need for physical cash or checks. This process is facilitated by digital payment processing, which relies on sophisticated systems to verify, authorise, and execute transactions in real time. The rise of new payment methods, such as mobile wallets, digital currencies, and contactless cards, has further accelerated the adoption of digital payments worldwide.

Digital payments now sit at the core of modern commerce, reshaping how money moves between businesses and consumers. These transactions provide a faster, safer, and more convenient alternative to cash or cheques. Backed by modern payment technologies, digital payment services are making it easier than ever to transact securely, locally and across borders on any device.

As businesses in Australia increasingly embrace eCommerce and global trade, the role of digital payment companies has become more critical than ever. These innovative firms provide the infrastructure, software, and expertise needed to process digital transactions securely and efficiently. By partnering with different payment processing providers, businesses can tap into new markets, streamline their payment processes, and deliver a seamless experience to their customers.

The benefits of digital payments extend far beyond convenience. For businesses, these systems can:

• Improve cash flow through faster settlement times

• Lower transaction costs by reducing the need for manual processing

• Reduce the risk of fraud with built-in security features

• Simplify reconciliation with automated tracking and reporting

• Support scalability by integrating easily with business platforms

Digital payments also promote financial inclusion, offering access to secure and affordable payment services for underbanked populations who may not have access to traditional banking options.

It's clear that the future of commerce lies in digital payment technology. Businesses that embrace this shift and invest in robust digital payment solutions will be well-positioned to thrive in the years ahead. 

By understanding the fundamentals of digital payments and partnering with trusted digital payment companies, organisations around the globe can unlock new payment methods for growth, efficiency, and customer satisfaction in an increasingly connected world.

The importance of digital payments in 2025

In 2025, digital payments are no longer a trend—they are the infrastructure underpinning modern commerce. With cash now playing a minor role in day-to-day transactions, businesses across Australia are adopting increasingly sophisticated digital payment systems to meet evolving consumer and operational demands.

A key driver in 2025 is the rise of AI-powered automation. Artificial intelligence is now embedded across the payment ecosystem, from real-time fraud detection and risk scoring to dynamic FX optimisation and automated reconciliation. Businesses leveraging these tools can move faster, make smarter financial decisions, and deliver smoother customer experiences.

Australia continues to lead in digital payments, supported by strong regulation, high consumer adoption, and ongoing innovation. Contactless cards, mobile wallets such as Apple Pay and Google Pay, and instant transfer platforms like Osko and PayID are now part of everyday life.

eCommerce remains a major driver, with more businesses offering BNPL and subscription-based payment options. Many are also integrating online and in-store systems to simplify reconciliation and improve the customer experience.

The introduction of PayTo, a recent upgrade to the New Payments Platform, has enabled faster, real-time account-to-account transfers. This gives businesses more control over cash flow while helping reduce failed payments.

Regulators are focusing more closely on areas like BNPL, digital currencies, and data protection. At the same time, artificial intelligence is being used behind the scenes to detect fraud earlier and automate payment processes.

In 2025, digital payments in Australia are not just a convenience—they are part of the core infrastructure shaping how businesses grow, operate, and deliver value. Platforms like Airwallex are helping to lead this transformation by offering businesses more efficient ways to move money globally, manage multi-currency payments, and reconcile transactions with ease.

How do digital payments work?

The process of executing a digital payment involves a complex interplay of technologies, networks, and financial institutions. While the specifics may vary depending on the payment method and platform, the core steps of a digital transaction typically include:

1. Initiation: The digital payment process begins when a user initiates a transaction, either through a website, mobile app, or physical payment terminal. This step involves providing payment details, such as credit card numbers, digital wallet credentials, or bank account information. 

