Digital Payment Issues

Digital payment systems offer consumers a fast, easy way to buy and pay without the need to carry cash or hassle with a credit card. Simply hold up your phone to a scanner, and digital payment services like Apple Pay, Google Pay, or Samsung Pay handle the rest by charging the payment to a card or deducting it from your bank account.

This ease of use has caused digital payment systems, often used through one’s mobile device, to skyrocket in popularity. In the U.S. alone, consumers spent $199 billion using Apple Pay in 2022, which was up from $91.7 billion in 2021 and $46.9 billion in 2019, according to the U.S. Consumer Financial Protection Bureau (CFPB). Nearly 56 million people in the U.S. made a payment using Apple Pay in April 2023 alone.

Not to mention the other players. Google Pay has an estimated 25 million users in the U.S. who spent more than $65 billion using it in 2022, up from nearly $25 billion in 2021. Samsung Pay, another popular service, has an estimated 16.3 million U.S. users.

Traditional banks also are trying to get into the digital payments game. In 2021, JPMorgan launched a digital payments app in the U.K. to compete with home-grown third-party applications. In early 2024, HSBC did the same thing, also in the U.K.

And, national governments have introduced their own payment systems. The most notable is India’s Unified Payments Interface (UPI), a government-sponsored system that has spurred a digital payments revolution in India. The system enables real-time money transfers and payments using mobile phones, and third-party payment apps can function on top of it.

Yet despite their rapid adoption, digital payment systems are far from perfect. In fact, they have a range of issues, from security problems to challenges around interoperability. While these factors aren’t derailing the digital payments industry as a whole, they are throttling the speed at which new and improved digital payment products are released to consumers, said Xavier Vives, a professor of finance at IESE Business School of Spain’s University of Navarra and president of the European Finance Association (https://european-finance.org/r/home).

The stakes for solving these issues are high, given how many millions of consumers rely on digital payment systems in their everyday lives.

“Digital payments is the field where the battle to control customer interface is played,” said Vives.

Concerns about Security

That customer interface today largely means smartphones, which are the dominant device used in digital payment transactions. Functionally, this means using a device that operates within the Apple ecosystem or in the Android sphere developed by Google. Predictably, that makes Apple and Google major players in the space, while other players build on top of both ecosystems to compete in the digital payments space via iOS or Android apps. These include tech giants like Samsung, as well as incumbent banks like Capital One, Citibank, and Barclays.

Regardless of provider, the apps work in similar ways for consumers. Simply connect one or more payment sources to the app or store an existing credit or debit card in a digital wallet, then swipe or tap your phone to pay for goods and services at a compatible point-of-sale (POS) system at a store or business. Once you swipe or tap, the funds are charged to your card or withdrawn from your account. It seems easy enough—and it often is for consumers.

But beneath this simple set of actions, problems lurk.

Many major digital payment systems have known security issues. Researchers at the U.K.’s Universities of Birmingham and Surrey have discovered vulnerabilities in Apple Pay that potentially allowed users to perform contactless payments without unlocking a phone first—a weakness that could be exploited by hackers or malicious actors who have stolen an iPhone.

Another vulnerability was discovered in Google Wallet that potentially put user cards at risk when certain features were enabled (though Google said it would address the issue in an upcoming patch).

Samsung Pay had issues with the tokens it uses to secure transactions being somewhat predictable, which opened up the possibility that hackers could guess them in order to make fraudulent transactions.

These issues often are addressed by security updates or software patches from these companies. However, the payment apps themselves present a constant, attractive attack surface for hackers and malicious actors. This vulnerability was put on display in 2020 when Uganda’s largest mobile money networks, MTN and Airtel, were hacked. The services were disrupted for four straight days and were completely shut down at times, bringing all transactions on the platforms to a halt.

The occasional security issue may not stop an experienced user from transacting with a digital payment system from a trusted company. However, repeated security issues can have a huge impact on how new potential users perceive the safety of digital payment systems. Researcher Vimala Balakrishnan, who studies digital payment adoption at the University of Malaya in Malaysia, said that a series of data breaches in the country have made many adults wary of the security of digital payment systems. A lack of awareness about how digital payment services work and how they use personal data also can cause significant mistrust, she said.

Getting Systems to Play Nice

However, despite the security concerns, larger forces appear to be driving significant adoption. In Malaysia and elsewhere, many businesses are going cashless, essentially forcing consumers to adopt digital payment systems. (Malaysia alone has three prominent digital wallets—Touch ‘n Go, GrabPay, and ShopeePay—which can be connected to bank accounts.) Banks, responding to consumer demand for digital payment systems, also frequently release their own payment apps or systems.

This type of gold rush into digital payments has caused adoption to explode. The World Bank estimates a full two-thirds of adults worldwide now make or receive a digital payment, and the share of digital payment usage in developing economies has surged from 35% of people in 2014 to 57% in 2021.

Even so, popularity is its own problem—and a huge cause of another major issue in digital payments: interoperability.

Interoperability is just as big an issue as security in the digital payments system. Interoperability refers to the ability of different digital payment systems, devices, and operating systems to work together seamlessly. There are significant interoperability challenges among the major digital payment systems.

Major players in the space have an incentive to lock in users to a specific payment platform, says Vives. “The name of the game is to control access to a segment of customers and force financial service suppliers to compete to be on your platform.”

For instance, Apple’s payment ecosystem is closed, like all of its software and hardware ecosystems. As part of its policies, Apple controls how developers access features like near-field communication (NFC) technology in its devices, which are necessary to power payment apps. This can make it prohibitive for developers to build payment apps across all devices.

Differing payment schemes and charge structures across digital payment systems also present problems. Existing credit card issuers are financially incentivized to prefer using Android-based digital wallets over Apple Pay because they are required to pay transaction fees to Apple when their cards are used. Android charges no such fees.

So, your access to different digital payment systems may depend in part on whether you’re on Team Apple or Team Android. Also, you may be forced to use multiple apps depending on your transaction needs, all of which have different capabilities and user interfaces.

Many Questions, Few Answers

So, what can actually be done to handle significant security and interoperability issues in digital payment systems? There are a few ways that experts suggest, but it remains to be seen which will actually be effective.

Increased awareness, especially in countries newly adopting digital payment systems, is critical, said Balakrishnan. “Financial institutions need to be more proactive in educating the public that digital payments are safe, and need to be transparent as to how users’ personal data are being used,” she said. That includes increasing awareness through education, social media, and advertising campaigns—or even using peer influence to promote digital payment adoption among the older or less educated, she said.

In Europe, the solution may come more from the top down, said Jeremy Srouji, an economics researcher at the Université Côte d’Azur. The European Central Bank (ECB) has spent the last decade trying to unify the fragmented European payment landscape, he said. That includes trying to limit the footprint and clout of U.S. credit card companies like Visa and Mastercard, and large tech companies.

“Its approach has been to build an increasingly robust and unified European payments space through home-grown technologies and solutions that are so seamless and competitive as to make it difficult for foreign players to gain traction,” he said.

This, at least, begins to address security and interoperability concerns among European digital payments users. However, in other countries, another possible solution may be provided by the free market, said Vives. Competition between incumbents in the financial sector and big tech disruptors is fierce—and could result in only a few big winners.

“The end result will likely be a new oligopoly where only a few players survive,” he said.

Though it’s unclear how good that will be for consumers, it would go a long way toward standardizing systems and solving interoperability issues simply by virtue of having fewer systems to make secure and interoperable.