Essay on Digital Payment Systems Revolution: A Comprehensive Exploration of Fintech Impact and Future Trends

Introduction

Today, the world is like one extensive marketplace. Innovative technologies are swiftly evolving as customers become fussier, and each industry is trying to cope up. In the financial sector, Fintech is the biggest disruptor that is revolutionizing service delivery from payment methods to credit settlements (Omarini, 2018). Fintech’s swift evolution has forced most traditional finance institutions such as asset management companies, insurers, and banks to face a new reality. Business models, products, and services that have existed for decades have been rendered obsolete as most companies reinvent to explore more efficient digital technologies, specifically Fintech (Omarini, 2018). Likewise, the Fintech industry is rapidly evolving by incorporating features that provide a seamless user experience. However, the inception of digital payment systems was the hallmark of the Fintech era (Omarini, 2018). Digital payment systems reflect a shift away from the traditional banking system and payment modes. They have tremendously transformed the finance sector by changing consumer expectations and empowering them in new ways (Omarini, 2018).

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This paper will, therefore delve deeply into digital wallets as an emerging form of digital payment systems and their significant role in the Fintech industry. In line with this, their application, the finance technology they have replaced, and the pros and cons of the solutions they offer will be critical for a detailed discussion.

The Concept of Digital Payment Systems

Digital payment systems such as e-wallets are digital versions of debit and credit cards, typically in the form of an app that allows payments of digital transactions in just one tap (Pachare, 2016). Although they are not directly linked to banking apps, digital payment apps such as Google Pay, Samsung Pay, and Apple Pay are increasingly being downloaded and preferred by most consumers compared to their mobile banking counterparts (Pachare, 2016). The growth of digital payment systems is becoming a global trend, and this is visible from their growing user base and their modes of use. With the discussion on wallet apps often being consumer-centered, the digital payment system has evolved, and several technology companies are introducing them into the market (Sharma et al., 2019).

Why Digital Payment Systems are Gaining Popularity

The rise of digital markets has forced most business owners to rely on digital payment systems as the fastest mode of payment (Bamasak, 2011). Digital payment systems are increasingly popular in developed countries and are rapidly gaining inroads in developing countries considering their ease of use in the current digital market. Despite playing different roles in both economies, the popularity of the e-payment system is immense with great success (Bamasak, 2011). So why are the digital payment systems this popular?

The primary reason for digital payment systems’ popularity is their mobile phone compatibility (Bamasak, 2011). In the age of modern technology and smartphones, payment modes are evolving rapidly. From a customer’s perspective, the rise of mobile phone technologies like NFC payments has made it much easier to send money and pay for products and services (Bamasak, 2011). Currently, smartphone developers are altering the way we handle cash by merely turning the phone into a wallet through an app.

Besides, this popularity is due to the easy accessibility of the global marketplace. The globalized marketplace has encouraged the use of e-payments as a mode of payment in international e-commerce sites (Bamasak, 2011). In a report by FIS 2019 Global Payments, it is predicted that digital payment systems will represent half of the global e-commerce sales in the next three years (Sharma et al., 2019).

Also, this popularity is linked to growing awareness and greater acceptance of digital payment systems as a safer mode of payment. Initially, a major hindrance to e-payment use was a lack of awareness of this type of service and how it can be used (Bamasak, 2011). Today, the rise of social media use has enabled e-payment providers to create awareness, and more consumers are now accepting them as a payment mode. Equally, as more customers use digital payment systems, merchants are beginning to see the need for such payment modes (Sharma et al., 2019).

Digital payment systems also offer a variety of options that appeal to consumers leading to their increased popularity. For instance, digital wallet providers are currently focusing on user-friendly services through a variety of digital payment options that appeal to consumers (Sharma et al., 2019). Such multipurpose digital wallets allow consumers to store several loyalty cards, gift cards, debit cards, and credit cards in one wallet. Such options for digital payments translate to greater acceptance and popularity.

Applications of Digital Payment Systems

Apart from just payment services, digital wallets have several applications that offer modern-day consumers highly secured financial solutions (Sharma et al., 2019). As a result, e-wallets have several uses depending on the services offered by the service provider. Nevertheless, with the rapid innovations in the sector, many digital wallet providers are incorporating several features with a variety of options to appeal to consumers.

Instant Payments

Payment services are the most common application of e-payment. Instant payment denotes that transactions between the payer and the payee occur within seconds instead of business days (Sharma et al., 2019). Digital payment systems enable payment at any time, making funds readily available. They also allow seamless transactions to and from bank accounts, including transfers to different accounts. Another critical feature that is important to most users today is bill payments as most prefer online payments (Sharma et al., 2019).

