DIGITAL PAYMENTS

Q1. Outline the steps involved in implementing digital wallets, and then
evaluate the opportunities they provide to both businesses and customers.
Ans 1
1. Introduction. A digital wallet, also known as an e-wallet or mobile wallet, is an
electronic device, online service, or software program that allows one party to make
electronic transactions with another party. This can include purchasing items either
online or at the point of sale in a brick-and-mortar store, using either mobile payment
(on a smartphone or other mobile device) or (for online buying only) using a laptop or
other personal computer. Money can be deposited in the digital wallet prior to any
transactions or, in other cases, an individual's bank account can be linked to the digital
wallet.
2. The implementation and core components of Digital Wallet are given in
succeeding paras.
3. User Profile Manager.
(a) It maintains a database of the user details such as usernames,
passwords, shipping and billing addresses.
(b) Also maintains the information about the financial instruments used by
the wallet and its access rights and information.
4. User Interface.
(a) Responsible for providing the graphical User Interface (GUI) to the
services offered by the wallet controllers interface.
(b) Optional component for the wallet. Alternatively, Wallet Controller may
be accessed by API.
(c) It is one of the core components of the designed wallet architecture as
parts of it is used to access the confidential information of the user.
5. Instrument Manager.
(a) Responsible for managing and supervising all the instrument instances
enclosed in the wallet.
(b) Instrument manager may be asked for the instrument classes and
instances while identifying the payment execution mode
6. Protocol Manager.
(a) The protocol manager takes care of all the protocols used by the wallet
for accomplishing various tasks.
(b) Responsible for invoking the required protocol for building the
connection between vendors and banks.
 (c) It depends on the communication manager which carries out the low-
level communication among the devices of these parties, i.e. vendors and
banks.
7. Wallet Controller.
(a) Responsible for presenting the user interface for the wallet.
(b) It makes sure that all the internal complexities of the wallets are hidden
from the user and they experience easy and convenient interface.
(c) It coordinates between the user profile manager, instrument manager
and protocol manager for performing the transaction request received from the
user.
8. Client API. Wallet controller offers Client API interface which is used by the
software agents. These software agents behave like a human user of the wallet so as
to identify its complete range of parameters.
9. Communication Manager.
(a) The communication manager offers an interface to have a
communication for sending and receiving messages and notifications between
the wallet and the e-commerce components.
(b) It remotely sets up the connection with the communication manager for
performing the required task.
(c) These notifications may be sent over the network by using the
communication protocols required for it.
(d) The complete process involves a series of actions, i.e. sending a
message by one peer, receiving the message by other peer, executing the
action and finally returning the response for the message
10. Steps Involved in Implementing Digital Wallet. Based on the above
mentioned core structure, the steps involved are as under :-
(a) Define Goals and Features for the Digital Wallet.
(b) Choose Platform and Technology.
(c) Create User Interface.
(d) Integrate Payment Gateways.
(e) Implement security measure.
(f) Test and Launch the Digital Wallet.
11. Opportunities of Digital Wallet. Digital wallets have started to grow, and has
shown great potential for the future. Some of the potential opportunities include:-
 (a) Financial Inclusion. Wallet consisting of all financial activities’ features
like withdrawal of funds, transfer funds, deposit and storage of funds, payments,
etc will rule the market.
(b) Virtual Currencies. Virtual currencies are gaining momentum in the
present market scenario which can be exploited by Digital Wallet.
(c) Multichannel Payment Services. The service must focus on the
different payment modes for making the payments using digital wallets. The
customer should not have any kind of restriction for the payment method.
(d) NFC, Biometrics and Tokenization. It should have the in-built
technologies for NFC, biometrics and tokenization. This is required due to the
support of multiple mainstream options like person-to-person and person-to-
business payments.
12. Conclusion. Digital Wallets are financial applications that allow to store funds,
make transactions and track payment histories on devices like phones, laptops etc.
Digital wallets are financial applications that allow to store funds, make transactions
and track payment histories. All financial information can be stored in the digital wallet
and in some digital wallet ID cards and Driver licenses can also be stored.

Q2. Explain how blockchain technology is utilized in digital payments and

evaluate its potential impact on the future of the financial industry.
Ans 2
1. Introduction. Blockchain is a decentralized digital ledger that records
transactions across a network of computers. Transactions recorded on a blockchain
are transparent, secure, and tamper-resistant. The technology has the potential to
revolutionize digital payments, as it offers increased security, transparency, and
sefficiency.
