Digital Payments: What are they and how do they work?

As a business owner, navigating digital payments is vital. With so many choices, it can be daunting. Let's dive into what digital payments are and how to select the best option for your business.

What are Digital Payments?

Digital payments involve the transfer of funds through digital channels without the need for physical cash or checks. This process is facilitated by digital payment processing, which relies on sophisticated systems to verify, authorise, and execute transactions in real time. The rise of new payment methods, such as mobile wallets, digital currencies, and contactless cards, has further accelerated the adoption of digital payments worldwide.

Digital payments have become a crucial component of modern commerce in a technology-driven world. These electronic transactions have revolutionised how businesses and consumers exchange funds, offering unparalleled convenience, speed, and security compared to traditional payment methods. Digital payment services, powered by cutting-edge payment technology, have transformed the financial landscape, enabling seamless transactions across borders and devices.

As businesses in Australia increasingly embrace eCommerce and global trade, the role of digital payment companies has become more critical than ever. These innovative firms provide the infrastructure, software, and expertise needed to process digital transactions securely and efficiently. By partnering with different payment processing providers, businesses can tap into new markets, streamline their payment processes, and deliver a seamless experience to their customers.

The benefits of digital payments extend far beyond mere convenience. By reducing the reliance on cash and paper-based processes, digital transactions can help businesses lower costs, mitigate fraud risks, and improve financial transparency. Moreover, digital payments can promote financial inclusion by providing access to secure and affordable payment services for underbanked populations.

It's clear that the future of commerce lies in digital payment technology. Businesses that embrace this shift and invest in robust digital payment solutions will be well-positioned to thrive in the years ahead. 

By understanding the fundamentals of digital payments and partnering with trusted digital payment companies, organisations around the globe can unlock new payment methods for growth, efficiency, and customer satisfaction in an increasingly connected world.

How do Digital Payments Work?

The process of executing a digital payment involves a complex interplay of technologies, networks, and financial institutions. While the specifics may vary depending on the payment method and platform, the core steps of a digital transaction typically include:

1. Initiation: The digital payment process begins when a user initiates a transaction, either through a website, mobile app, or physical payment terminal. This step involves providing payment details, such as credit card numbers, digital wallet credentials, or bank account information. 

2. Authentication: Once the payment details have been entered, the system must verify the user’s identity to prevent fraud and unauthorised access. This authentication process may involve a variety of methods, such as:

• Password or PIN entry

• Biometric verification (e.g., fingerprint or facial recognition)

• Two-factor authentication (2FA) via SMS or email

• Tokenisation, which replaces sensitive data with a unique digital identifier 

3. Authorisation: After the user’s identity has been confirmed, the payment system communicates with the relevant financial institutions to authorise the transaction. This typically involves the following steps:

•  The payment gateway securely transmits the transaction details to the acquiring bank (the merchant’s bank).

• The acquiring bank forwards the information to the issuing bank (the user’s bank) through the appropriate card network (e.g., Visa or Mastercard).

• The issuing bank verifies the user’s account status, checks for sufficient funds, and either approves or declines the transaction.

• The decision is communicated back to the payment gateway and the merchant.

4. Processing: If the transaction is approved, the payment system initiates the transfer of funds from the user’s account to the merchant’s account. This process, known as clearing and settlement, involves the exchange of funds and transaction data between the acquiring bank, issuing bank, and card network. The specific timeline for this step varies depending on the payment method and the policies of the financial institutions involved.

5. Confirmation: The user and the merchant receive a confirmation notification once the transaction has been successfully processed. This may come as a digital receipt, an SMS message, or an email, providing a record of the transaction details for future reference.

Advanced security measures are employed throughout the digital payment process to safeguard sensitive financial data and prevent unauthorised access. These measures may include:

• Encryption: Converting data into a coded format that can only be read with a specific decryption key.

• Tokenisation: Replacing sensitive data with a unique digital token without intrinsic value.

• Fraud detection: Using machine learning algorithms and real-time monitoring to identify and block suspicious transactions.

• PCI DSS compliance: Adhering to the Payment Card Industry Data Security Standard to ensure the secure handling and storage of cardholder data.

As digital payment technologies evolve, these security measures become increasingly sophisticated, providing users with greater peace of mind and protection against cyber threats. By staying at the forefront of these advancements, digital payment companies can help businesses and consumers navigate the complexities of the digital economy confidently and efficiently.

