In low and middle-income economies, digital merchant payments have grown during the pandemic. But skepticisms about privacy and security persist.
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Making payments digitally can help entrepreneurs increase participation in e-commerce and improve interactions with clients, vendors and financial institutions. It can also lower costs and working capital by reducing accumulated interest in supplier loans.
1. Ease of Payment

Increasingly, consumers are demanding safer and faster payments. They want to use mobile phones and other devices to pay at points of sale, online or over the internet — and they expect their money to be available instantly. In fact, the emergence of mobile payment technologies and their widespread adoption have accelerated global non-cash transactions. In 2020, non-cash transactions increased by more than 14% globally to reach 708 billion transactions, according to the World Payment Report 2021.

Digital payments can help increase financial inclusion and boost economic opportunities for households, particularly low-income workers. For example, digital wage payments can help embed workers in a system of automatic deposits, scheduled text reminders and other positive default options that can help overcome psychological barriers to saving. These “nudges” can be used to encourage forward-looking financial and nonfinancial behavior, such as defined-contribution pension accounts and commitment savings products, enabling individuals to build wealth over time.

However, the expansion of digital payments must be done responsibly to ensure that it benefits all members of society. For example, if a payment system is primarily denominated in private digital currencies without strong links to sovereign money, the integrity of monetary sovereignty could be weakened. This would raise concerns about potential monetary policy spillovers and lender of last resort implications. In addition, the broader participation of PSPs — including non-bank entities and fintechs — increases the potential for cross-border payments, which can have serious consequences for monetary policy implementation and stability.

The success of a digital payments solution depends on both the supply side (entrepreneurs who are willing to accept the product) and the demand side (customers who are eager to make purchases with it). It is important to develop front-end interfaces that facilitate interoperability between competing PSPs, as well as back-end infrastructures that support a seamless transfer of different settlement assets. In addition, it is crucial to build a solid user base with adequate awareness of the products, services and features that are offered. This includes educating and training customers on the advantages of digital payments and the safety and security of these systems.
2. Security

A digital payment is the quickest and safest way to pay for goods and services. It eliminates the risk of losing cash or a credit card, and it ensures that customers’ data is secure. For small business owners, digital payments also streamline transactions and boost customer satisfaction by providing convenience.

Digital payments are more than just a money transfer service – they’re a powerful tool for empowering entrepreneurs, building financial inclusion and reducing inequality. According to the World Bank Enterprise Surveys, half of all small businesses need a loan, but only 33% have one. In developing countries, high interest rates and collateral requirements often make it hard for these entrepreneurs to access formal finance. But by transferring funds via digital payment platforms, entrepreneurs can avoid the high costs of lending and instead invest back into their businesses.

This approach also reduces risk and enables small businesses to offer more convenient services, like password-free checkout. And as technology evolves, consumers will continue to expect faster and safer payments, no matter the transaction type or channel.

For example, e-commerce or ride hailing apps have started to bundle their services with payment functionality to provide users with a complete digital experience. The bundling of services is analogous to the town square market, where vendors of different products and services can co-exist in a single marketplace.

A payment system is a complex market with many different types of participants, including banks, non-bank payment service providers (PSPs) and aggregators. Most payment systems have a "front end" that connects with end users through service channels such as a bank branch, automated teller machine (ATM) or point-of-sale (POS) terminal and a payment application. The system also has a set of "back end" arrangements that enable clearing and settlement for payments.

Traditionally, back end arrangements have been managed by central banks, which are responsible for the technical underpinnings of the payment system. However, as the world's economies become increasingly interconnected, and global standards for settlement become more common, the role of the central bank is shifting. In addition to its traditional mandate of regulating payments, many central banks are now embracing an additional role in the market, as a provider of back-end infrastructure that facilitates competition and encourages innovation.
3. Transparency

Digital financial payments can be more transparent than cash, reducing the risk of corruption and theft by middlemen. This is particularly important for government employment transfer payments, where researchers in India and Ghana have found that transferring funds via biometrically verified fingerprints reduced “leakages” (money pilfered by middlemen) and improved accountability. In addition, the transparency of digital payments facilitates more effective monitoring and enforcement by government agencies.

The shift to digital payments can also improve economic outcomes by supporting broader policy goals. For example, greater use of electronic wage payments reduces the informal economy and gives workers a payment record that can improve their ability to access credit. It can also make tax collection, law enforcement and social protection more efficient. And it can make it easier for entrepreneurs to pay business and income taxes, as well as to receive government support programs.

Technological advances in mobile phones/internet, contactless solutions such as QR codes, Big Data analytics, application programming interfaces (APIs), and biometric technologies are driving innovation in payments. These innovations reduce transaction costs by developing new delivery channels and payment methods; simplifying customer onboarding and payment workflows; and improving the precision of real-time approvals. Additionally, many of these developments are leveraging horizontal interoperability to allow PSPs to compete on front-end user interfaces while retaining back-end infrastructure that is compatible with different types of settlement assets.

In addition, many fintechs and neo banks are offering new expense management experiences that help small businesses to manage their costs and build better cash flow. As a result, small businesses are increasingly prioritizing digital payment solutions over traditional paper checks. In fact, during the COVID-19 pandemic, 82% of small businesses surveyed said that they were changing how they process and receive B2B payments, largely in order to replace paper checks with faster, simpler alternatives. This rapid shift to digital is accelerating the pace of digital transformation for all players in the payments industry. This is particularly true for central banks, which are accelerating their efforts to promote more innovative ways to improve the efficiency and effectiveness of their payment systems.
4. Convenience

Convenience is a key factor in customer behaviour. Customers want fast, secure and convenient services that allow them to meet their needs at a time and place that is right for them. Payment systems that don’t keep up with these demands will lose out to those that do.

For example, many consumers will only use a new smartphone if it comes with features they value – like face recognition, fingerprint scanning and a large screen. The convenience these features deliver will make the device an attractive proposition even if it is more expensive than its rivals.

This is also true in the digital payments market where there are many PSPs competing for users’ business. Some of these are big tech and fintech firms whose digital platforms embody the traditional characteristics of networks (network externalities, economies of scale and scope, large fixed costs and low marginal cost of adding new users) alongside additional features. These new players offer a range of consumer-facing and retail services at the front end – such as ride hailing, messaging or social media – while also providing clearing, settlement and processing on the back-end.

Similarly, small merchants will want to access the same digital payment convenience as consumers. The emergence of solutions like Tap on Phone that enable them to use their existing mobile phones as their point of sale (POS) system offers them an opportunity to do so. This can free them from the need to invest in point of sales machines or accept cash, while protecting their customer data with cutting-edge security techniques like tokenization.

As digital payment penetration continues to grow rapidly across the globe, so too will consumer demand for a faster, safer, more convenient and integrated experience. It’s important for merchants and banks to ensure they have the right partners in place to help them keep pace with these evolving consumer expectations and continue to meet their customers’ needs at every touchpoint. This includes ensuring that their payments are safe and secure from digital fraudsters and giving consumers the flexibility they desire with solutions like instalment payments.