2. Decentralised Ledger. A block chain facilitates secure online transactions. A
block chain represents a decentralised ledger which maintains transactions processed
in networked computers in such a manner that it is difficult to retroactively alter the
registered transactions.
3. Blockchain Technology.
(a) Blockchain technology can be seen as an ordered sequential chain of
block of transactions which forms an elementary structure of blockchain.
(b) A block consists of two parts, the Content and Header :-
(i) Content - Details of transaction including address of miner.
 (ii) Header – Holds metadata consisting of unique reference number,
timestamp and link to previous block.
(c) Each block of blockchain is identified and represented by hash algorithm
termed as SHA-256. The 32 byte hash is termed as ‘block hash’ or ‘block
header hash’ which serves as fingerprint.
(d) Next block is referenced to the previous block by parent hash stored in
header field. This sequential chain of linked hashes traverses all the way back
to the first generated block called the genesis block.
(e) A block can also be identified in blockchain by its position termed as
‘block height’.
4. In a blockchain-based payment system, transactions are verified and
processed by a network of computers on the blockchain network. When a user initiates
a transaction, it is broadcast to the network, and the network nodes work together to
validate the transaction and add it to the blockchain.
5. Each transaction is verified by multiple nodes on the network, and once it is
validated, it is added to the blockchain as a new block. The block is then added to the
existing chain of blocks, creating a permanent and unalterable record of the
transaction.
6. The use of blockchain technology in payment systems offers several benefits,
including faster transaction processing times, lower transaction fees, and increased
security and transparency.
7. Impact on future of Future of Financial Industry.
(a) Processing of Digital Transactions.
(i) Serve as automatically notarised ledger.
(ii) Protects against potential risk and financial frauds.
(iii) Automate time consuming processes.
(iv) Employed to collect and record taxes, risk management etc
(b) Asset Management.
(i) Distributed Ledger concept facilitates direct trading and
settlement across geographical boundaries.
(ii) Real time visibility of assets within systems.
(iii) Reduction in cost, increase in accuracy and reduction in delay.
(iv) Reduces trading errors, cyber fraud and misinterpretation during
exchange of assets between multiple parties.
(c) Efficient Payments.
(i) Improves payment transparency, efficiency, trust and security.
 (ii) Reduce the cost for both financial firms and users.
(iii) With use of distributed ledger technology and digital currencies,
payment is faster, cheaper and convenient.
(iv) Reduces the requirement of middle office and back-office staff as
payment gets instantly settled.
(d) Improved Compliance Processes.
(i) Blockchain services such as KYC-chain can help the financial
firms to streamline their KYC process.
(ii) Blockchain technology can provide KYC updates to the banks in
real time and highly efficient manner by reducing the data duplication of
data, lowering workload and increasing trust in the source.
(iii) Technology automates customer identification through means of
single digital source ID and multiple other information.
(iv) Automation of account opening, reduction of cost while
maintaining privacy of data
(e) Claim Management in Insurance.
(i) The technology automates the process of claim sorting and
processing further through its feature of smart contracts.
(ii) With blockchain, steps involved in claim settlement such as cross-
industry data access, customers transactional history and centralised
pool of customer authentication is automated and hence making it fraud
free.
(iii) Block chain links the parties involved i.e client, broker, insurer and
bank via shared network and collaborate in a manner which reduces
inefficiency and streamlines the process.
8. Conclusion. Blockchain technology has potential applications in various
different domains. It can serve as a transforming technology for economic and social
systems operating globally. Blockchain technologies are connecting global financial
systems so they are easily interoperable, efficient, affordable and accessible.
Confidence in blockchain technologies are rising as more governments and
businesses invest in these areas.
Q.3 You are a business consultant working with a small retail store that
specializes in handmade crafts. The store primarily operates with cash
transactions and has a limited customer base. The store owner is interested in
exploring digital payment options to improve customer convenience and
expand their business. As a consultant, you need to recommend and analyze
the implementation of digital payment solutions.
a) Suggest and justify two suitable digital payment options that the small retail
store can implement to enhance customer convenience. Consider factors such
as ease of use, security, and cost-effectiveness in your recommendations
Ans 3(a)
1. Introduction. The store is a small retail store that specialises in handmade
crafts. The operation is primarily cash transactions with limited customer base. The
owner has sought assistance in analysing and implementing digital payment.