Different Types of Digital Payments in Australia

The digital payment landscape in Australia is diverse and dynamic, with a wide range of options available to suit various use cases and preferences. Some of the most common types of digital payments in Australia include:

• Credit and Debit Cards: Credit and debit cards remain a staple of the digital payment ecosystem in Australia. These payment methods allow users to make purchases online or in-store by entering their card information or using contactless technology. Major card networks like Visa, Mastercard, and American Express are widely accepted, offering users convenience, security, and rewards programmes.

• Mobile Wallets: The proliferation of smartphones has given rise to the popularity of mobile wallets in Australia. These digital payment platforms, such as Apple Pay, Google Pay, and Samsung Pay, enable users to store their payment information securely on their mobile devices. Using near-field communication (NFC) technology, users can make contactless payments at compatible point-of-sale terminals, as well as online purchases. Mobile wallets often incorporate additional security features, such as biometric authentication and tokenisation, to protect users’ financial data.

• Bank Transfers: Direct bank transfers are a common digital payment method in Australia, particularly for larger or recurring payments. These transfers can be initiated through online banking portals, mobile banking apps, or through services like Faster Payments or BACS (Bankers’ Automated Clearing Services). Bank transfers offer a secure and cost-effective way to move funds between accounts for personal or business purposes.

• Online Payment Gateways: eCommerce has been a significant driver of digital payment adoption in Australia, with online payment gateways playing a crucial role in facilitating secure transactions. Platforms like PayPal, Stripe, and Worldpay allow users to make online purchases using a variety of payment methods, including cards, bank transfers, and digital wallets. These gateways handle the complex process of authenticating, authorising, and processing digital payments, providing a seamless experience for both merchants and customers.

• Buy Now, Pay Later (BNPL): BNPL services have gained traction in Australia as a flexible and accessible digital payment option. Providers like Klarna, Afterpay, and Laybuy allow users to split the cost of purchase into smaller, interest-free instalments, often with no credit check required. This has made BNPL an attractive choice for younger consumers and those looking to manage their cash flow more effectively.

• Digital Currencies: While still an emerging area, digital currencies have begun to make inroads in the Australian payment landscape. Cryptocurrencies like Bitcoin and Ethereum offer a decentralised, peer-to-peer payment system that operates independently of traditional financial institutions. Although adoption remains limited, some businesses in Australia  have started accepting digital currencies as a form of payment, often through specialised payment processors.

As the digital payment ecosystem in Australia continues to evolve, new and innovative payment methods will likely emerge. The key to success for businesses and consumers will be to stay informed about these developments and choose the payment options that best align with their needs and preferences. By embracing the diversity of digital payment types available in Australia, users can enjoy greater flexibility, security, and convenience in their financial transactions.

Importance of Digital Payments in 2024

In 2024, digital payments will play an increasingly vital role in shaping the future of commerce and finance in Australia. The COVID-19 pandemic accelerated the shift towards cashless transactions, and this trend shows no signs of slowing down. Digital payment adoption is expected to reach new heights in the coming years, driven by technological advancements, changing consumer behaviours, and supportive regulatory environments.

One key factor boosting the importance of digital payments in 2024 will be the continued growth of eCommerce. As more Australian consumers embrace online shopping, businesses will need to offer a range of convenient and secure digital payment options to remain competitive. This will include not only traditional methods like credit cards and bank transfers but also emerging technologies such as mobile wallets, digital currencies, and biometric authentication.

Another major driver of digital payment adoption in recent years has been the increasing focus on financial inclusion. Digital payment services have the potential to bring millions of unbanked and underbanked individuals into the formal financial system, providing them with access to secure, affordable, and convenient payment options. The Australian government and financial institutions are likely to prioritise digital payment initiatives to promote economic growth and social development.

The importance of digital payments in 2024 will also be underscored by the need for greater efficiency and cost savings in the business world. By streamlining payment processes and reducing the reliance on manual, paper-based transactions, digital payment solutions can help businesses lower costs, improve cash flow management, and enhance overall financial transparency. This will be particularly crucial for small and medium-sized enterprises (SMEs) in Australia, which often face significant challenges in managing their financial operations.

The increasing sophistication of digital payment technologies will also drive adoption. Advancements in areas such as artificial intelligence, machine learning, and blockchain are expected to unlock new possibilities for secure, seamless, and personalised payment experiences. As these technologies mature, digital payment providers will be able to offer more robust fraud detection, real-time risk assessment, and customised loyalty programmes, further enhancing the value proposition for users.

Finally, the regulatory landscape in Australia is likely to evolve in ways that support the growth and importance of digital payments. Policymakers and regulators increasingly recognise the need for clear, flexible, and forward-looking frameworks to accommodate the rapid pace of innovation in the digital payment space. By fostering a supportive regulatory environment, Australia can position itself as a global leader in the digital payment ecosystem, attracting investment, talent, and business opportunities.