2. Authentication: Once the payment details have been entered, the system must verify the user’s identity to prevent fraud and unauthorised access. This authentication process may involve a variety of methods, such as:

• Password or PIN entry

• Biometric verification (e.g., fingerprint or facial recognition)

• Two-factor authentication (2FA) via SMS or email

• Tokenisation, which replaces sensitive data with a unique digital identifier 

3. Authorisation: After the user’s identity has been confirmed, the payment system communicates with the relevant financial institutions to authorise the transaction. This typically involves the following steps:

•  The payment gateway securely transmits the transaction details to the acquiring bank (the merchant’s bank).

• The acquiring bank forwards the information to the issuing bank (the user’s bank) through the appropriate card network (e.g., Visa or Mastercard).

• The issuing bank verifies the user’s account status, checks for sufficient funds, and either approves or declines the transaction.

• The decision is communicated back to the payment gateway and the merchant.

4. Processing: If the transaction is approved, the payment system initiates the transfer of funds from the user’s account to the merchant’s account. This process, known as clearing and settlement, involves the exchange of funds and transaction data between the acquiring bank, issuing bank, and card network. The specific timeline for this step varies depending on the payment method and the policies of the financial institutions involved.

5. Confirmation: The user and the merchant receive a confirmation notification once the transaction has been successfully processed. This may come as a digital receipt, an SMS message, or an email, providing a record of the transaction details for future reference.

Advanced security measures are employed throughout the digital payment process to safeguard sensitive financial data and prevent unauthorised access. These measures may include:

• Encryption: Converting data into a coded format that can only be read with a specific decryption key. This is commonly used in payment platforms to protect data in transit.

• Tokenisation: Replacing sensitive data with a unique digital token without intrinsic value. For example, Apple Pay uses tokenisation to ensure that card details are never directly transmitted or stored.

• Fraud detection: Using machine learning algorithms and real-time monitoring to identify and block suspicious transactions. Many platforms apply behavioural analytics to flag anomalies before they result in fraud.

• PCI DSS compliance: Adhering to the Payment Card Industry Data Security Standard to ensure the secure handling and storage of cardholder data. This is a baseline requirement for any digital payment provider handling credit or debit card information.

As digital payment technologies evolve, these security measures become increasingly sophisticated, providing users with greater peace of mind and protection against cyber threats. By staying at the forefront of these advancements, digital payment companies can help businesses and consumers navigate the complexities of the digital economy confidently and efficiently.

Different types of digital payments in Australia

The digital payment landscape in Australia is diverse and dynamic, with a wide range of options available to suit various use cases and preferences. Some of the most common types of digital payments in Australia include:

• Credit and Debit Cards: Credit and debit cards remain a staple of the digital payment ecosystem in Australia. These payment methods allow users to make purchases online or in-store by entering their card information or using contactless technology. Major card networks like Visa, Mastercard, and American Express are widely accepted, offering users convenience, security, and rewards programmes.

• Mobile Wallets: The proliferation of smartphones has given rise to the popularity of mobile wallets in Australia. These digital payment platforms, such as Apple Pay, Google Pay, and Samsung Pay, enable users to store their payment information securely on their mobile devices. Using near-field communication (NFC) technology, users can make contactless payments at compatible point-of-sale terminals, as well as online purchases. Mobile wallets often incorporate additional security features, such as biometric authentication and tokenisation, to protect users’ financial data.

• Bank Transfers: Direct bank transfers are a common digital payment method in Australia, particularly for larger or recurring payments. These transfers can be initiated through online banking portals, mobile banking apps, or through services like Faster Payments or BACS (Bankers’ Automated Clearing Services). Bank transfers offer a secure and cost-effective way to move funds between accounts for personal or business purposes.

• Online Payment Gateways: eCommerce has been a significant driver of digital payment adoption in Australia, with online payment gateways playing a crucial role in facilitating secure transactions. Platforms like PayPal, Stripe, and Worldpay allow users to make online purchases using a variety of payment methods, including cards, bank transfers, and digital wallets. These gateways handle the complex process of authenticating, authorising, and processing digital payments, providing a seamless experience for both merchants and customers.

