Electronic Payment: What Small Business Owners Should Know (2022)

In 2021, 75% of US consumers buy goods online and 82% use some form of digital payment. Functions like sending and receiving payments—once done on paper—are now, for the most part, done digitally. Understanding popular electronic payment methods and payment systems helps small business owners ensure that their target customers can purchase their goods and services. That’s a competitive advantage.

What is electronic payment?

Electronic payments are any way to transfer money that does not require cash or paper checks. Electronic payment processing methods include credit card payments, debit card payments, ACH transfers, digital wallet payments and wire transfers.

5 types of electronic payment

1. Credit card payment
2. ACH payment
3. Direct debit
4. Digital wallet
5. Wire transfers

Electronic payment processing methods differ in terms of cost, security, speed and ease of use for merchants and customers. Knowing the pros and cons of five popular payment methods can help you choose a payment processing system that meets your business needs.

1. Credit card payment

Credit card payments allow you and your customers to make purchases on a line of credit provided by the credit card company. The credit card company settles the purchase debt with the vendor, and the cardholder either pays the total amount of their credit card debt at the end of each billing cycle or accrues additional debt in the form of interest on the balance.

Benefit

• In terms of purchases, credit cards are easy to use and can help business owners organize their accounting systems. For example, you might open a line of credit for operating expenses and issue cards to your chief operating officer (COO) and office manager, which they can then use to pay for all business operating expenses. Linking this card to an operating expense account helps make it easier to isolate and track specific expenses.
• Accepting credit cards is also beneficial for business owners. Since many customers prefer to use credit cards, businesses that accept credit cards have a competitive advantage over those that do not. Customers may prefer to buy from companies that make it easy to pay by accepting their preferred payment method.

Cons

• Most credit card companies charge merchants a credit card payment processing fee per transaction, which can range from 2% to 5% of the total transaction cost.
• Credit cards can also be expensive for the cardholder if the full card balance is not paid at the end of each billing cycle. Interest on revolving balances (calculated in APR form) averages around 16%.

2. ACH Payment

An ACH payment, also known as an ACH credit, is a common type of electronic payment. ACH credits are sent through the Automated Clearing House (ACH) network, an electronic network that acts as an intermediary between financial institutions. All ACH transfers are classified as either ACH credits (payments) or ACH debits (withdrawals).

Benefit

• ACH payments are secure and have low per-transaction fees, typically from 20¢ to $1.50 per transaction, or between 0.5% and 1.5% of the total transaction cost. Payment processing fees are determined by your bank and are calculated either as a fixed fee per transaction, as a percentage of the transaction or as a monthly cost.
• Transfers like salary direct deposit are often free.

Cons

• ACH transactions are processed in batches. This reduces fees but can make ACH payments slower than other types of electronic payments.
• ACH credit transactions are usually processed within one to three business days.

3. Direct debit

Direct debit is a form of ACH transfer that draws money from one bank account to another bank account through the ACH network. Many businesses accept payments from customers via ACH direct debit.

Benefit

• ACH direct debits have low per-transaction fees, especially when compared to credit card processing fees—ACH debit fees are typically 0.5% to 1.5% of the total transaction cost, while credit card processing fees range from 1.5% to 3.5% of the total. transaction costs.
• Businesses also frequently use ACH debit to pay bills: Recurring bill payments often carry no transaction costs and can be automated, reducing administrative burdens and making it easier to pay your bills on time.

Cons

• ACH direct debits take longer to process than many other types of electronic payments. ACH direct debit transactions are processed by the ACH network in one business day, but receiving banks often hold transactions for an additional one to two business days, bringing the total transfer time to an average processing time of one to three business days.

4. Digital wallet

A digital wallet is a general term that encompasses many electronic payment methods (such as debit or credit card payments) that are stored on a user’s device or in the cloud.

Benefit

• Digital wallets make debit and credit card payments easier for customers—while adding a layer of security, since your credit card number is invisible. The tap-to-pay feature on the iPhone, for example, allows users to complete purchases without having a card in hand.

Cons

• Digital wallets rely on a charged device (and sometimes an internet connection) to function, and not all vendors accept digital wallet payments. For customers, having a physical credit card keeping the phone dead doesn’t mean the inability to make purchases.

5. Wire transfer

A wire transfer transfers money directly from one bank to another without using an intermediary such as the ACH network.

Benefit

• Wire transfers are usually processed within 24 hours (and sometimes instantly).
• They tend to have higher per-transaction limits than ACH transfers. Transfer limits vary greatly across financial institutions, but ACH transfers are often capped at $10,000, while wire transfer limits are often in the $100,000 to $250,000 range.

Cons

• Wire transfers have higher per-transaction fees than ACH transfers.
• Although wire transfers are a safe method of transferring funds between bank accounts, they are also more often targeted for fraud because they process quickly, which does not allow businesses or banks to stop suspicious payments.

Things to consider when choosing an electronic payment type

Businesses use electronic payments to send and receive money. When choosing which types of payments to use and accept, consider your business needs, your customer base’s spending preferences, budget, and the technology you use to accept electronic payments.

Electronic payment FAQ

What is an electronic payment system? How do they work with payment service providers?

Electronic payment systems allow businesses to send and receive electronic payments. Payment service providers (such as PayPal, Square or Shopify) may allow you to accept credit card payments and digital wallets.

Is it easy to set up electronic payments?

Setting up an electronic payment system is easy, and your existing accounting software may already offer the ability to accept electronic payments. Setting up with a third-party payment processor like Venmo or Square usually involves providing your payment processing partner’s bank account number and routing number so that funds can be deposited into your account.

What are examples of electronic payments?

Recurring electronic transfers from your bank account to pay bills are examples of electronic payments that occur over the ACH network. Making a payment using your credit card is another form of electronic payment.

source: https://www.shopify.co.id/blog/electronic-payment