• Shreyas Sinha

Cashless Transactions - The Technology Behind It!


 

Table of Content

 

The world is gradually moving towards a cashless economy. With the arrival of new technologies, more and more people use their cards or mobile phones for transactions. This has led to the emergence of new companies helping companies with their transition to the cashless market. They provide technological solutions for different aspects of this transition, like financial, regulatory, and security-related issues. As seen in various countries around the world, there are various advantages to adopting a cashless system. The present and future scenario of this market are discussed below.


What is Cashless Market?

The Cashless market is the market where transactions are done through credit cards, debit cards, mobile wallets, and other electronic payment methods. It can also be referred to as electronic payments or e-payments.


Cashless Transaction Systems

Following are some of the widely used cashless transaction systems:


Credit Cards

Consumers' spending habits have shifted as a result of credit cards. They've pushed for electronic payments to become the norm. Credit card networks have become ubiquitous by generating the correct incentives for everyone engaged in the transaction. Payments are processed using a four-party arrangement with credit cards. The four entities are as follows:

  • Cardholder: A cardholder is a person who has the card in their possession.

  • Issuer: The bank or organization that issues the card to the cardholder is known as the issuer.

  • Acquirer: The bank that receives money on behalf of the merchant from the issuer.

  • Merchant: The entity that interacts with customers and receives payment instructions is the merchant.

Process of Payment

Private networks run by firms like Visa and MasterCard facilitate credit card payments. Credit card and signature debit transactions pass through the network twice: once in real time for authorization and again (usually at the end of the day) for clearing and settlement. The card network processing hubs (Visa, MasterCard, and others) sit in the middle, receiving transactions from acquiring member banks (or, more commonly, their processors), sorting them, and routing them to issuing banks and processors. The authorization transaction takes place in real-time, with less than a second response time. Clearing and settlement transactions are completed in batches, usually when the store shuts at the end of the day. The payment process from a cardholder to the merchant is illustrated below:

  • The Customer goes to Best Buy to buy a new music player and wants to pay with your Bank of America Visa card (the "issuer").

  • The data is read from the magnetic stripe on the back of the card by the card reader. It creates an electronic message by combining this information with information about the merchant and the money amount of the purchase.

  • Following that, the card reader phones the merchant's acquirer's server's phone number (the bank that handles transactions for the merchant). Once the connection is established, a message is delivered to the acquirer's servers.

  • After reading the message, the acquirer's server determines that the customer used a Visa card. The message is then forwarded to the Visa servers by the acquirer. Visa knows to check with Bank of America after reading the message to determine if the consumer has enough money on their credit line to secure the purchase.

  • Bank of America will send a message to Visa if the consumer has sufficient funds. As a result, the transaction is approved.

  • Visa sends a message to the store's acquirer, who in turn sends a message to the store's terminal. The customer signs the receipt that is printed out by the terminal.

  • The store then sends a payment request to its acquirer, who subsequently sends it to Visa. Visa sends the request to Bank of America, which processes it and deposits the funds into the customer's account.

  • This transaction is combined with all other Visa transactions by the Visa computer, which settles accounts between banks.

  • Bank of America pays the acquirer, who then pays the BestBuy shop for the purchase. The process usually takes two to three days to complete from the time the buyer makes the purchase.

  • Only around 98 percent of the money charged for the music player goes to the BestBuy shop. The "merchant discount," which is the price given to the acquirer for performing its services, accounts for the remaining 2% difference. The buyer, in turn, pays the issuer, in this case, Bank of America, around 1.4 percent of the acquisition price. The "interchange fee," which is regulated by Visa, is 1.4 percent.

Mobile Payments

Smartphones have pushed the boundaries of customer experience. The options are endless. When everyone has a computer connected to the internet, the possibilities are endless. As a result, many businesses attempt to enable and capture payments through smartphones. Mobile wallets and closed loop mobile money services are two business models that have arisen to ease the supply of financial services via mobile phones.


Mobile Wallet

Mobile wallets assist consumers by allowing them to save all of their card payment details, loyalty programmes, and other information digitally in a single application. Customers can receive added value from financial institutions through marketing, loyalty programmes, and on-demand financial services, among other things. Mobile wallets, such as Apple Pay and Google Wallet, are services that improve the user experience of existing payment methods.


Closed Loop Mobile Money System

M-PESA is the largest closed loop mobile money system in the world. It lets people transfer cash using their phones. M-PESA was launched in 2007 by Safaricom, a mobile-network operator, in Kenya. Over two-thirds of Kenya's adult population now uses it, and it accounts for about a quarter of the country's gross domestic product. M-PESA is a closed-loop system that enables users to conduct transactions. After signing up, a consumer deposits funds into the system by delivering cash to one of Safaricom's 40,000 agents, who credits the funds to the M-PESA account. The transfer of money from one client to another is just a database update that credits the payee and debits the payer because it is a closed loop system. To imitate the M-PESA model, dozens more mobile-money systems have been developed around the world. Venmo and Circle are two companies vying for this market in the United States.


Wire Transfer Systems

Wire transfer systems in the United States and its counterparts worldwide are built to handle admiringly high-value transactions between corporations, most commonly between financial institutions. Despite having a modest volume, these systems transfer a significant percentage of the dollar value. Wire transfer systems settle each transaction individually as it happens, and this gross settlement is required to avoid the danger of bank collapse. FedWire and CHIPS are the two wire transfer systems used in the United States.