• Buy Now, Pay Later (BNPL): BNPL services have gained traction in Australia as a flexible and accessible digital payment option. Providers like Klarna, Afterpay, and Laybuy allow users to split the cost of purchase into smaller, interest-free instalments, often with no credit check required. This has made BNPL an attractive choice for younger consumers and those looking to manage their cash flow more effectively. However, as usage has surged, BNPL providers have come under increasing regulatory scrutiny in Australia, with authorities examining responsible lending practices and consumer protections.

• Digital Currencies: While still an emerging area, digital currencies have begun to make inroads in the Australian payment landscape. Cryptocurrencies like Bitcoin and Ethereum offer a decentralised, peer-to-peer payment system that operates independently of traditional financial institutions. Although adoption remains limited, some businesses in Australia  have started accepting digital currencies as a form of payment, often through specialised payment processors. However, challenges remain around volatility, regulatory uncertainty, and integration with existing financial infrastructure, all of which continue to impact broader adoption.

eCommerce remains a major force behind the shift, but the lines between physical and digital retail continue to blur. Mobile wallets, wearable payment tech, and biometric authentication are now commonplace across sectors, from hospitality to healthcare. This omnichannel shift is redefining how customers pay and how businesses manage revenue.

Meanwhile, financial inclusion is being reshaped by mobile-first fintechs and embedded finance solutions. These innovations are helping small businesses, remote communities, and gig economy workers gain access to payment infrastructure and financial services once reserved for larger institutions.

Regulatory frameworks have evolved in response. The Australian Government’s focus in 2025 includes not only maintaining security and consumer protection, but also supporting innovation. Real-time payments, digital identity standards, and open banking protocols are now foundational components of the digital economy.

Blockchain also remains a significant force in digital payments. While not yet mainstream, its application in secure cross-border transactions, smart contracts, and digital currency infrastructure is growing. In 2025, more businesses are exploring blockchain-backed settlement networks and decentralised finance (DeFi) tools to reduce cost and increase transaction transparency.

Looking ahead, businesses that view payments as a strategic function, not just a transactional one, will be best positioned to grow. The ability to integrate intelligent, scalable, and compliant digital payment solutions is now critical to success in a fast-moving, digitally connected world.

What is an example of a digital payment? 

Digital payments encompass a wide range of transaction types, from everyday purchases to complex international transfers. One common example of a digital payment in Australia is using a mobile wallet, such as Apple Pay or Google Pay, to make an in-store purchase. In this scenario, a customer would tap their smartphone on a contactless payment terminal, and the funds would be securely transferred from their digital wallet to the merchant’s account. This process eliminates the need for physical cash or credit cards, offering a more convenient and secure payment experience.

Another example of a digital payment in Australia is using a service like PayPal or Stripe to make an online purchase. When a customer shops on an e-commerce website that accepts these payment methods, they can enter their account details or use a stored payment method to complete the transaction. The funds are then securely transferred from the customer’s account to the merchant’s account without entering sensitive information like credit card numbers.

In a business context, digital payments are critical to managing global supply chains and operational costs. For instance, an Australian company might use a platform like Airwallex to pay international vendors in their local currency. This streamlines the payment process, reduces FX-related fees, and speeds up reconciliation across teams.

As digital payment technologies continue to develop, new examples are emerging—such as blockchain-based payments, biometric verification, and automated invoice payments. Each reflects the shift toward more secure, frictionless, and data-driven financial transactions.

Why choose Airwallex for digital payment services

Selecting the right digital payment provider is a strategic decision for businesses seeking to expand internationally, manage costs, and maintain operational efficiency. Airwallex offers a comprehensive solution tailored to the needs of Australian businesses operating in a fast-changing global economy. Here’s why:

• Global Payments Made Simple: Airwallex’s core strength lies in its ability to simplify and optimise international payments for Australian businesses of all sizes. The platform enables users to create virtual bank accounts in multiple currencies, allowing them to send and receive payments globally without the need for traditional bank transfers. This eliminates the complexity and high costs often associated with cross-border transactions, making it easier for businesses to expand their global footprint.

