The Future of Electronic Payments Is Here – Are You Ready?
The actual definition of an electronic payment is simple: when you transfer money from one account to another electronically, i.e., without the need for paper checks or currency notes. Examples include making online bill payments; direct debits and credits in your bank account; tax refunds and other government disbursement into your bank account; and using credit and debit cards in online stores.
Sounds straightforward enough, until you consider the many types of electronic payments and the concerns they raise. Get started with this look at how electronic payments have evolved, and how they might look in the future.
The First Electronic Payments
Some payment mechanisms have been around much longer than others. The earliest versions of modern-day credit cards existed even in the mid-20th century. The first forms of electronic payments were motivated by the need for efficient alternatives to paper-based payments, primarily for business-to-business transactions, but with e-commerce, electronic payments are the only practical option.
Even as recently as the late ‘80s, several of the EFT (Electronic Fund Transfer) platforms were primarily used for B2B banking. Today, that’s changing, because a significant proportion of the globe’s population has access to at least one of the following: a credit card, online access to their bank account, a stored value online account, or the like.
Types of Electronic Payments Popular Today
If you have made a payment without handing over some form of paper – currency notes, checks, coupons – then you likely made an electronic payment. The most common types include:
- Credit and Debit Cards: These are the most popular electronic payment tools. While a credit card gives you a convenient loan for purchases, a debit card withdraws money from your bank account. Given their popularity, no business owner can afford to reject credit cards as a form of payment.
- RFID Cards: Some toll passes, such as E-ZPass, allow you to automatically pay as you drive past a tollbooth. These RFID (radio-frequency identification) cards “talk” to a receiving device at the tollbooth and make the payment. The greatest attraction of RFID cards is they process transactions without the need for physical contact – no swiping, no tapping. Especially in high-speed locations, such as a tollbooth, nothing can match the convenience of an RFID card.
- Online Bank Payments: When you transfer money to someone else’s account, or pay a utility bill from your account, you’re making an online bank payment. For many, bank accounts are the primary payment facilitators. Even if you use some other form of payment, you likely need to associate it with a bank account.
- Electronic Checks: These did not get as popular as some predicted. Electronic checks are just the online version of paper checks. They require a digital signature, and are governed by the same regulations that govern paper checks. Its similarity to a paper check makes an electronic check attractive, but people expect electronic payments to be much faster. Electronic checks aren’t much faster, and that prevent them from becoming too popular.
- Online Stored Value Accounts: Stored value accounts such as PayPal have become quite popular because the convenience—you can receive payment based solely on an email address. Of course, if you want to add or withdraw money from your account, you need to link it to a credit card or bank account.
- Digital Wallets: A digital wallet is a device, or application on a device such as a mobile phone, that either stores money or can withdraw money from a credit card or bank account. They enable customers to store information for multiple cards, making it more convenient to pay when shopping online or on a mobile device, beacause you don’t have to enter card information for every purchase. Examples include Apply Pay, Google Wallet and Softcard. Versatility makes digital wallets a major electronic payments innovation.
- Smartcards: Smartcards are the new generation of plastic. Instead of a magnetic strip, your information is stored in a microchip, which enables greater functionality. In many cases credit card issuers have upgraded the plastic of all cardholders. This has caused smartcards to become a common payment method overnight. Widespread usage, coupled with a much higher degree of security, has motivated businesses to upgrade their swipe machines to accept smartcards too.
What’s the Catch? Electronic Payments Aren’t Without Challenges
- Security: The upside of electronic payments is that they are more efficient than manual methods. The downside is that if left unchecked, they can also lead to efficient payment frauds! If all you need to authenticate a transaction is a device or credit card numbers, then someone might very well be able to withdraw money from your account.
- Privacy: To transact, electronic payment mechanisms store your information. Users fear that this information could be misused.
- Connectivity: To authenticate and complete an electronic transaction, you need an Internet connection. Places with poor connectivity can’t easily adopt electronic payment systems.
- Inclusion: Underlying most electronic payment mechanisms is a bank account. For the part of the population not eligible for a bank account, this is a deterrent.
The Future of Electronic Payments: What to Expect in 2015 and Beyond
- Stronger Security: Today we can configure a foolproof authentication system. But the problem with very high levels of security is that they make transactions cumbersome. For instance, you could take a thumbprint scan every time you use your digital wallet. But in addition to delaying each transaction, this process would require a fingerprint scanner. Every year, we are making greater strides in security. Encryption technologies, including SSL (Secure Sockets Layer), are now commonplace. Several online payment options require multifactor authentication too.
- Smarter Credit Cards: How smart can a credit card be? A smartcard could easily enable parents to block mobile app purchases by their kids, while permitting other purchases. Until then, present-day technology permits all your credit cards to be loaded on to one smartcard, doing away with the need to carry a wallet full of plastic.
- Biometric Payments: What if at a checkout counter, all you had to do was press your thumb to a scanner, and the money would automatically be taken from your credit card or bank account? It’s technologically possible today, and many researchers support biometric authentication. But the necessary backend infrastructure is not in place to make this option widely available—yet.
- Mobile Payments: While mobile phone-based payments rely on a credit card or bank account, they may do away with the need to carry that piece of plastic. Using the NFC (Near Field Communication) technology in your mobile device, you can get authenticated, and money can be withdrawn from your account.
Electronic payments are rapidly evolving, and the future is looking to bring more convenience and security than ever before. Is your small business ready?
Ajeet Khurana is CEO of the Society for Innovation and Entrepreneurship (SINE) at IIT Bombay, India’s premier engineering school. A famous entrepreneur, mentor and angel investor, Ajeet comes with extensive startup experience to his credit. From starting two ventures as a solopreneur, to helping a large number of startups with their go-to-market, he has never shied from getting his hands dirty. At the same time he has helped dozens of startups raise investment. He truly believes that small business owners are driving change in the world, and need to be facilitated as much as possible. Innumerable small businesses have gained from his attitude, vast professional networks, financial acumen and digital mindset.