The importance of digital payments today and its potential cannot be overstated. As the world becomes increasingly interconnected and digitised, the ability to transact securely, efficiently, and inclusively will be a key determinant of economic success and social progress. By embracing the power of digital payment technologies and partnering with trusted service providers, businesses and consumers in Australia can navigate this exciting and transformative landscape with confidence and success.

Why choose Airwallex for Digital Payment services

In the rapidly evolving world of digital payments, choosing the right service provider can make all the difference in efficiency, security, and global reach. Among the many options available, Airwallex stands out as a leading choice for businesses seeking to streamline their cross-border payment processes and unlock new growth opportunities. Here’s why:

• Global Payments Made Simple: Airwallex’s core strength lies in its ability to simplify and optimise international payments for Australian businesses of all sizes. The platform enables users to create virtual bank accounts in multiple currencies, allowing them to send and receive payments globally without the need for traditional bank transfers. This eliminates the complexity and high costs often associated with cross-border transactions, making it easier for businesses to expand their global footprint.

• Competitive FX Rates and Transparency: One of the key advantages of using Airwallex for digital payments is the company’s commitment to offering competitive foreign exchange rates and full transparency. Unlike traditional banks, which often charge high FX spreads and hidden fees, Airwallex provides users with access to near-market rates and a clear breakdown of all costs involved. This allows businesses to save money on currency conversions and make more informed decisions about their international payment strategies.

• Seamless Integration and Scalability: Airwallex’s payment platform is designed to integrate seamlessly with a business’s existing financial systems and workflows. The company offers a range of API and plugin options, making it easy to connect with popular eCommerce platforms, accounting software, enterprise resource planning (ERP) systems or even embedded within their own platforms. This integration capability allows businesses to automate their payment processes, reduce manual data entry, build new products, and scale their operations more efficiently.

• Robust Security and Compliance: In the world of digital payments, security and compliance are of utmost importance. Airwallex understands this and has invested heavily in building a robust and secure payment infrastructure. The company employs state-of-the-art encryption and fraud detection technologies to protect sensitive financial data and prevent unauthorised transactions. Airwallex is also compliant with all relevant regulatory requirements, including anti-money laundering (AML) and know-your-customer (KYC) regulations, providing businesses with peace of mind and reducing their compliance burden.

• Innovative Features and Customisation: Airwallex’s payment platform is packed with innovative features designed to meet the unique needs of modern Australian businesses. For example, Airwallex's virtual cards allow users to make payments in multiple currencies without incurring FX fees, while its Xero integration enables seamless reconciliation of international transactions. Airwallex also offers customisable payment request links, making it easy for businesses to invoice their customers and receive payments directly. These features and many others demonstrate Airwallex’s commitment to innovation and customer-centricity.

• Exceptional Customer Support: Airwallex is known for its excellent customer support and dedication to helping Australian businesses succeed in the global marketplace. The company’s team of payment experts is available 24/7 to answer questions, provide guidance, and resolve any issues that may arise. Airwallex also offers a comprehensive range of resources, including tutorials, webinars, and developer documentation, to help users get the most out of the platform.

Ultimately, Airwallex is an outstanding choice for Australian businesses seeking a reliable, innovative, and customer-centric digital payment solution. With its focus on simplifying cross-border transactions, offering competitive FX rates, and providing a range of customisable features, Airwallex is well-positioned to help businesses navigate the complexities of the global payment landscape. By partnering with Airwallex, companies can streamline their payment processes, reduce costs, and unlock new growth opportunities in the years ahead.

What is an example of a digital payment? 

Digital payments encompass a wide range of transaction types, from everyday purchases to complex international transfers. One common example of a digital payment in Australia is using a mobile wallet, such as Apple Pay or Google Pay, to make an in-store purchase. In this scenario, a customer would tap their smartphone on a contactless payment terminal, and the funds would be securely transferred from their digital wallet to the merchant’s account. This process eliminates the need for physical cash or credit cards, offering a more convenient and secure payment experience.

Another example of a digital payment in Australia is using a service like PayPal or Stripe to make an online purchase. When a customer shops on an e-commerce website that accepts these payment methods, they can enter their account details or use a stored payment method to complete the transaction. The funds are then securely transferred from the customer’s account to the merchant’s account without entering sensitive information like credit card numbers.

