Digital Payments and its comprehensive functions

In digital payments, banks need to pay each other all the time, sometimes because a customer has instructed the bank to make a payment on their behalf, and sometimes because a bank needs to pay another bank as a result of its own trading or lending activity.

Here, in digital payments, we are going to look at the bank-to-bank payment that arises when a customer wishes to make a payment to someone else who banks elsewhere. We easily understand physical payments that are made directly when you pay in cash for something without a third-party intermediary. This can be described as ‘peer-to-peer’ as you simply hand over cash to the other person.

digital payments
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Digital Payments made in Interbank or Accounts

In digital payments, there’s no one in the middle, you don’t need to instruct or pay a third party, and no one can stop the payment. Cash payment is also resistant to censorship. If you are the recipient, you can be reasonably confident, upon inspection, that the banknote or coins are unique (i.e., not counterfeit copies), otherwise, you should not accept them and there is no transaction.

It is also obvious that the payer hasn’t spent that same cash already (else they wouldn’t have it to give to you), and furthermore, they can’t use the same cash to simultaneously pay you and someone else (because physical cash can’t exist in two places at once). Of course—this is all intuitive.

Background of Digital Payments

As soon as you move into the digital world, things become a little more complex. Digital assets are easy to copy. Unlike physical cash you can’t give a digital asset (e.g., a file) to someone as a currency payment. Well, you can, but they won’t value it because they can’t tell if it is unique. They can’t be sure that you will delete it once you have sent it to them, and they can’t tell if you have sent, or will send, a copy of the file to a different person. This problem with digital assets is called the ‘double spend’ problem.

Keeping a record of the Digital Payments

The digital payments money world deals with this by using a bookkeeper who is an independent third party, who, because they are regulated, can be trusted to maintain accurate books and records and abide by certain rules. You also trust that when you instruct your bank to make a payment, the amount of money leaving your account is the same as the amount that is entering the recipient’s account (less fees, of course).

So, with any form of digital asset, you need a trusted bookkeeper to maintain a list of who owns what and who plays by some well-understood and trusted rules. They often have a license from an authority that gives them some credibility and increases your confidence that they are carrying out their activities according to certain standards.

In the next session of the tutorial, we look into the rest of the process and its functionalities of it in the Digital eco-space.


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