Digital payments have been with us for quite some time now, and they are constantly developing and evolving. With mobile devices invading the world, we can already pay with our smartphone or even a smartwatch with NFC technology. Online banking has been around for a few decades, so it’s no longer a new invention. How does it all work though?
How does online banking work?
You log into your bank’s website, make the transfer and receive money from others, but how is that possible? Your connection is encrypted using the HTTPS protocol so that only your bank knows what you are doing. When you want to verify where your money is, you go to the website again and log in using your credentials which are stored on the server. This type of “connection” that we know today is called session-based authentication. This is good when it comes to logging into a bank account as no one will access your account when you leave it open on the computer, as the session will already be closed.
The most interesting question is how come your money is inside the computer? Well, they’re not there physically. In fact, the numbers on your account may not be represented by physical money at all. How? ‘Or’ What? In fact, it’s not the numbers you have in your account that are important. It’s more like a number representing your money (just like an ID card also has name information and other details).
Let’s say you have $ 10,000 in 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 these numbers is just a metaphor, but it helps to understand how things work. Your bank doesn’t actually move your money inside the computer system. It just knows that you have € 10,000 in the account that is at bank X. When you try to transfer money from account A (for example, your savings) to account B (for example, your bank account current), it’s just a matter of changing numbers in the database.
The same goes with online banking on your smartphone or smartwatch. What happens here is just you connect your device via NFC technology to the ATM or contactless card reader which works the same as a computer. You enter your identification number (your bank account) then your PIN code and you are logged into your account, even if we don’t know exactly what is going on under the hood. Everything is encrypted but again only your bank knows what is going on inside the system.
So, is this how when you pay online, your bank sends an envelope with money to the receiving bank? Of course not, it is just numbers that are out of place, and yet it has a precious meaning for you. When you pay online, your money is actually leaving your account and moving somewhere. You can find out where they were sent by asking your bank (such as looking at the transaction history). Again, no physical object travels from one place to another.
By following this lead, is there still physical money in the bank? That’s right, in fact the physical money representing each account of their customers is not there. Physical cashiers are no longer present in some banks, but that does not mean that these banks have no cash at all in their ATMs or safes (although some of them hardly use 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 ahead, things are going to be very different. In fact, we have already seen some changes over the past few years. We are well beyond the days when contactless card payment was a new invention, it is so obvious now. We also get used to paying with our phones or smartwatches, nothing fancy anymore. What is the next step?
The very first and easiest thing that will change is that you won’t have to type in a password or scan your fingerprint every time you want to pay for something. This is because most of the online payments today use two-factor authentication. This means that in addition to entering your identification number (for example, bank account) and your PIN code (which only you know), you must also enter a code that only your bank knows and sends it to you via your phone (or smartwatch).
So, in fact, the next step is not so much to pay online directly with our phones as it is to authenticate us during payments. Although we will not be able to pay directly by simply leaving a fingerprint or face on the terminal, we will still pay with our smartphones only by entering our identification numbers (bank account) and authorizations.
This could be made possible by combining cryptology and secure elements (secure chip already present on all cell phones). But it also requires the support of banks (and central institutions like Visa or MasterCard) to migrate to this type of solution.
There are many manufacturers of secure items, but they often focus on other industries such as government administration (ID cards), automotive (car keys), and secure communication services. (even governments use it to encrypt their messages). The technology itself is also not fast, secure and responsive enough to be used as an application processor for mobile payments. While that too is set to change, let’s see what will happen with service providers wanting to connect crypto money to their customers’ e-wallets.
We will see changes, for sure, but let’s wait how far we can go as a humanity. The truth is, we have only seen the beginning. Electronic chips? Sounds like science fiction now, but you never know if it won’t be our new reality in a few years. The future of digital payments is bright. We can tell because he is just starting to learn to crawl.
Interesting related article: “What is an electronic wallet?” “