Digital payments have been with us for quite a while now, and they are constantly developing and evolving. With mobile devices taking over the world, we can already pay with our smartphone or even smartwatch with NFC technology. Online banking has been with us for a few decades so it is not a new invention anymore. How is it all working though?
How is online banking working?
You log in on your bank’s website, do the transfer and receive money from others, but how is it possible? Your logging in is encrypted by HTTPS protocol so only your bank knows what you are doing. When you want to check where your money is, you access the website again and log in using your credentials which are stored on the server. This type of “logging in” we know today is called a session based authentication. It’s good when it comes to logging into a bank account because no one will access your account when you leave it open on the computer, because the session will be closed already.
The more interesting question is how is it that your money is inside the computer? Well, they are not there physically. In fact, numbers on your account might not be represented by physical money at all. How? In fact, it is not the numbers you have on your account that are important. It is more like a number representing your money (just like an ID card also contains information about name and other details).
Let’s say you have €10,000 on your account. Your bank keeps track of how much money you have in their system by “moving” those numbers for you. They always know where exactly your money is and where they are going. Of course, the concept of moving those numbers is just a metaphor but it helps understanding how things work. Your bank does not really move your money inside the computer system. It just knows that you have €10,000 in the account which is located at Bank X. When you try to transfer money from account A (for example, your savings) to account B (for example, your current bank account), it is just a matter of changing numbers in the database.
The same goes with online banking on your smartphone or smartwatch. What happens here is simply that you connect your device via NFC technology to the ATM machine or contactless card reader which works similarly as a computer does. You enter your ID number (your bank account) then PIN code and you are logged in to your account, although it is not clear what exactly happens under the hood. Everything is encrypted but again, only your bank knows what’s going on inside the system.
So, is it that way that when you pay online, your bank sends an envelope with money to the receiver bank? Of course not, it’s just numbers that are being moved, and yet it has a valuable meaning for you. When you pay online your money is actually leaving your account and moving somewhere. You can find out where they have been sent by asking your bank (just like looking at transaction history). Again, no physical objects are traveling from one place to another.
Following that lead, is there physical money in the bank anymore? That’s true, in fact the physical money representing every account of their clients is not there. Physical cashiers are not there anymore in some banks but it doesn’t mean that those banks don’t have any cash inside their ATMs or safes at all (even though some of them are almost using only virtual money). Banks still have tens and hundreds of billions of Euros or Dollars on hand so they can send you real money if you need it .
The future of digital payments
Looking to the future, things are going to be very different. In fact, we have already seen some changes over the last few years. We are far beyond the times in which paying by card contactless was a new invention, it is so obvious now. We are also getting used to paying with our phones or smartwatches, nothing fancy about it anymore. What is the next step?
The very first and easiest thing that will change is when you will not have to enter a password or scan your fingerprint every time you want to pay something. That’s because most of the online payments today are using two factor authentication. This means that besides entering your ID number (for example, bank account) and your PIN code (which only you know)you also need to enter a code that only your bank knows and sends it to you through your phone (or smartwatch).
So, in fact, the next step is not so much about paying online directly with our phones as authenticating ourselves when making payments. Even if we will not be able to pay directly by just leaving a fingerprint or face on the terminal, we will still pay with our smartphones only by entering our ID numbers (bank account) and authorizations.
This could be made possible by combining cryptology and secure elements (secure chip that is present on every mobile phone already). But it also requires the support from banks (and central institutions such as Visa or MasterCard) to migrate to this type of solution.
There are many existing secure element manufacturers but they often concentrate on other business sectors such as governmental administration (ID cards), automotive (car keys) and secure communication services (even governments use to encrypt their messages). The technology itself is also not super fast, secure and responsive enough to be used as an application processor for mobile payments. Although this too should change, let’s see what will happen with the service providers who are interested in connecting crypto money to their customers’ e-wallets.
We will see changes, that is for sure, but let us wait how far we can go as humanity . The truth is, we have seen just the beginning. Microchips? Sounds like science-fiction now, but we never know if it is not going to be our new reality in just a few years. The future of digital payments is bright. We can say so because it is just beginning to learn how to crawl.
Interesting related article: “What is an e-Wallet?“