digital-payment-infrastructure

Digital Payment
Infrastructure

Higher Operational Risk with

Higher Interdependence

Digital payments infrastructure is becoming more sophisticated and technologically advanced, with this the underlying infrastructure becomes more complex. For a seamless user experience, the digital payment system often integrates various service providers, including banks, merchants, payment processors, and technology providers. The new complexities arise from interdependencies that come with the higher reliance on third-party providers, and cross-border links. The digital payment infrastructure majorly depends on electricity, computer software/hardware, and telecommunications. Therefore, any instance of a prolonged outage or business failure of third-party services leads to operational risks and challenges to resilience. Higher operational failure has resulted in disrupted monetary operations, settlement of transactions, failure of urgent payments, and loss of public trust. According to the analysis, the Accenture payment failures for several banks have already risen to 2%, up from less than 1% before the pandemic. However, the use of real-time gross settlement (RTGS) helps in immediately transferring and settling the funds upon initiation. The RTGS has significantly mitigated the risk of operational failure in digital payments by reducing the time window for potential system outages or interruptions, as transactions are settled instantly.


What is Digital Infrastructure

Digital infrastructure is the conglomeration of various systems, technologies, and processes, that conducts the digital transaction of real money between parties. Digital payments have rapidly penetrated the world, it is one of the common payment methods used by consumers, businesses, and even the government sector. Various technologies have been integrated into this infrastructure to boost the efficiency of digital payments.

  • Mobile Payments: The payments are made with the use of smartphones, or initiated via a mobile phone application, such as mobile apps, digital wallets, and OTP-based systems. Owing to its convenience, mobile payments are becoming highly popular, anyone with a mobile phone and internet connection can make a seamless payment. Mobile payments are utilized by almost two billion people worldwide as of January 2023, with millions more joining online each year.
  • QR Code Scanning: It is a contactless payment, that also employs the use of a smartphone and its camera to scan the picture of a QR code, which takes the user directly to the payment gateway of the merchant. QR code payment is much quicker and simpler than any other method. It exterminates the need for carrying cash or cards or even typing payment details on phones. Moreover, in comparison to traditional payment methods, QR code payments are generally more cost-effective, since they don’t need expensive point-of-sale hardware. QR code usage went up from around 3 billion in 2016 to nearly 7 billion in 2023. This would equate to a 4.2% annual rise.
  • Blockchain Technology: IT has been integrated into digital payments for decentralizing transaction verification across a network of computers. The transactions are done without the use of personal details and once the transaction details are fed into blockchain technology they cannot be tampered with, thus the data is highly secure, transparent, and unalterable.
  • AI and Machine Learning: The use of AI and machine learning has revolutionized the use of electronic payments. It has boosted efficiency by making quicker real-time decisions. The overall customer experience has been augmented with the aid of AI-powered virtual assistants and chatbots. In addition to this, deep learning and natural language processing have the potential to further enhance the security and efficiency of AI and ML use in banking and finance.
  • Biometric Authentication: The use of biometrics, such as fingerprints, voice, facial and retina recognition for the verification, makes it hard for scammers to replicate it and steal private information or money. It provides much greater security than passwords or PINs. Biometric authentication can readily expand to support high-volume digital payment systems. Furthermore, as more devices and platforms accept biometric payments authentication, it has the potential to become a more extensively used authentication mechanism. By 2027, mobile biometrics will be used to validate remote mobile payments a total of over USD 1 trillion, up from USD 332 billion in 2022.
digital-payment-infrastructure
Campaigns to Promote Women's

Adoption of Digital Payment

  • Unilever has initiated the digitization of payments for 40,000 Shakti entrepreneurs in 132 locations by 2025, with technical assistance from the Alliance Secretariat of the United Nations, to reach 2.4 million last-mile consumers. This is beneficial to the government's goal of closing the gender disparity in financial empowerment by 2024.
  • Rapidly expanding consumer goods businesses are working on an awareness campaign in collaboration with the Ministry of Finance of Mexico to help 1.2 million mom-and-pop stores, the bulk of which are owned by women, embrace digital payments.
  • The Ministry of Trade and Industry and the Bangko Sentral ng Pilipinas launched a drama series named 'Pay me with your love' to encourage 800,000 sari-sari retailers. 50 percent of which are owned by women, contributing to the burgeoning digital economy.
digital-payment-infrastructure
The landscape of Digital Payment

Infrastructure in Developing Countries

Governments financial institutions, and technology companies have been actively promoting financial inclusion in developing countries. Digital payment services are playing a crucial role in providing banking services to the unbanked population.

  • According to MyGovIndia data, India topped the list of five countries in digital payments with 89.5 million digital transactions in 2022. According to the research, India was responsible for 46% of worldwide real-time payments in 2022, with more digital payment transactions in India than the other four leading countries combined, that include, South Korea, China, Brazil, and Thailand.
  • Furthermore, the Digital India program is the Government of India's flagship initiative to promote digital payments and offer digital payment services to each region of the country. The goal is to make digital payments available to all citizens in a way that is comfortable, simple, economical, rapid, and reliable.
  • Civil servants, schoolteachers, medical staff, technicians, journalists for official media outlets, and state enterprise employees were expected to receive their salary in the e-CNY beginning in May 2023, as part of a larger Chinese drive to promote the usage of digital yuan, also known as e-CNY.
  • Banco Central do Brasil (BCB) established Pix, the Brazilian instant payment (IP) scheme that allows individuals, organizations, and governmental entities to initiate or receive money transfers in a few seconds at any time.

Approaches of Developing Countries

  • The Digital Payments Program has been implemented in combination with USAID's (United States Agency for International Development) first-ever Digital Strategy designed to help USAID workers and the broader development community in building competence for digital infrastructure. It was established to create open, inclusive, and secure digital payment ecosystems that facilitated online payment fraud detection in host countries.
  • On February 13, 2023, the Bank of England announced that Transition State 3, the implementation of the new RTGS core ledger and payment settlement engine, the full implementation will take place in the summer of 2024. Under this transition plan, CHAPS rules will call for the inclusion of Purpose Codes and LEIs in domestic CHAPS payments between banks and credit unions A CHAPS payment is a high-value, same-day digital transfer between banks that is capable of handling substantial amounts of money.
digital-payment-infrastructure

Conclusion

The digital payment infrastructure is a rapidly growing area and has huge potential for more innovation and growth. Consumers and businesses are looking forward to better digital payment solutions that meet all of their demands as digital payment has grown more common around the world. With the growing need for faster, more efficient, and more secure payment choices, consumers and businesses are looking forward to better digital payment solutions that meet all of their needs. The greater demand for seamless experience requires the need for overcoming the redundancy in the existing models. Therefore, the new product and service offerings, advanced technologies, and points for payment initiation have become a crucial part of digital payment infrastructure development. Building operational resilience in payment systems entails developing the ability to identify both inside and outside sources of risk as well as anticipating and planning for large-scale or severe outages.

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Swara Keni

Head- Global Business Development

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