Adding offline capabilities to digital payments

From e-commerce and mobile point-of-sale to remittances and person-to-person transfers, the use of digital payment channels continues to surge. For 2024, the value of digital payments made globally is expected to reach $12 trillion, up 15% on 2023, with growth set to average 13% for the rest of the decade.¹

But even as digital payments have become widely popular, there has been little change in the way offline payments are handled. Indeed, banknotes and coins remain the sole means of payment in the absence of an adequate internet connection and/or reliable power source. When either of these is absent, payments are held in limbo or declined, with frustration for end users, merchants, and service providers alike. Moreover, the two worlds are distinct: no single payment approach has to date allowed end users to transact seamlessly both offline and online.²

Finding a solution to the processing and settlement of payments in an offline setting is one of the great challenges of the digital payments sector. And it’s a challenge that will become even more pressing as expectations for online transactions grow in more remote and rural areas of the world. It is also high on the agenda of many of the world’s central banks as they edge toward the introduction of a central bank digital currency (CBDC) that will need to be exchangeable no matter the level of connectivity. As a reflection of that, 98% of central banks regard offline payment functionality as either a vital or an advantageous component for any retail CBDC.³

The imperative for closing the digital payments gap

But what exactly is offline digital payment? And how does it work?

According to the Bank of International Settlements, it involves the transfer of a digital money token between devices that takes place without the payer and payee requiring a networked connection to any ledger system or back-end system to complete the payment. The lack of connection could be due to a system/power outage or the absence/weakness of an internet signal or telecommunications connection.

With a fully offline payment, any value exchanged is immediately transferred to the payee such that they can spend it at the end of the value transfer (i.e., settlement occurs immediately offline). And both payer and payee can stay offline without limitation in time.

The creation of an offline digital payment capability would fill a yawning gap left by online-only systems. It would require stakeholders in the payments and CBDC ecosystems to address some major challenges spanning technology, security, operations, and design. But the benefits of providing an offline capability are compelling – for both that ecosystem of players and its customers:

• Extends financial and digital inclusion: Currently, participation in the digital economy is restricted to those who have access to the networked world. This is defined not merely by the availability of a connection, but also by access to a suitable device such as a smartphone or laptop, which effectively serves as the gateway to digital finance. Introducing a digital payment solution with offline capabilities could drive that shift to wider financial inclusion, especially if it is supported by wallet form factors and transaction processes that are intuitive, easy to distribute, and cheap to manufacture (such as feature phone, card, and wristband wallets).
• Enhances payments resilience: It is a fact that internet access, even in highly developed economies, is not uniformly reliable. Countries such as the UK, New Zealand, and Greece are scored outside the world’s top 20 in terms of the reliability of the mobile internet experience they deliver.⁴ Indeed, intermittent outages are not uncommon in Western countries: a recent service interruption in the US, for example, cut mobile internet services for large numbers of users in US cities over an 11-hour period.⁵ Meanwhile, in some sub-Saharan countries (such as Ethiopia, Angola, and Sudan), the network may be relatively reliable but it is still based on 2G and 3G technology, limiting the types of devices and applications they can support.⁶ To address this issue and increase the resilience of a digital payment system, the incorporation of an offline solution to the payments infrastructure would be highly beneficial. The offline solution could establish a stable and reliable payment system that is not dependent on unpredictable or high-speed internet connectivity, ensuring that transactions could be carried out anywhere and anytime. Moreover, to establish and maintain widespread trust in any digital payment system, it must operate reliably even under unforeseen events such as a natural disaster or an economic crisis. So, support for both online and offline payments not only reinforces the robustness of the overall system, but also bolsters public confidence in a payment scheme.
• Adds cash-like characteristics to digital payments: By its nature, cash has many compelling features: it is universally accepted and understood, exchange is private, and it requires low financial literacy. And, of course, it works in a 100% analog environment. While it is widely agreed by central banks that any future CBDC system should mimic cash’s privacy as much as possible, today’s electronic transactions don’t. They leave a data trail that raises some customer concerns about privacy and data security. Incorporating an offline component into a digital payment system could address such fears. From a technical perspective, offline payments can support anonymous transactions and provide end users with the freedom to choose between traceable online transactions and more anonymous offline transactions, giving them the control they might desire over their data and privacy. 

