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Like everything in our world, commerce is rapidly shifting to digital payments. What began more than a decade ago with the growth of e-commerce popularizing digital forms of payment was exponentially accelerated over the last two years by the pandemic. Today, more than four in five people in the U.S. use digital payments — part of an ongoing trend experts expect will only continue in the post-pandemic "new normal."

Banks, credit unions, and other financial institutions cannot ignore this Great Payments Disruption. They need to be investing in the technologies to create forward-thinking, future-ready digital payment solutions that meet consumer demand, enable frictionless digital payment experiences, capture opportunities to bank the unbanked, and deliver the security advantages needed to mitigate growing cyber risk.

What are digital payments?

In the simplest sense, digital payments are transactions facilitated through digital, online, or other electronic media. This includes everything from internet bank transfers, wire transfers, and eChecks to mobile wallets and digital payment apps like Apple Pay and Google Pay, to the growing use of cryptocurrency and related products like the Coinbase Wallet.

What are digital payments?

  • The most recent McKinsey study on digital payments found that 82% of Americans used digital payments in 2021. This reflects an upward trend that has been building for the last decade.
  • The global digital payments market will grow at 19.4% CAGR through 2028.
  • The use of in-store mobile payment apps (like Apple Pay) hit a significant milestone in 2021: More than 100 million Americans (101.2M) used a mobile payment app to make an in-store purchase in 2021, representing 29% YoY growth.
  • By 2025, more than half of all U.S. smartphone users will be using mobile payment apps to make in-store purchases.
  • Half of consumers say contactless mobile payment apps or digital wallets are their preferred payment method.
  • 52% of consumers say they would consider using digital currencies like Bitcoin, Ethereum, or central bank digital currency (CDBC) for payments.

What are digital payments?

There are three key reasons why every financial institution should be prioritizing digital payment solutions now and in the future:

  1. Meeting consumer demand: The banking world, like other segments, is now all about customer experience — and customers clearly want digital payment options. Our recent report found more than half of consumers say contactless digital payment options are their preferred payment method. Moreover, consumers increasingly say flexible payment options are the top factor they consider when selecting a financial institution — and a top reason for switching to another financial institution. Delivering a modern digital payment experience is now essential to attracting and retaining customers.
  2. Enabling online account-opening: Consumers do the majority of their banking through digital channels, and this increasingly includes opening new accounts entirely online or on a mobile device. Almost two-thirds of survey respondents prefer to open a bank account digitally. This preference is especially high among Gen Z (65%), millennial (69%), and Gen X (54%) respondents. Digital payments like digital card solutions enable financial institutions to deliver a seamless online account-opening experience — and give new account holders purchasing power almost instantly.
  3. Securing transactions: Fraud has always been a drag on revenue and reputation. But the costs of fraud continue to grow significantly, particularly as more transactions move online — where conventional credit and debit cards can more easily be hacked, compromised, and fraudulently used. More important than the cost of fraud is the damage to customer trust. Nine in 10 consumers are highly concerned about becoming a victim of fraud. And when fraud does strike, they tend to hold the financial institution accountable: two-thirds of people surveyed said they switched financial institutions after being notified of fraud. Leading digital payment and digital card solutions deliver multiple additional layers of security around transactions — both online and in-store — to give customers and FIs confident peace of mind.

Key benefits of digital payments

Compared to cash, checks, and other forms of conventional physical or analog payments, digital payments like digitally issued credit and debit cards offer a number of benefits to both the issuer and the customer:

  • Security: With a digital card solution, a separate card number is issued for each purchase. This greatly reduces the risk of credential theft and fraud. Digital payments also enable the use of leading-edge digital security technologies, including high-assurance methods of authentication, tokenization, encryption, and more.
  • Control: A digital card solution enables the issuer (or the cardholder) to put tighter, more granular controls around how, when, and where the card can be used. The issuer also can give the cardholder flexible control over these restrictions via an online or mobile banking platform.
  • Transparency/visibility: Because each transaction with a digital card is tied to a separate card number, it is easier for issuers and cardholders to see and track transactions and balances in real-time. It also makes fraud investigation faster and clearer.

What are the types of digital payments?

  • Online electronic payment systems: Electronic bank transfers, eChecks, and wire transfers
  • Mobile payment apps: PayPal, Venmo, Zelle, etc.
  • Mobile wallets/digital wallets/e-wallets: Apple Pay, Google Pay, Samsung Pay, etc.
  • Digital cards: A credit or debit card issued directly from a financial institution to a customer’s mobile/e-wallet
  • Contactless payments: This broad category includes contactless credit and debit cards with near-field communication (NFC) technology, and can refer to mobile wallets that use magnetic security transmission (MST) technology
  • Cryptocurrencies: Distributed ledger technologies, the most common of which is blockchain, that facilitate secure digital transactions

Why digital cards will dominate the future of digital payments

As mobile/digital wallets like Apple Pay and Google Pay gain widespread adoption and utilization, financial institutions and other issuers are shifting to a new, better way to issue cards. Instead of issuing a physical credit or debit card, banks and credit unions are using digital card solutions to instantly provision digital payment credentials (i.e., a new credit or debit card) directly to the cardholder’s mobile/digital wallet.

