A guide to different payment methods

There are hundreds of different payment methods ranging from credit cards and bank transfers to crypto and cash.

Previously dominated by cash, today payments is fueled by digital alternatives that typically involve a virtual wallet or card on a phone.

Digital payments driven by the likes of Apple Pay, PayPal, or Alipay are predicted to be the fastest growing payment globally. The CAGR of such digital wallet transactions in e-commerce, for example, is estimated to be 15 percent between 2023 and 2027.

Businesses must offer these convenient and preferred payment options to meet customer expectations and ensure smooth transactions.

In this blog, we'll cover various payment methods, their pros and cons, and factors to consider when choosing the right payment methods.

What are payment methods?

Payment methods offer various options for customers to pay businesses for products or services, both in physical and online stores.

Payment methods include cash, credit cards, debit cards, gift cards, and mobile payments, enabling smooth transactions based on customer convenience and preference.

They enable economic activities across e-commerce, in-person, and other business types.

Understanding payments

Payments transfer value between parties, often following an invoice. Payees choose the method, but legal tender laws apply. Foreign currency payments may incur extra fees.

Before currency, barter was common. Goods and services were exchanged directly. For instance, a farmer could trade eggs with another farmer for wheat.

Today's monetary system simplifies transactions with currency, providing a convenient, storable approach for payments.

The benefits of diverse payment methods

Improved sales

PayPal research reveals 59% cart abandonment due to unavailable preferred payment methods.

Offering the most popular payment methods like credit cards, PayPal, Apple Pay, Google Pay, and cryptocurrencies is crucial for meeting diverse customer preferences.

Providing the right payment method ensures customers pay.

Improved customer satisfaction and experience

Providing flexible payment options enhances customer satisfaction, nurturing long-term relationships and repeat business.

Meeting global customers needs

To capture new market opportunities, businesses should accept local payment methods critical for customer engagement and sales growth.

Reducing payment fraud

Selecting payment methods aligned with risk tolerance and robust customer authentication decreases the risk of payment fraud. Better levels of customer authentication will reduce the chances of fraud cases and chargebacks.

Competitive edge over other businesses

Merchants that accept multiple payment methods can differentiate in a competitive environment and convert prospects into customers. It is not uncommon for customers to switch to a different business that meets their payment expectations.

Different types of payment methods

Card payments

Credit card payments

Credit cards provide users with a line of credit up to a set limit. This specifies their maximum spending allowance. Each use of the card entails agreeing to repay the balance, often with interest.

When used, account information is sent to the merchant bank for authorization from the credit card network to process transactions.

Common credit card issuers include: Visa, Mastercard and American Express.

Advantages of credit cards

1. Establish a credit history and trust for future large purchases.
2. Lower risk compared to carrying cash.
3. Earn rewards like points, airline miles or cashback.
4. Provide deferred payment options.
5. Flexibility to make purchases now and pay later.
6. Enhanced Fraud Protection.

Disadvantages of credit cards

1. Risk of overextending credit and debt accumulation.
2. High processing fees for the merchant.
3. High interest rates on unpaid balances (15% to 25% APR).

Debit card payments

A debit card links directly to a bank account, allowing access only to available funds for purchases or withdrawals. If funds are insufficient, debit card transactions will be declined for purchases.

Debit cards offer conveniences similar to credit cards: easy portability, broad business acceptance, and diverse levels of fraud protection. They offer the convenience of cashless transactions and provide expense tracking capabilities.

Unlike credit, debit cards typically offer fewer promotional benefits and can incur fees if users inadvertently overdraw their account.

Advantages of debit cards

1. Facilitate easy transactions via ATM withdrawals or purchases at major retailers.
2. Usually no annual fees and transaction costs with sufficient account funds.
3. Promote responsible spending by limiting purchases to available balance.
4. Do not accrue interest as payments utilize the spender's own funds.
5. Transactions are logged to assist with budgeting.

Disadvantages of debit cards

1. Debit cards often offer limited fraud protection for specific amounts or periods.
2. They restrict spending to available balances, preventing excess in emergencies.
3. Banks may charge overdraft fees if funds exceed the account balance.
4. They do not contribute to building a credit score due to their use of available funds.
5. Debit cards offer fewer rewards and perks compared to credit cards due to their focus on direct access to funds rather than credit lines.