Easy Management of Virtual and physical Card Operations

Digital payment systems such as e-wallets are always encrypted with high-grade security that allows users to carry all their cards with them safely. The mobile wallets also store users’ debit and credit card data allowing them to make transactions at any time while conveniently monitoring all their card operations in one central space.

Budgeting and Planning

Digital payment systems can replicate as financial planners allowing users to create budgets that help them in making wise financial decisions. Such digital wallets often give the user options such as setting saving goals, sending reminders of pending bills, and creating expense and income categories.

Loan Origination

Digital payment systems such as e-wallets also act as a critical source of loan origination to most users. It is usually one of the features that meet the increasing demand for real-time banking. In most instances, the loan origination process is mobile-friendly and fast. The loan origination enables easy collection of customer details, instant approval, and quick integration with bank systems.

Digital Payment Systems vs Traditional Credit Cards

As digital payment systems continue to gain widespread popularity, global mobile payment revenue is expected to hit the 1.3 trillion mark by 2022 (Bagla & Sancheti, 2018). Although credit cards are still the leading consumer payment mode in the world, digital payment systems are rapidly replacing the traditional payment method (Bagla & Sanchetti, 2018). The shift to a digital payment system is thus on the horizon. In Asia, digital wallets are already the leading mode of e-commerce payment (Bagla & Sanchetti, 2018). With the changing human behaviour, rapid technological innovations, and smartphone penetration, e-payments are replacing credit and debit cards at a higher rate forcing most banks to develop innovative strategies to stay relevant.

Are Digital Payment Systems the Solution to Traditional Credit Cards?

Undeniably, the growing popularity of digital payment systems is due to the significant pitfalls of credit cards as a mode of payment. In as much as a credit card can be an invaluable financial tool if used correctly, it has several loopholes that e-wallet providers capitalize on. Therefore, most consumers view digital payment systems as a significant upgrade to credit cards due to the several solutions offered (Omarini, 2018). However, some of these solutions also have disadvantages that need to be considered.

Increased Security. Credit cards are inherently secure regarding the fact that they are too easy to use. The more the cards are used, the less secure they become (Boyd, 2005). The static three-digit security code on the card is what unscrupulous merchants need. And the more one uses the card, the easier it is exposed. How do digital payment systems solve this challenge? With e-payment systems, the card information is not saved in the device, it is stored in the cloud, and it is difficult to leak vital personal information or lose the card. Also, digital payment systems cannot be skimmed since they use tokenization that does not require sharing of the card’s data.

The main security drawback of this solution is the use of data transmission across mobile networks. Data transmission is the least secure method when using digital payment systems as personal information can easily leak. Also, there is the risk of losing the phone, which jeopardizes one’s financial transactions and confidential information.

More Convenient. Although learning how to use digital payment systems might seem complicated, one of the main advantages of e-payments is they are more convenient. Before credit cards were a must-have when leaving the house and it was cumbersome to carry more than three cards. Nowadays, phones are arguably the most important. Digital payment systems can be quickly accessed through smartphones by merely swiping left or right. This encourages easy online checkouts through saved cards in the wallets rather than the tedious process of using a card. It also enables easy in-store payments as most retail and grocery stores accept e-payments.

A disadvantage of this convenience is that it is dependent on a strong internet connection. Digital payment systems like e-wallets use the cloud, and any payment process can only be successful with a 4G cellular network or secure VPN.

They have Reduced Transaction Fees. One of the significant drawbacks of credit cards is high withdrawal charges and interest rates. Credit cards also charge annual fees apart from the deductions on withdrawals and purchases. Generally, credit cards incur a lot of fees despite the rewards. Digital payment systems like digital wallets remove the need for bank intermediaries that usually incur high transaction costs. Most consumers view this as an alternative to costly credit cards (Boyd, 2016).

Despite digital payment systems reducing transaction costs incurred by credit cards by a considerable amount, the disadvantage of this solution is that it encourages reckless spending. The high transaction costs of credit cards limit spending by most users. Moreover, the money doesn’t feel real, and proper budgeting may be a challenge.

Conclusion

Overall, digital payment systems have an inherent level of protection that most credit cards lack. Transactions and personal information on e-payments are heavily encrypted, reducing the chances of any fraud. Even though credit cards are still popular among many customers, e-payment providers are capitalizing on rapid innovations to grab a significant share of this market. The user-friendly features of most digital payment providers appeal to most consumers, making it a significant threat to credit cards in the near future.