How to define digital payments?
Payments are made using payment instruments. Cash, for example, is a payment instrument. So too are checks. However, digital payments are not one instrument but rather an umbrella term applied to a range of different instruments used in different ways. In this section, we provide some parameters for creating this definition.
Since there is no one standard definition of a digital or e-payment, you should settle on a clear and implementable definition at the start of any measurement exercise. The subject matter is complex, but there are two key dimensions of categorization that are most important:
- The nature of the payment instrument: through which means—paper or digital—are the instructions carried.
- The payer-payee interface: whether the payer, payee, or both use an electronic medium in a payment transaction.
Read Step 3: Definition options to see how these two dimensions overlap in commonly used definitions of digital payments.
How to define digital payments — step 1
The nature of the payment instrument
A key first step is understanding which instruments are even available, and on what basis, in your country and how they can be grouped according to their nature. Digital payment instruments can be grouped together with respect to their underlying nature in two ways:
- Narrow choice- ‘Paper’ vs ‘non-paper’: Instruments which rely on a paper-basis for authorization, such as checks, traveler’s checks, and money orders, are regarded as ‘non-digital’ and all other instruments are regarded as ‘digital’.
- Broad choice – ‘Cash’ vs ‘non-cash’: Every instrument other than cash is regarded as ‘non-cash’ and therefore digital, since each usually takes a digital form at some stage in the transfer of value.
In reality, there is a spectrum between pure digital and pure physical in how most instruments other than cash are transacted over the whole transaction cycle. The choice of which definitional option to apply will depend on the purpose. For example, if you are measuring to highlight the need to transition away from existing payment instruments due to, for example, cost, then you can make a case for focusing on the broader definition (non-paper instruments). However, if you want to highlight the potential of payment flows to be digitized, you may consider checks as much closer to digital than cash, therefore including them with ‘non-cash’ in the narrow definition. In an increasing numbers of countries, paper checks are truncated into an digital message on deposit, and since they require the payer to have an account, and are also traceable, they are less like cash in these attributes and more like account-based digital options.
Note, however, that technology is challenging the boundaries of all instrument-based definitions—for example, countries like Canada are considering the introduction of digital cash, where digital legal tender is transferred directly from payer to payee in a payment transaction, and where paper and metallic currency will become obsolete. Hence a ‘cash’ transaction could be ‘digital.’
Click to access a glossary of payment terms. For a more comprehensive list, see the glossary from the international standard setting body for payments, the Committee on Payment and Settlement Systems at the Bank for International Settlements.
How to define digital payments — step 2
The payer-payee interface
The other definitional dimension to clarify is which of the payment parties, if any, use electronic interfaces. When both the payer and the payee use electronic means to initiate and receive payments, the picture is clear—this can be considered ‘pure electronic’. However, there other payer-payee scenarios which may affect where the boundary line is drawn for electronic, as shown below.
How to define digital payments — step 3
Choices to be fit for purpose
Combinations of these two dimensions can create a range of different definitions regarding a digital payment for measurement purposes. The real question is: does your definition fit your measurement objectives? To illustrate that choice, we show on the next slide two common choices of boundary definitions for digital payments. To be considered digital, both require that at least one party, whether the payer or the payee in the payment transaction, uses a digital medium to authorize or receive payment. This rules out transactions where only the intermediate parties (such as banks) exchange electronic messages.
However, the boundaries differ with respect to the treatment of checks. Under the narrow definition, checks are considered fundamentally a paper instrument which, like cash, carry high costs transactions costs. Therefore, regardless of whether the payee gets credited electronically or not following a deposit, checks are grouped with cash. In the broad definition, checks are considered to be closer to digital because they (i) are often scanned and converted to digital messages soon after deposit; and (ii) require that the payer has a payment account and is therefore financially included.
So, what’s the difference? You might prefer the narrow definition if you are interested in measuring and promoting the efficiency of payments; and all the more so, if checks are still processed manually in your country so that you can separate out their effect from cheaper digital alternatives. However, the broad definition allows you to include checks in a wider universe of formal payment payments, which may be appropriate if your interest relates more to measuring patterns of financial inclusion, for example.