Credit and debit cards allow customers to pay via a card machine using chip & PIN or contactless. This can also be over the phone or an online transaction. The money is withdrawn directly from their bank account, typically processed within the same day. However, it can sometimes take 48-72 hours to process.

Prepaid card payments

Prepaid cards serve as an alternative to cash, functioning similarly to debit and credit cards. They allow for online and in-store payments via Chip and PIN or contactless methods.

The card is loaded with funds and can be topped up when required.

Advantages of prepaid cards

1. No linked bank account is required for cardholders.
2. The flexibility of traditional payment cards is available without the risk of accruing debt.
3. Adding specific funds to the prepaid card makes it easier to control spending.
4. Disadvantages of prepaid cards.
5. Needing to reload a card is inconvenient.

Contactless payments

By card

Most cards now support contactless payments. This method enables transactions without needing a PIN code. The card machines have contactless technology, allowing transactions to process simply be tap and go.

Contactless payments can be made with credit and debit cards or mobile devices. The concern is how easy it is for a thief to use someone else's card. Therefore, contactless transactions are limited.

By smartphone/digital wallets

Digital wallets, which also cover mobile wallets or e-wallets, are apps that store payment card information on smartphones or wearable devices. Digital wallets can store multiple payment types, including credit cards, debit cards, and bank transfers.

This turns the device into a wallet, enabling contactless payments with compatible card readers.

The credit or debit card machine, known as a point of sale terminal (POS), reads the customer's banking information via the mobile device's software application.

The phone reads the POS terminal information and generates a signal to confirm the payment.

This method allows for enhanced security measures in contactless transactions. Biometric requirements like fingerprint or facial recognition may be needed to confirm payment.

Biometric requirements in digital wallets address theft concerns associated with contactless card payments.

The technology uses Radio Frequency Identification (RFID) and Near Field Communication (NFC).

Advantages of mobile payments include:

1. Rapid transactions with a simple tap for authentication.
2. Eliminates the need to carry extra items, provided the user has their phone.
3. Enhanced financial security via tokenized apps, and additional safety with biometric authentication on devices.

Disadvantages of mobile payments include:

1. Dependency on specific types of mobile phones.
2. Risk of losing access to funds if phone is lost or faulty tech, and requirement to use specific apps at certain merchants (e.g., Apple Pay at Apple stores).
3. Connectivity issues can also arise.

Cryptocurrencies

Cryptocurrencies such as Bitcoin and Ethereum are increasingly popular as digital payment methods. They utilize cryptographic security, providing anonymity, but face challenges like price volatility and regulatory oversight.

Cryptocurrencies use decentralized networks called blockchains, which are databases that grow continuously with records called blocks.

Each block holds data about all cryptocurrency transactions, including when they occurred. This setup differs from traditional debit or credit cards.

When customers make online purchases with cryptocurrency, they transfer a set amount from their digital wallet to the merchant's. This transaction is recorded on the blockchain for transparency and security.

Improvements in blockchain technology and security measures have led to broader adoption for legitimate purposes. Businesses, from online retailers to tech firms and even some physical stores, now take cryptocurrencies as payment.

Advantages of cryptocurrencies include:

1. Global access thanks to international transactions.
2. Operates on decentralized ledgers.
3. Strong encryption and blockchain technology.
4. Easily adapts to preferred digital currencies via centralized or decentralized exchanges.
5. Bank account is not needed.
6. Faster payments.

Disadvantages of cryptocurrencies include:

1. Cryptocurrencies can fluctuate in value, potentially leading to capital loss.
2. Sending funds requires technical know-how and familiarity with the crypto platforms.
3. Mistakes can lead to fund loss.
4. They aren't as widely accepted for payments as other methods.

Cheques

Cheques  function as paper vouchers linked to a current account, often used for bill payments or paying tradespeople. The payee deposits the cheque at their bank to complete the transaction.

Cheques provide a clear payment history and allow for delayed processing. However, they carry risks like bounced cheque. The process can also be tedious with having to write, male, and deposit.

Advantages of cheques include:

1. They allow for delayed payment for goods and services.
2. They provide a paper trail for transactions which can serve as proof.
3. There's less risk of theft compared to cash.
4. Low to no fees apart from the cost of the check and postage.
5. Offers protection since recipients must sign them and often show ID to cash them.