In the business world, digital payments play a crucial role in facilitating cross-border trade and streamlining supply chain transactions. For instance, a company in Australia may use a digital payment platform like Airwallex to pay its overseas suppliers in their local currency. This type of digital payment helps businesses avoid the high costs and complexities associated with traditional international wire transfers, while also providing greater transparency and control over their cash flow.

As the realm of digital payments continues to evolve, we can expect to see even more innovative examples emerge. From biometric authentication to blockchain-based transactions, the possibilities for secure, efficient, and user-friendly digital payment experiences are virtually endless. By staying attuned to these developments and embracing the power of digital payments, businesses and consumers in Australia can position themselves for success in the future digital economy.

Popular Digital Payment systems in Australia

Australia is home to a diverse and thriving digital payment ecosystem, with numerous popular systems catering to the needs of consumers and businesses alike. Some of the most widely used digital payment platforms in Australia include:

• Contactless Cards: Contactless payment cards have gained widespread adoption in Australia, with millions of consumers using them for everyday purchases. These cards use near-field communication (NFC) technology to allow users to make payments by simply tapping their card on a compatible payment terminal. Contactless payments are fast, convenient, and secure, with transaction limits in place to prevent unauthorised use.

• Mobile Wallets: Mobile wallet apps like Apple Pay, Google Pay, and Samsung Pay have become increasingly popular among Australian consumers. These platforms allow users to store their payment card information securely on their smartphones and make contactless payments using NFC technology. Mobile wallets offer an added layer of security through features like biometric authentication and tokenisation, making them a safe and convenient choice for on-the-go payments.

• Peer-to-peer (P2P) Digital Payments: P2P payment platforms like BeemIt and Osko allow users to pay each other digitally. This has become increasingly popular amongst individuals as most platforms have additional features to split payments from a group of user or request payments from specific users.

• Direct Debit: Direct Debit is a popular payment method in Australia for recurring payments, such as utility bills, subscriptions, or membership fees. This system allows businesses to collect payments automatically from customers’ bank accounts on a predetermined schedule. Direct Debit offers consumers convenience and helps companies to improve cash flow and reduce late payments. 

• Buy Now Pay Later (BNPL)

BNPL has gained popularity in Australia as it is similar to a credit card, which enables customers to make purchases immediately and defer payments. Especially for eCommerce firms, BNPL allows them to target customers who at that time may not have the funds to purchase from them.

As Australia continues to embrace digital payments, new and innovative systems are likely to emerge to meet the evolving needs of consumers and businesses. By staying informed about the most popular digital payment options and their unique features, users can choose the platforms that best suit their preferences and requirements.

Digital Payments in Australia 

The digital payment landscape in Australia is dynamic and rapidly evolving, shaped by a combination of consumer preferences, technological advancements, and supportive government initiatives. The adoption of digital payments in Australia has been growing steadily in recent years, with the COVID-19 pandemic further accelerating the shift towards cashless transactions.

One of the most significant drivers of digital payment adoption in Australia, and further afield, has been the widespread use of contactless cards. Mobile wallets have also gained considerable traction in  Australia, with Apple Pay and Google Pay leading the charge. These platforms have integrated seamlessly with the country’s extensive contactless payment infrastructure, allowing users to make secure, convenient mobile payments. The introduction of wearable payment devices, such as smartwatches and payment-enabled rings, has further expanded the reach of mobile payments.

In eCommerce, digital payment platforms like PayPal, Stripe, and Klarna have become integral to Australia’s  online shopping experience. These providers offer a range of payment options, including credit and debit cards, digital wallets, and buy-now-pay-later schemes, catering to the diverse preferences of Australian consumers. The seamless integration of these platforms with online retailers has helped to drive the growth of e-commerce in the country.

To support this digital revolution, the Australian government introduced the New Payments Platform (NPP) which allows each payment message to carry more data. The Reserve Bank also introduced the Fast Settlement Service for transactions to be settled in close to real time. These initiatives help to keep our digital payment systems robust for businesses and individuals to seamlessly accept and make payments. 

By embracing the latest advancements in payment technology and collaborating with innovative providers, businesses and consumers in Australia can position themselves at the forefront of the global digital payment revolution.

Disclaimer:  We wrote this article in Q3 2024. The information was based on our own online research and we were not able to manually test each tool or provider. The information is provided for educational purposes only and a reader should consider the specific requirements of their business when evaluating providers. If you would like to request an update, feel free to contact us at [email protected]

This information doesn’t take into account your objectives, financial situation, or needs. If you are a customer of Airwallex Pty Ltd (AFSL No. 487221) it is important for you to read the Product Disclosure Statement (PDS) for the Direct Services, which is available here.