Offline functionality: delivering widespread advantages

The provision of unplugged digital payments solutions promises to deliver a host of benefits to stakeholder groups, including individual consumers, merchants, businesses, and regulators.

• Consumers: An offline capability makes payments accessible and reliable even when end users are in the most remote, unconnected locations or situations. Some of the most common use cases for consumers include peer-to-peer payments between individuals (P2P or person-to-person) and payments at merchants (P2B or person-to-business).
  Commercial banks and fintechs: By integrating offline capabilities into their payment systems, financial service providers (FSPs) can make their services more appealing to customers. Enhanced resilience against network failures and disruptions minimizes related revenue loss and customer churn. They can also offer services to a wider group of customers, no matter where those customers live or their level of financial literacy. Moreover, an online/offline approach lets FSPs differentiate their offerings. Those can range from tokenized deposits on wallets and apps tailored to different groups of customers through to the development of products and services for merchants so they can easily accept offline digital payments, as well as providing innovative services, such as machine-to-machine (M2M) payments for industrial customers.
• Mobile money (MoMo) service providers: MoMos have already significantly contributed to financial inclusion, particularly in developing countries, by providing an accessible platform for digital transactions. As of now, a transaction with mobile money requires at least a 2G connection to the mobile network, which can be a challenge for transactions in rural and off-grid areas. To expand the societal impact of MoMo and potentially attract a broader customer base, including those who have been unable to join the mobile money payment network due to lack of prerequisites or those living in remote areas with unstable network connectivity, mobile network operators can introduce consecutive dual offline payments, allowing transactions even without stable network connectivity.
• Industry: As industrial companies transition to an era of Industry 4.0 and the Internet of Things (IoT), there is likely to be strong demand for machine-to-machine (M2M) interactions, where transactions are executed autonomously and securely between machines over a tokenized payment system. In certain scenarios, such as a high-security production plant, it might be beneficial for these M2M payments to operate without any connection to the internet. The approach could help mitigate potential cyber threats and protect vital operational data by minimizing online exposure.
• Merchants: Transactions with offline tokens are immediate and final, allowing the funds to be promptly utilized by the recipient. Offline transactions provide merchants with the benefit of immediate funds settlement, compared with the 1 to 3 days it takes to settle a card or smartphone payment.
• Central banks: Two of the main motivations for central banks exploring this approach are resilience and financial inclusion. By adding offline capabilities to CBDC offerings, central banks can ensure their services reach all citizens, including those with limited or no access to the internet. 

G+D Filia^® Unplugged: leading innovation

G+D Filia^® Unplugged is a new solution designed to provide offline capability to digital payments. It can be seamlessly integrated into existing payment offerings such as commercial bank’s tokenized deposit system, an instant payment system, or a mobile money service.

G+D Filia^® Unplugged is part of a technology solution set that has been field tested by central and commercial banks around the world, including:

• G+D partnered with Banco do Brasil to test an offline payment solution within its CBDC pilot of the Brazilian Digital Real Electronic (DREX). This allows the exploration of payment use cases using the Brazilian digital currency in situations where there is no internet connection or electricity.
• Together with Standard Chartered Bank, G+D concluded trials in the Hong Kong Monetary Authority’s (HKMA) e-HKD Pilot Programme. We explored the storage and transacting of a hypothetical e-HKD via wallets on smart cards, mobile phones, and wearables. The payment mechanism fully supported offline capabilities, enabling transactions without internet connection, electricity, or a third party for settlement. 

As those initiatives acknowledge, offline payments are the missing link in the digital payment sphere. When introduced they can enhance financial inclusion and payments resilience, support cash-like features in the digital world, and drive innovative use cases for the tokenized economy. In doing so, they will take the digital payments revolution to the next level.