2. Analysis. The customer base is limited and mostly are doing cash transactions.
In todays scenario, everyone has a smartphone and most of the customers will have
debit / credit cards. The same can be utilised for digital transaction. Based on the
above, the suggested digital payments options are as under :-
(a) Point of Sale
(b) UPI or Unified Payment Interface.
3. Point of Sale (POS). A POS terminal is an electronic device used to process
card payments at retail locations. The factors for consideration are as under:-
(a) Ease of Use. It is easy to use with enhanced network connectivity. All
major banking cards are acceptable and in some provider like HDFC Merchant
services, UPI facility is also available with cards. This provides the customer
with various options of payment and added convenience.
(b) Security. The payment is through secure payment gateway and a
receipt is generated once the transaction is completed. It uses PIN for
authentication.
(c) Cost Effectiveness. There are many POS terminal Providers and they
charge nominal fees which can be passed on to the customers with negligible
increase in the cost of handmade craft.
4. UPI Payments. UPI stands for United Payment Interface. It has been
introduced by RBI and launched by National Payments Corporation of India (NPCI).
UPI offers the payment architecture and set of API apps by RBI for facilitating instant
payments through smart phone. The factors for consideration is as under :-
(a) Ease of Use.
(i) Customer can pay scanning the QR Code.
(ii) Payment can be done through virtual address.
 (iii) Instant Payment and can be made from payer to payee and vice
versa.
(iv) Single App based.
(v) Customer requires to have a UPI App installed in the smart
phone.
(b) Security. Payment is secure and can be made using a single identifier.
UPI supports single click two-factor authentication (mobile number and
biometrics).
(c) Cost Effectiveness. It is cost effective as there is no investment cost
involved except for placing the QR code.
4. Conclusion. The digital payments have many advantages such as user
friendly, Tax discounts, send/receive money etc. In this case, I have recommended
UPI and POS which are the most convenient and easy to use digital payment mode
for my clients customers and will improve his business.
Q3(b) Analyze the potential impact of adopting digital payments on the
small retail store's business growth and customer acquisition. Discuss how
digital payments can help reach a broader customer base and improve overall
sales.
Ans 3(b)
1. Introduction. Digital payments refer to the transfer of funds using electronic
platforms, such as mobile wallets, online banking, and cryptocurrencies, instead of
traditional cash or physical credit cards. We will analyze the potential impact of
adopting digital payments on small retail store business growth and customer
acquisition.
2. Convenience and Accessibility. Digital payments offers conveniences to
both small retail stores and customers. With digital payment methods, customers can
make transactions anytime and anywhere, eliminating the need for physical visits to
retail stores. By accepting digital payments, retail store can tap into a broader
customer base, including those who prefer the convenience of online shopping or
mobile payments. Additionally, digital payments enable businesses to offer various
payment options to cater to diverse customer preferences, such as credit cards, e-
wallets, and bank transfers.
3. Enhanced Security and Fraud Protection. Digital payments provide a higher
level of security compared to traditional payment methods. Cash transactions are
susceptible to theft, loss, and counterfeiting, whereas digital payments employ robust
encryption protocols and authentication measures to safeguard sensitive customer
data. Moreover, digital payment platforms often offer additional security features like
two-factor authentication and tokenization. By accepting digital payments, retail store
can reduce the risks associated with handling cash and mitigate the chances of fraud,
benefiting both the business and the customers.
4. Improved Operational Efficiency. Incorporating digital payment systems
streamlines and improves the overall efficiency of business operations. Digital
payments eliminate the need for manual intervention, enabling businesses to
automate their payment processes, thereby saving time and reducing administrative
costs. Additionally, digital payment systems integrate seamlessly with accounting and
inventory management software, providing real-time transaction data and enabling the
store to gain valuable insights into consumer behaviour and purchasing patterns and
expand his business.
5. Tap into the Growing Cashless Economy. Cashless transactions are on the
rise, driven by factors such as increased smartphone penetration, the popularity of e-
commerce, and the proliferation of digital wallets. By embracing digital payment
methods, retail store can cater to evolving consumer preferences and align with the
expectations of tech-savvy customers. Additionally, accepting digital payments opens
up new opportunities for businesses to participate in global commerce, facilitating
cross-border transactions and expanding their reach to a broader international
customer base.
6. Conclusion. The advantages of convenience, enhanced security, operational
efficiency, improved customer experience, and tapping into the growing cashless
economy will improve business prospects of the retail store. By embracing digital
payment methods, retail store can attract a wider customer base, streamline
operations, and foster lasting customer relationships.