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

As a business owner, offering a range of digital payment options is essential. Your local and international customers have their preferred ways to pay. For example, credit and debit cards are the most commonly used payment methods in the US, accounting for over half of all transactions. Additionally, digital payment methods like PayPal, Apple Pay, and Google Pay are rapidly gaining popularity, especially among younger consumers.¹

According to an Airwallex research report by Edgar, Dunn & Company, 77% of consumers abandon their cart if their preferred digital payment method isn't available.² Let's explore digital payments and how to select the best option for your business.

What are digital payments?

Digital payments transfer funds electronically, eliminating the need for physical cash or checks. This process is facilitated by digital payment processing, which relies on sophisticated systems to verify, authorize, 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.

The benefits of digital payments extend far beyond convenience. By reducing the reliance on cash and paper-based processes, digital transactions can help businesses lower costs, mitigate fraud risks, and improve financial transparency. By understanding the fundamentals of digital payments and partnering with trusted digital payment companies, organizations around the globe can unlock new payment methods for growth, efficiency, and customer satisfaction in an increasingly connected world.

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 unauthorized 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

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

3. Authorization: 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 financial institutions' policies.

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

Digital payment systems employ advanced security measures to safeguard sensitive financial data and prevent unauthorized access. These measures may include:

• Encryption: converting data into a coded format that can only be read with a specific decryption key

• Tokenization: replacing sensitive data with a unique digital token without intrinsic value

• Fraud detection: using machine learning algorithms and real-time monitoring to identify and block suspicious transactions.

• PCI DSS compliance: adhering to the Payment Card Industry Data Security Standard to ensure the secure handling and storage of cardholder data

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.

What is an example of a digital payment? 

Digital payments encompass a wide range of transaction types, from everyday purchases to complex international transfers. A typical example of a digital payment in the US is using a mobile wallet like Apple Pay, Google Pay, or PayPal for in-store purchases. In this scenario, a customer taps their smartphone or scans a QR code at the point of sale, and funds are securely transferred from their digital wallet to the merchant’s account. This eliminates the need for physical cash or even pulling out a card, offering a faster, more secure checkout experience.

Another example is when a customer shops on an eCommerce website. At checkout, they can typically pay with a credit card, a digital wallet (like PayPal or Shop Pay), or even a buy now, pay later option such as Affirm or Klarna. The website’s payment gateway processes the transaction securely, often without requiring the customer to manually enter sensitive card information, making online payments more seamless and protected.

Different types of digital payments in the US

The US is home to a robust digital payment ecosystem, shaped by evolving consumer preferences, rapid fintech innovation, and expanding infrastructure for real-time payments.

Some of the most widely used digital payment platforms in the US include:

• Contactless cards: Contactless credit and debit cards have gained widespread adoption in the US, especially after the pandemic accelerated demand for touch-free payment options. These cards use near-field communication (NFC) technology, allowing users to tap their cards on a compatible terminal to complete a transaction. Contactless payments are fast, secure, and typically subject to transaction limits for fraud protection. For online purchases, traditional credit and debit cards remain the most popular payment method. These payments are processed through networks like Visa, Mastercard, American Express, and Discover, and are often integrated with eCommerce platforms that offer one-click checkout experiences or tokenized storage via tools like Apple Pay or Shop Pay.

• Mobile wallets: According to Nasdaq, around 25% of Americans use digital wallets, which continue to grow as mobile payments become more accepted by retailers and consumers alike.³ Popular options in the US include Apple Pay, Google Pay, Samsung Pay, and PayPal. These platforms allow users to store payment information on their smartphones and securely make online and in-store purchases using contactless NFC technology. Mobile wallets offer added convenience and enhanced security through tokenization and biometric authentication, making them an increasingly attractive alternative to physical cards or cash.

• Instant payments: Real-time payments are starting to gain traction in the US. The RTP network from The Clearing House enables real-time bank-to-bank transfers, and FedNow, launched in 2023, offers 24/7 instant payments between financial institutions. These systems are increasingly adopted for payroll, disbursements, and B2B transactions.

• Buy now, pay later (BNPL): BNPL options like Affirm, Klarna, Afterpay, and PayPal Pay Later have seen rapid growth in the US, especially among younger consumers. These services let shoppers split purchases into multiple interest-free payments at checkout. According to Statista, as of 2023, 41% of US adults have used a BNPL service in the past 12 months, with adoption highest among those aged 18 to 34.⁴

As the US continues to embrace digital payments, new and innovative systems will likely emerge to meet the evolving needs of consumers and businesses. By staying informed about the most popular digital payment options and their unique features, users can choose the platforms that best suit their preferences and requirements.

Looking ahead: the importance of digital payments in 2025

Offering diverse digital payment options, such as credit cards, mobile wallets, and BNPL services, can significantly improve customer satisfaction and drive sales. A 2023 Visa survey revealed that 82% of small and micro-businesses planned to accept digital payment options, recognizing the benefits of convenience and speed that these methods offer to consumers.⁵

The need for greater efficiency and cost savings in the business world will also underscore the importance of digital payments in 2025. By streamlining payment processes and reducing the reliance on manual, paper-based transactions, digital payment solutions can help businesses lower costs, improve cash flow management, and enhance overall financial transparency. This'll be particularly crucial for SMEs, which often face significant challenges in managing their financial operations.

Offer the payment methods your customers prefer with Airwallex 

In the rapidly evolving world of digital payments, choosing the right service provider can make all the difference in efficiency, security, and global reach. 

Over 150,000 companies worldwide use Airwallex to accept customer payments and simplify their financial operations securely. Our powerful payment gateway has the following features that'll give you an edge in local and international markets:

• Accept 160+ payment methods in 180+ countries, such as AliPay and WeChatPay in China, GrabPay in Southeast Asia, and AfterPay in the US.

• Airwallex offers like-for-like settlements in USD, GBP, and twelve more leading currencies. This means you can accept payments in these currencies without converting them to USD, which saves you from paying unnecessary conversion fees.

• Seamless integrations with eCommerce platforms like Shopify and accounting software like Xero. Airwallex works with your existing infrastructure and saves you time on manual tasks. 

• Gold-standard security in safeguarding your funds and your customers’ payment data with end-to-end encryption, tokenization, featuring real-time fraud protection that’s PCI-DSS compliant.

Airwallex is more than a payment gateway – we’re an end-to-end payments solution that helps you streamline global business operations. With our all-in-one Business Account, you can open Global Accounts with local bank details, make low-cost international payments, issue multi-currency debit cards, automate bill payments, and more.

Stay future-ready with Airwallex. Create a free account now, or view case studies that show how Airwallex has fueled the growth of local businesses like yours.

Sources:

1. https://upgradedpoints.com/finance/most-popular-payment-methods-in-us/

2. https://www.airwallex.com/newsroom/cross-border-ecommerce-2024-report

3. https://www.nasdaq.com/articles/just-25-americans-use-digital-wallets-here-are-4-popular-options

4. https://www.statista.com/chart/31300/usage-of-buy-now-pay-later-services/

5. https://www.retaildive.com/news/small-businesses-digital-payments-visa-cashless-smb/694281/