The Future of Online Payment Systems: Opportunities and Risks
Following the fast pace at which payment technology is developing and gaining acceptance across the globe, it makes sense to think that a cashless society is inevitable. But will that come to pass any time soon? Read on to find out.
In this article, we highlight the future trends, opportunities, and risks associated with digital payments. The information here is helpful to consumers, businesses, and governments.
What are the Future Opportunities for Digital Payments?
The current trends in online payments speak volumes about what the future of digital transactions will look like. In the coming years, it is expected that payments and cross-border money transfers will become easier, faster, smarter, and more secure. That is because of the following opportunities in the industry:
Buy now, pay later
By 2027, it is expected that 900 million people will use "buy now, pay later" (BNPL) products due to low credit costs and simple repayment processes. This prediction was made known in a report published by Jupiter Research in August 2022, which also revealed that 360 million people were already using BNPL apps.
Most of the users of BNPL products are young customers who like to go shopping but would prefer to make payments in instalments. Their best choices of payment apps include the likes of PayPal, Klarna, and Clearpay. Such payment opportunities are expected to increase in the future.
Mobile point-of-sale (mPOS) solutions
A wireless device that performs the functions of an electronic point-of-sale terminal is a mobile point-of-sale (mPOS). This type of device allows businesses to accept payments securely on the go. It is a revolutionary technology that is gaining popularity in the payments industry.
mPOS makes it possible for those who used to be traditional brick-and-mortar store merchants to seamlessly accept payments while at different locations, such as trade shows and concerts. This digital payment method is also good for freelancers and digital nomads.
Cards with dynamic CVV/CVC
A typical payment card has security features, especially a CVV (Card Verification Value), which is a static three- or four-digit number that enables the authentication of transactions. You will find it on most debit and credit cards, including the physical and virtual versions branded by card issuers for the top payment networks like Mastercard and Visa.
A CVV, or CVC (Card Verification Code), ideally helps provide an additional layer of payment security. But since fraudsters have devised various ways to capture these static codes to take advantage of the increase in e-commerce since the COVID-19 pandemic, payment card technology has also evolved to counter their efforts. Thus, a dynamic CVV/CVC system was introduced to enhance the security of payment cards.
Dynamic CVVs/CVCs are numbers that refresh or change whenever the prepaid, credit, or debit cards are used. Some of them are also set to change automatically every 30 to 60 minutes or after a certain number of hours. In that way, card users can eliminate, or more realistically, minimise, the risk of card verification number-related fraudulent transactions.
If the CVV on your card does not change, you are using a payment card with a static code. The changeable CVV on a card is usually displayed in the issuer’s app or digital wallet, or on a small screen on the physical card.
As of January 2023, only a few banks issue cards with dynamic CVVs. An example is Deutsche Bank (in Spain). In the future, it is expected that more financial institutions will issue physical cards, virtual cards, and battery-powered payment cards that come with dynamic CVVs/CVCs.
Voice-based payments
Voice-based payment is a revolutionary payment method that requires speaking to a portable device, such as a speaker or a smartphone that is powered by artificial intelligence (AI), in order to make a transaction. It uses a branch of AI known as "natural language processing" (NLP) to perform this operation.
Under normal circumstances, when the owner speaks to a voice-enabled device, his or her voice will be recognised, and the verbal request will be responded to or acted upon immediately. Examples of such devices are the voice assistants of Amazon (Alexa) and Apple (Siri).
New cost-saving opportunities have been brought to the financial services industry by voice-based payment systems. They simply work with digital voice assistants to enable routine financial tasks like card activations, bill payments, and money transfers. You can drive to the pump and fill up your car with gas using voice commands and voice payments on the Alexa mobile app with Amazon Pay or any device that is Alexa-enabled in your car.
The best examples of digital platforms that support voice-based payments via the likes of Siri and Alexa are:
Venmo
Cash App
Zelle
Square Cash
PayPal
Smart contracts
A "smart contract" is a digital agreement that controls financial transactions and takes the form of computer code that is saved and run on the blockchain. Additionally, smart contract codes can prevent disagreement and squandered time while lowering transaction costs and risk.
Smart contracts can run on their own. They control a party's adherence to the terms of the contract using predetermined, programmed criteria and may even act in the event of a violation, including automatically imposing a late payment fee in respect of deadlines that were missed. The terms are encoded directly into lines of code throughout a distributed, decentralised blockchain network, eliminating the need for a middleman.
With the elimination of human mistakes, smart contracts are becoming more common and can improve the efficiency of agreements. They're frequently employed since they make it possible for firms to operate more productively, reaching outcomes without communication, paperwork, or actual contracts.
Unfortunately, cryptocurrency use is becoming more and more difficult due to its volatility. Since cryptocurrency prices fluctuate often, transactions can be made quickly. Moreover, fintech businesses and their clients can conduct these transactions more quickly thanks to access to smart contracts than many banking institutions can.
By electronically enabling, validating, or enforcing the negotiation or fulfilment of an agreement, smart contracts make it possible for businesses to increase worldwide payouts. They make it possible for crypto payments, provide corporate security, transparency, speed, and efficiency, and let parties trade digital assets in a frictionless manner while maintaining privacy and security.
Smart contracts can be used to set up complete corporate structures in various industries, like business and mergers and acquisitions. Additionally, banks and fintech companies can use smart contracts for dealing with stock splits and dividends, identity verification for fraud control, debt payments, and automated transfers. These are but a few illustrations.