Disadvantages of cheques include:

1. Processing time as They can take time to clear.
2. Manual handling and deposit.
3. Risk of bounced or forged cheques.
4. Longer processing time as funds are only transferred when the recipient cashes the cheque.
5. Fraudulent cheques can be cashed with just a forged signature if the depositing bank does not verify ID.

Autopay

An autopay system automatically deducts funds from the user's bank account, credit card, or debit card on a scheduled date, typically monthly.

It's commonly used for recurring payments like credit card bills, utilities, subscriptions, and donations.

Autopay ensures payments are made on time, but it requires sufficient funds in bank accounts.  Keeping track of spend is key as there is a risk of forgetting payments or overdrawing the account.

Advantages of autopay

1. Scheduled automatic purchases increase convenience and customer retention.
2. Timely payments prevents missing important bills like phone service and utilities.
3. Simplifies maintaining online subscriptions.

Disadvantages of autopay

1. Suitable only for periodic transactions, not one-time purchases.
2. Lack of oversight on individual payments.
3. Requires frequent account checks to ensure availability of funds.

Pay by Bank or Bank to Bank

Pay-by-bank lets customers make online purchases directly from their bank accounts without a credit or debit card. They use online banking credentials to authorize and transfer funds.

Advantages of pay by bank

1. It enhances security by eliminating the need to provide credit or debit card details, reducing fraud risk and protecting customer data.
2. Pay-by-bank is convenient for customers without credit or debit cards or those who prefer not to use them online. It speeds up checkout by eliminating the need to enter payment details for every purchase.
3. Pay-by-bank offers faster payment processing, with real-time transactions that help merchants receive payments quickly. This improves cash flow and simplifies payment reconciliation.

Disadvantages of pay by bank

1. Bank transfers aren't ideal for everyday or small online purchases because they can take several days to process, delaying transactions unnecessarily.
2. They can also face other delays, errors, or cancellations due to human or technical issues.

Cash payments

Cash remains a staple in retail, with supermarkets, cafes, and local businesses accepting it. Many small businesses favor cash due to lower transaction fees. However, cash poses risks like loss, theft, and damage, prompting extra costs for security measures.

Advantages of cash payments

1. Avoid hidden fees since cash transactions typically have no additional costs.
2. Helps manage spending by limiting purchases to the amount of cash on hand.
3. Aids in budgeting by providing a clear view of available funds.
4. Doesn't require internet access or technology for transactions.

Disadvantages of cash payments

1. Cash transactions don't contribute to building your credit score.
2. It lacks the ability to track spending like digital methods do.
3. Cash poses a higher risk of theft since it's owned by whoever holds it.
4. ATM withdrawals can result in fees.

What is the best payment method?

No single best form of payment exists, as each has its pros and cons. Traditional payment methods like cash are widely accepted. However, modern payment methods offer less risk of theft.

Merchants must cater to their customers' preferred payment methods. Convenience and a smooth payment experience are crucial.

Choosing the best payment methods for your business

When selecting payment methods for your customers, consider several factors. Not all methods suit every business and demographic.

Geographical location

The geographical location of your business and target audience influences which payment options to offer, as preferences vary by region. Identify available options in your areas and determine the most widely accepted methods for your customers.

Security and compliance

Ensure payment methods are secure and compliant with industry standards and regulations, protecting your business and customers by adhering to data protection and privacy rules.

Payment method vs business model

Tailor payment methods to your business model; subscription-based services benefit from recurring billing and automatic payments, while e-commerce platforms need secure online gateways and seamless checkouts.

Determine whether transactions are primarily online, in-store, or both, offering appropriate methods like digital payments for online businesses and card payments or cash for brick-and-mortar stores.

Future plans

Choose solutions that support your growth plans and future expansion, ensuring they integrate seamlessly with your existing systems, such as websites, POS systems, or mobile applications.

Conclusion

There is no single best payment method for your business, as each has its own advantages and disadvantages.

The key thing must be to prioritize your customers' preferred payment method and ensure a smooth and convenient payment experience.

Consider factors like geographical location, business model, and transaction type when selecting payment methods. Ensure security and compliance, and choose scalable solutions that integrate seamlessly with your existing systems to support future growth and expansion.