• Competitive FX Rates and Transparency: One of the key advantages of using Airwallex for digital payments is the company’s commitment to offering competitive foreign exchange rates and full transparency. Unlike traditional banks, which often charge high FX spreads and hidden fees, Airwallex provides users with access to near-market rates and a clear breakdown of all costs involved. This allows businesses to save money on currency conversions and make more informed decisions about their international payment strategies.

• Seamless Integration and Scalability: Airwallex’s payment platform is designed to integrate seamlessly with a business’s existing financial systems and workflows. The company offers a range of API and plugin options, making it easy to connect with popular eCommerce platforms, accounting software, enterprise resource planning (ERP) systems or even embedded within their own platforms. This integration capability allows businesses to automate their payment processes, reduce manual data entry, build new products, and scale their operations more efficiently.

• Robust Security and Compliance: In the world of digital payments, security and compliance are of utmost importance. Airwallex understands this and has invested heavily in building a robust and secure payment infrastructure. The company employs state-of-the-art encryption and fraud detection technologies to protect sensitive financial data and prevent unauthorised transactions. Airwallex is also compliant with all relevant regulatory requirements, including anti-money laundering (AML) and know-your-customer (KYC) regulations, providing businesses with peace of mind and reducing their compliance burden.

• Innovative Features and Customisation: Airwallex’s payment platform is packed with innovative features designed to meet the unique needs of modern Australian businesses. For example, Airwallex's virtual cards allow users to make payments in multiple currencies without incurring FX fees, while its Xero integration enables seamless reconciliation of international transactions. Airwallex also offers customisable payment request links, making it easy for businesses to invoice their customers and receive payments directly. These features and many others demonstrate Airwallex’s commitment to innovation and customer-centricity.

• Exceptional Customer Support: Airwallex is known for its excellent customer support and dedication to helping Australian businesses succeed in the global marketplace. The company’s team of payment experts is available 24/7 to answer questions, provide guidance, and resolve any issues that may arise. Airwallex also offers a comprehensive range of resources, including tutorials, webinars, and developer documentation, to help users get the most out of the platform.

Ultimately, Airwallex is an outstanding choice for Australian businesses seeking a reliable, innovative, and customer-centric digital payment solution. With its focus on simplifying cross-border transactions, offering competitive FX rates, and providing a range of customisable features, Airwallex is well-positioned to help businesses navigate the complexities of the global payment landscape. By partnering with Airwallex, companies can streamline their payment processes, reduce costs, and unlock new growth opportunities in the years ahead.

Digital payments: Frequently asked questions

What are the main advantages of using digital payments for businesses?

Digital payments can improve cash flow, reduce manual errors, lower processing costs, and increase customer satisfaction. They also support faster settlements, better financial tracking, and easier integration with accounting and eCommerce platforms.

Are digital payments secure for businesses and customers?

Yes. Most digital payment platforms use advanced security measures like encryption, tokenisation, two-factor authentication, and PCI DSS compliance. These features help protect sensitive information and minimise fraud risk for both merchants and customers.

What’s the difference between digital payments and online payments?

Online payments refer specifically to transactions made over the internet (e.g. shopping on an eCommerce site), while digital payments include all electronic payment methods—online or in-person—such as mobile wallets, contactless cards, and direct bank transfers.

Can small businesses in Australia use digital payment platforms?

Many digital payment solutions are designed to be scalable and easy to integrate, making them ideal for small businesses. From mobile payment apps to low-fee payment gateways, there are options that suit various industries and budgets.

Disclaimer:  We wrote this article in Q3 2024. The information was based on our own online research and we were not able to manually test each tool or provider. The information is provided for educational purposes only and a reader should consider the specific requirements of their business when evaluating providers. If you would like to request an update, feel free to contact us at [email protected]

This information doesn’t take into account your objectives, financial situation, or needs. If you are a customer of Airwallex Pty Ltd (AFSL No. 487221) it is important for you to read the Product Disclosure Statement (PDS) for the Direct Services, which is available here.