Governments can increase the efficiency and openness of their various departments with the adoption of smart contracts. They can use them for reliable digital identity management, fast and accurate tax collection, vaccination verification and tracking, open data for promoting citizen participation in policymaking and reducing corruption, and many more functions.
Biometric smart cards and payments authentication
The size of the worldwide biometric smart card market was estimated at $74.4 million in 2021. Its long-term growth is anticipated to be supported by the rising demand for biometric authentication techniques among end-users. Notable examples of these users are traditional banks, neobanks, retailers, health workers, gamers who use casino e-wallets, and security service providers.
Due to digital product consumers’ increasing preference for alternative payment methods, there is a greater demand for fast and secure authentication. With nearly instantaneous payment and identity identification offered by fingerprint biometrics, customers' lives are made easier, and they have additional options for proving their identity.
Biometric smart cards can safely keep fingerprint data in the card's chip without sending data to bank computers in light of growing data privacy concerns. The very personal and private character of the biometric smart card is essential for its future success since it reduces issues with facial recognition like deepfakes and other forms of fraud.
Biometric payment cards are recommended as the main solution for the financially marginalised because they offer a more concentrated approach to financial inclusion. Biometric payment cards provide clear benefits for both consumers and issuers, and their usage is likely to see exponential expansion in 2023 and beyond.
Stronger security through AI and ML
The most important factor when it comes to payment is security. People will always favour making payments via a system that is very secure. Because of this, there cannot be any meaningful and practical development in the online payment market without the creation of systems with higher levels of security.
Each day, financial institutions receive a lot of information on their customers and payments. Hence, they are now using machine learning to implement proactive, rather than reactive, measures in the identification and prevention of potential threats to user data and their digital platforms. The finest illustration of this is when the bank texts you to inquire about whether a transaction originated from you or not, thereby monitoring fraud. This warning notice aids both the user and the bank in avoiding a serious incident.
What are the Potential Risks for Digital Payments?
Online payment systems require adequate risk management on a daily basis. One mistake could cause a great loss to the business and do much harm to its customers. Below, we outline the various risks to keep in mind as you look forward to the opportunities that digital payment solutions are bringing now and in the future.
Chargebacks
Chargebacks might resemble standard refunds in many ways, but there is one key distinction. The customer requests that money be taken forcefully from the business's account through the bank instead of contacting the merchant to request a refund. Following an investigation of the chargeback claim, if the bank determines that the cardholder's request is legitimate, money is taken out of the merchant's account and given back to the customer. This can be very costly. Hence, it is important for business owners and managers to know how to prevent chargebacks.
Online fraud
Here, our attention is on the possibility of monetary loss for one of the parties to a payment transaction as a result of wrongdoing or criminal fraud. Payment fraud, broadly speaking, is any fictitious or illicit transaction that takes place online.
Even though we expect more secure transactions in the coming years, it is necessary to remind everyone to use their fintech platforms as safely as possible. For their evil deeds, cybercriminals typically take someone else's cash, valuables, or private information; therefore, having these things safely stored can help to prevent fraud. Contact your bank or financial institution whenever you are in doubt about a transaction.
Data security
Criminals are always searching for new methods to obtain user information from various financial sources. Financial card information that has been gathered during the acceptance of card payments has been recognised by fraudsters as a vulnerable point of breach.
To increase the security of payment card user data, card schemes adopt the globally regulated Payment Card Industry Data Security Standard (PCI DSS). Every retailer or company that accepts credit or debit cards, whether online or offline, must have this accreditation; otherwise, they face penalties, licence loss, and legal repercussions with local authorities if negative outcomes related to security occur often. Also, users should ensure that their payment service providers are PCI DSS certified, preferably at Level 1.
FAQ
Digital payments are the future of financial transactions because they are more embedded in everyday life than cash. Also, they follow the revolutionary trends in banking and fintech. Digital payments are relatively secure, more convenient, much more flexible, and faster to use for online and in-person transactions.
We know that cash is already being replaced by digital payments in modern transactions. However, what we cannot tell is when and where the use of cash will completely disappear. For now, the best we can do is follow the trend.
India occupies the number one position in the use of digital payments worldwide. The country achieved the highest volume of digital payment transactions globally, which was approximately 70 billion, in 2022.
Real-time payments (RTP) will see more success in the future, but that will depend on some factors, especially the speed at which financial institutions can create an international standard for their RTP network. Another factor will be the type of benefits that will be accessible to customers through value-added services, such as greater speed of integration of RTP systems, better infrastructure, and a richer customer experience.
The disadvantages of online payments are as follows: low appeal to some people (especially older generations) due to a lack of technological literacy; technical problems and user frustrations caused by system failures or downtime; risk of unauthorised access to digital payment platform users' personal and bank details; financial loss due to theft or fraud; and frequent inability to tell the true identity of the person making the transaction.
Many banks consider digital currency, especially CBDCs, a threat to their existence because they reduce physical deposit-taking, thereby eliminating intermediaries and limiting the funds and other resources that they need to serve their customers and operate smoothly.
It is difficult to determine how long it will take the world to go completely cashless. Some cities, territories, and countries will achieve it faster than others. Nevertheless, in the very near future, it is hoped that at least half of the world will have stopped using cash.
Conclusion: Long Live Digital Payments!
In the future, payment methods will continue to shift from using banknotes or physical cash to the adoption of a variety of digital payment methods, ranging from voice-enabled systems to smart contracts. More individuals, businesses, and governments will seize the opportunities in the payment industry to their benefit, going cashless and supporting online transactions. While the risks of fraud and data security seem like they will always be there, significant progress will be made towards minimising or eliminating them.
