The hidden cost of making digital payments easier

Tapping to pay for a meal takes less than a second. What leaves with the payment takes considerably longer to trace.

Digital wallets, payment apps and connected banking services have stripped most of the friction from everyday transactions. Moving money is faster, more accessible and more integrated into daily life than it was a decade ago.

That shift has produced a problem the industry has not resolved: how much financial information people give up each time they use those services.

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Every digital transaction can reveal something about the person behind it. Spending patterns can indicate where someone lives, which businesses they frequent and how much they earn.

When banks, payment processors, digital wallets and data brokers each hold portions of that information, individual transactions can combine into a profile that travels further than most customers realize.

The convenience comes with a data trail

The risks compound with routine activity. A single payment reveals limited information. A record of hundreds of transactions, drawn from multiple services, tells a more complete story.

Ermo Eero, managing director of IronWallet, told TheStreet that the exposure builds gradually rather than through any single event. “The biggest risk isn’t one dramatic breach. It’s the quiet build-up of data: every fast, one-tap payment leaves a trail that wallets, payment processors, banks and data brokers can combine into a detailed picture of someone’s life, including where they go, what they buy and what they earn.”

Open banking connections and third-party integrations extend that trail. Each link that makes it easier to move data between platforms also introduces another point where that data can be retained, shared or used in ways customers did not specifically anticipate.

Financial institutions collect transaction data for legitimate reasons: detecting fraud, verifying payments and meeting regulatory requirements. The problem is that the same infrastructure serving those functions can expose information that both individuals and institutions would prefer to keep private.

Consent agreements typically disclose how data is used. Accepting terms does not mean customers understand every downstream use of their information. That gap is likely to widen as financial services become more automated.

Digital wallets, payment apps and connected banking services have stripped most of the friction from everyday transactions.

Images By Tang Ming Tung / Getty Images

When financial records are public by design

Some digital financial networks record transactions on shared ledgers visible to any participant. That transparency supports verification. It also creates confidentiality problems that conventional banking systems were not built to solve.

An account identifier on such a network does not automatically reveal its owner. But once it is linked to a real person or organization, its full transaction history becomes accessible. For businesses, that can expose trading positions, treasury movements and commercial relationships to competitors.

Exposure matters more as financial activity expands across shared digital infrastructure. Whether institutions adopt these systems more widely may depend in part on their ability to protect sensitive information while using them.

Guy Itzhaki, CEO of Fhenix, told TheStreet the issue is about control, not concealment. “Privacy is increasingly becoming less about ‘having something to hide’ and more about having basic control over who can see what.”

Verifying without revealing

Several technologies are being developed to let financial systems run checks and process data without exposing the underlying information. Fully homomorphic encryption, multi-party computation and zero-knowledge proofs each approach the problem differently.

Fully homomorphic encryption allows computation to run directly on encrypted data. Multi-party computation enables computations among multiple participants without requiring each party to have full access to all inputs.

Zero-knowledge proofs allow someone to demonstrate that a condition is met, such as having sufficient funds or having passed an identity check, without disclosing the underlying details.

In financial services, those capabilities could allow systems to verify transactions and assess positions while limiting what each participant in a transaction can see.

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“A financial system should be able to execute rules correctly without requiring every underlying input to be public,” Itzhaki added.

On Oct. 21, Fhenix launched its CoFHE encrypted-computation coprocessor on Ethereum and Arbitrum, allowing smart contracts to process financial data without exposing the underlying values. The release includes a Consensys Diligence security audit and two design partners, Fluton and Alpha Engine, developing confidential financial applications on the network.

The technology still carries trade-offs in cost, performance and implementation complexity. Privacy protections also need to work alongside financial regulations. Anti-money laundering requirements and customer identity checks remain in force regardless of how underlying data is encrypted.

Building privacy into the product, not onto it

Technology does not fix the data exposure problem on its own. Financial services providers also have to decide what information they collect, how long they retain it and who can access it.

Those decisions are most effective when made at the product design stage. Collecting less data by default, shortening retention periods and giving customers usable controls over their information can reduce exposure before any encryption layer is introduced.

Eero said the choices providers make about data will shape how consumers and regulators judge them. “In finance, trust is the real currency, and a service that is convenient but careless with data will eventually lose both its customers and its regulators’ goodwill.”

For technology companies, building privacy into the underlying product rather than treating it as a compliance feature could open access to institutional customers. Banks and asset managers need to demonstrate control over what is visible and to whom before committing sensitive financial activity to shared infrastructure.

Digital payments will continue to get faster and more connected. The industry’s next question is not whether to collect transaction data, but how to limit what gets exposed and to whom.

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