FedWire

Fedwire is a real-time, gross-settlement system that allows you to transmit and receive payments for yourself or on behalf of clients, settle commercial payments or positions with other financial institutions or clearing arrangements, submit federal tax payments, and purchase and sell federal funds. Fedwire is available to banks that have an account at one of the Federal Reserve Banks. The Federal Reserve Bank serves as a mediator between bank customers, facilitating transactions.

A company that wishes to transfer money, for example, sends a communication to its bank. The bank deducts the funds from the account and sends a Fedwire notification. The Federal Reserve Bank debits the bank's account while crediting the receiving bank's account. The receiving bank then credits the receiving company's account. All of this is done in real time, online. Electronic messaging is done in a highly secure manner.


CHIPS

CHIPS (Clearing House Interbank Payments system) is an electronic payment system that uses a real-time system to transmit money, settle transactions, and guarantee intraday payment certainty. Small payments that the banks' available balances can meet are settled individually through CHIPS.CHIPS is a private-sector Fedwire substitute. The Clearing House, which significant banks in the United States own, owns CHIPS. Each participant funds its CHIPS account by depositing a certain amount between 12:30 and 9:00 a.m. This "security deposit" is updated every week by CHIPS and is determined by the number and value of the bank's previous CHIPS transactions. CHIPS uses these deposits to settle any unresolved transactions at the end of the day.


Architecture of Cashless Transaction System

A customer is connected to a merchant in the present card payment system shown in Figure 1, and the merchant is then connected to a Payment Gateway. PGS (Payment Granting Server) replaces the Payment Gateway in NNCC, although it is connected to both the client and the merchant, unlike the current payment system. PGS acts as a clearinghouse for all credit card transactions.


It creates a token with a certain monetary value for each credit card transaction and provides it to the customer who requested it. However, because it constructs the token based on the session token issued by PAS (Payer Authentication Server), it does not know the real credit card number. Similarly, the Merchant is unaware of any credit card information. The real credit card number is only known by the consumer and PAS.

A customer first sends his or her credit card information to the PAS server, where they are given a session token. The customer then submits the payment information (amount and merchant ID) to PGS, together with the session token, and receives a Payment Token from PGS.


Following that, the customer provides the Payment Token to the seller. A merchant must provide the transaction number included in the Payment Token to PGS in order to accept the actual payment. After then, the payment token is used for the merchant's settlement processing. Following receipt of the transaction number, PGS continues with the payment processing in the same manner as the present system.


Patent Data Analysis

Top 10 Companies

As we can infer from the graph, IGT- International Game Technology has a maximum no. of patents filed in the field of cashless transactions. This is because IGT and Scientific Games Corporation has signed a cross-licensing agreement for patents related to cashless slot gaming technologies. Under the agreement, Scientific Games and IGT will be able to offer patented cashless gaming technologies from the companies’ combined portfolios of casino management systems solutions to the U.S. gaming industry.


Top 10 Countries

As we can see from the graph, US has maximum no. of patents filed on cashless transactions due to several US payment technology firms such as Mastercard, PayPal and Square (created by Jack Dorsey) are one of the highest patent owners in the world.


Patent Filing Trend Over Last 10 Years

Future of Cashless Transactions

As world is gradually moving towards a cashless economy, modernizing the financial sector has been one of the most significant changes in recent decades. Considering this trend, it becomes necessary to produce a white paper on cashless transactions' present and future scenarios. The current market scenario of the global cashless market is discussed below:

  • The global digital payment market size was valued at USD 68.61 billion in 2021 and is expected to expand at a compound annual growth rate (CADR) of 20.5% from 2022 to 2030.

  • The total transaction value from P2P mobile payments is expected at $478.87 billion in 2021, 20.8 percent higher than in 2020.

  • Consumers around the world prefer checkout processes that are as quick as feasible and help them avoid large queues. Furthermore, allowing firms to use online payment systems to raise sales, cut costs, and grow profits over time. Credit cards, e-wallets, debit cards, charge and deferred debit cards, and bank transfers are among the most important developing payment methods, according to the study. In 2021, the global online payments market was valued at US$ 6.75 trillion.

  • The share of population using digital banking in the United States from 2018 to 2022 increased from 61.3% to 65.3% in 2022.

Over the last few years, digital payments have advanced dramatically. According to the research, worldwide digital payments have a promising future. In the future, industries that use online payment will be able to remain ahead of the latest trends in the ever-changing payment landscape. Furthermore, industrial applications that fail to employ innovative digital payment technology that keeps up with consumer demand are projected to suffer revenue losses and lag behind their competitors.


Conclusion

With cashless transactions, customers can use either their card or their phone to make payments without the need for coins or paper money. Cashless transactions, also known as electronic or digital payments. Cashless transactions are growing in many sectors, particularly in developing economies. The future of cashless transactions is expected to grow to $279 billion by 2022. With this growth, there will be a shift in how the world does business.


References

  1. https://www.zoho.com/books/articles/cashless-payments.html#:~:text=In%20cashless%20transactions%2C%20payments%20are,removes%20the%20need%20for%20cash

  2. https://en.wikipedia.org/wiki/Cashless_society

  3. https://www.forbes.com/sites/forbestechcouncil/2021/07/21/why-cashless-transactions-could-be-king-moving-forward/?sh=7c05e4ae2235