These digital card solutions not only offer clear benefits over traditional payment methods, but digital cards also are emerging as a leading digital payment method for consumers and issuers alike.

  • Security of digital payments: Digital cards enable the issuer to put all the high-assurance digital security technologies in place to mitigate fraud.
  • Trust and familiarity: Compared to mobile payment apps like Venmo or volatile cryptocurrencies, digital card solutions are issued by the customer’s bank or credit union — starting from a strong foundation of trust and familiarity.
  • Instant issuance: Customers do not have to wait for a physical card to arrive in the mail — and then enter the new card in their mobile/digital wallet. The digital card is instantly issued directly to their mobile/digital wallets and immediately available for use.
  • Convenient use: The surging use of mobile wallets demonstrate consumers’ preference for the convenience of digital card solutions — for both online and in-store transactions.

How digital card solutions work

  1. Customer Bank Account: The cardholder must have an established account with a financial institution with sufficient funds for the transaction.
  2. Mobile/Digital Wallet: The cardholder must have a mobile/digital wallet, such as Apple Pay or Google Pay, installed on their smartphone or other device.
  3. Digital Card: The digital credit or debit card, issued by the financial institution, links the customer’s bank account to the customer’s mobile/digital wallet — giving them the ability to access funds to transact via the mobile/digital wallet.
  4. Digital Transmission/Processing System: This is the medium through which the transaction is processed, commonly referred to as payment rails.
  5. Merchant Payment System: Finally, the merchant must have the POS system or other payment processing technology in place to receive digital card payments.

Key components of a digital card solution

The above explanation shows the digital card ecosystem in its most basic sense. In truth, digital card solutions can include a wide variety of features and technologies. As issuers build their digital card solutions, they should look to include the following components and capabilities to deliver on the full potential and value of digital cards:

  • Instant issuing: Provision of digital cards directly to cardholders’ smartphones in real-time without a waiting period.
  • Secure card display: Securely display sensitive card information within the mobile/digital wallet application to enable cardholders to pay for internet transactions without using a physical card.
  • NFC issuer wallet: Turn your mobile banking app into an NFC-enabled wallet, maintaining strategic links with cardholders through in-app NFC mobile payments.
  • Push to x-pays and e-commerce merchants: To deliver maximum convenience and simplicity, cardholders should be able to push digital cards directly to digital wallets. As an additional feature, enable “Click to Pay” with compatible e-commerce merchants.
  • Card alerts and controls: Enable cardholder controls to reduce fraud and ensure trust, including the ability to turn on and off cards and tokens, and limit spending in specific payment categories, such as clothing or transportation.
  • Token manager: Enable cardholders to self-manage their digital cards and secure tokens with a state-of-the-art payment management tool that reduces the support burden on the issuer end.
  • PIN in and out: Securely display the PIN code in the application and let cardholders choose the PIN for their card. The PIN is immediately available in the app.

How to secure transactions with digital card solutions

Digital card solutions inherently deliver a higher level of transaction security than conventional payment methods. But there are two key ways issuers can step up transaction security to mitigate fraud and protect customers:

  1. Tokenize sensitive information: Tokenization or encryption protects all sensitive customer data at its source and when shared. Tokenization obscures personally identifiable information so it can only be interpreted and used by systems or authorized users with the correct security key. So, when a customer makes a purchase with a digital card, tokenization provides a merchant-specific encrypted token for each purchase instead of sharing a single card number directly. If the merchant suffers a breach, the cardholder’s information is protected, unreadable, and effectively useless to hackers.
  2. Authenticate identity: A whopping 61% of breaches are caused by stolen or compromised credentials. Using advanced authentication to ensure the user of a mobile/digital wallet (and the digital card it holds) is whom they claim they are can mitigate most of these attacks. This includes tactics such as passwordless access, device reputation management, transaction verification, and adaptive authentication — all of which significantly level up transaction security, without creating unnecessary friction or hassle for the cardholder. These authentication technologies also play an important role in a comprehensive fraud monitoring program, helping an issuer proactively detect fraudulent patterns to alert the cardholder and respond quickly.

Investing in digital card solutions to build a competitive advantage

Consumers want to be able to pay when and how they want — and you can enable that feature with Entrust. Banks are increasingly abandoning homegrown peer-to-peer (P2P) and peer-to-business (P2B) solutions and instead focusing resources on partnerships to meet consumer demands in this space. Buy now pay later (BNPL) features are becoming ubiquitous as more banks look to offer deferred payment options. And digital wallets are making a comeback for hands-free and low-friction transactions. Issuers who don’t embrace this trend with integration for myriad payment apps will be left behind.

Learn more about how the Entrust Digital Card Solution allows banks to instantly provision digital payment credentials directly from your bank or credit union’s mobile application to the cardholder’s mobile wallet. Quickly implement digital payments into your banking app with Entrust.

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