Customers today expect to make purchases using a number of methods, including cash payments, credit and debit cards, and online payments via mobile wallet services. This puts the onus on business owners to be able to accept payments in all sorts of formats. Learning how to set up your business to accept different payment types will go far in keeping your customer base happy—and spending.
Today’s purchasers pay for goods and services using eight principal payment types. Here’s a rundown of these payment methods, including the advantages and disadvantages that come with each.
8 popular payment options
1. Credit and debit card
Credit and debit card payments are the most common payment type. Credit card companies, including Visa, Mastercard, American Express, and Discover, extend credit to purchasers; they cover the purchase price, and customers pay their card balance every month. Debit cards, instead of extending credit to a purchaser, deduct money directly from the purchaser’s bank account.
- Advantages of credit and debit card payments: Credit cards allow customers to make large purchases even if they don’t currently have a lot of cash. This may benefit retailers, since using a credit card usually results in a larger shopping cart total than if the customer pays with cash. Debit cards only let customers spend what is in their bank accounts, but they offer the customer convenience and security, as they don’t have to walk around with large sums of cash in their wallets.
- Disadvantages of credit and debit card payments: The principal disadvantage is the payment processing fee that credit card companies levy on merchants. Most debit card fees stay below 1% of the purchase price, but some credit cards can charge a merchant up to 3.5% of the purchase price. Furthermore, there is a lag from when the purchase happens to when the amount appears in the merchant’s bank account. This stands in contrast to cash, which is immediately available after the sale.
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Cash payments are the most traditional of payment methods (and no, we’re not including the barter system in our list). This is when a customer hands paper or coin currency to a merchant.
- Advantages of cash payments: The merchant instantly receives payment, and they do not owe any fees for payment processing.
- Disadvantages of cash payments: For all its simplicity, cash has lost much of its appeal among customers. Many customers prefer credit cards that give them cash-back rewards, while others like the convenience of mobile payment services embedded into their smartphones and smartwatches. For a merchant, keeping cash on site renders them vulnerable to theft. And for online retailers, accepting cash is largely impractical, if not impossible.
3. Mobile wallet
Mobile wallet services function via apps that run on smartphones, tablets, and smartwatches, and link to a customer’s credit card, debit card, or bank account. They include Apple Pay, Google Pay, and Samsung Pay. Once a person sets up their mobile wallet account, they can use these apps to pay for things at vendors that accept mobile payments.
- Advantages of mobile wallet payments: Mobile wallets offer great convenience to customers, who can use them at tap to pay terminals in brick-and-mortar stores or in an online shopping cart when purchasing items over the internet. While they don’t yet rival credit or debit cards in popularity, their popularity is growing. Global consumers spent $1.786 billion via mobile payments in 2021, and financial analysts expect that figure to more than triple within five years.
- Disadvantages of mobile wallet payments: Merchants will need a new point of sale terminal to accept tap to pay transactions in a brick-and-mortar store. Many mobile wallet apps also place transaction limits on their customers—limits that tend to be much lower than most credit card limits. This can put an artificial cap on the size of a customer’s purchase.
4. Buy now, pay later (BNPL)
A buy now, pay later plan (BNPL) is a loan that the BNPL company offers to a customer so that they can purchase merchandise on credit, but without a credit card. Popular BNPL lenders include Shop Pay Installments from Shopify, Affirm, Afterpay, Sezzle, PayPal, and Klarna. BNPL is particularly popular for online shopping, and some brick-and-mortar retailers now accept it in stores.
- Advantages of BNPL: A BNPL service extends credit to consumers, including to many of those without good credit or those without credit cards. For consumers, there are typically no fees to use the service. Customers pay back the loan in installments without interest, unless they miss a payment. Even then, interest tends to be less than credit cards charge. BNPL often encourages customers to spend more than they might with cash, a debit card, or even a traditional credit card.
- Disadvantages of BNPL: BNPL services don't charge high interest rates to customers; they instead charge higher percentages to retailers. This typically ranges from 2% to 8% of the purchase, which is far higher than what credit cards charge retailers.
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Some customers still pay with paper checks, either from a personal checking account or with a cashier’s check from a bank. These checks serve as promissory notes that a retailer can redeem at a bank for cash.
- Advantages of check payments: For a customer, checks come with almost no purchase limits. They can draft a check covering any amount of money in their bank account.
- Disadvantages of check payments: Financial fraudsters have long favored checks as a way to stiff merchants out of money. To avoid the risk of bounced checks, merchants must invest in check processing terminals that rapidly process such financial transactions. These check readers typically cost north of $250 and must link to a payment verification network. As such, many small businesses accept bank checks but refuse personal checks.
6. Bank transfer
Also known as a wire transfer, a bank transfer sends money directly from the account of one person or business to the account of another person or business. These transfers are popular for very large purchases, particularly those involving real estate.
- Advantages of bank transfers: Bank transfers are very secure. While they come with a one-time fee for both sender and receiver, they do not involve a percentage-based commission like one would pay in a BNPL or credit card transaction.
- Disadvantages of bank transfers: Bank transfers are impractical for most everyday purchases. They require advance planning because they typically require interacting with a bank representative during business hours. The one-time wire transfer fee (often ranging from $30 to $50) can be exorbitant when linked to small purchases. For this reason, bank transfers tend to be limited to very large purchases.
An autopay system automatically debits a person’s bank account, credit card, or debit card on a set date, usually once per month. Autopay is popular for credit card payments, utility payments, monthly subscriptions, and scheduled charitable donations.
- Advantages of autopay: Autopay promotes customer retention, since customers can schedule automatic purchases as opposed to reauthorizing payment every single month. Customers also like autopay since it prevents them from missing important payments for items like phone service and electric bills.
- Disadvantages of autopay: Autopay only applies to certain transactions that occur on a periodic basis. It does not work for all types of purchases or for one-time purchases.
Cryptocurrency has become an increasingly viable way to pay for goods and services, as services like BitPay and Wirex offer debit cards consumers can fund with mainstream cryptos like Bitcoin.
- Advantages of crypto payments: Many leading digital currencies, including Bitcoin, run via blockchains, which are systems that record financial transactions using decentralized peer-to-peer computer networking. These blockchains operate independently of government control, which appeal to people who want to use currency that’s outside government-backed financial systems. Accepting crypto as payment opens businesses up to this audience.
- Disadvantages of crypto payments: Compared to government-backed “fiat” currencies like the US dollar and the euro, cryptocurrency is unstable and prone to large losses in value. This may pose a risk to merchants who accept crypto payments. Crypto also lacks the robust payment infrastructure enjoyed by credit cards, debit cards, and mobile payments.
How to choose your business’s payment options
As you ponder the best way for your business to process payments, here are some things to consider.
- Who is your customer? Create a profile of your ideal customer. What is their age? What is their demographic? What other stores do they frequent? How do they pay at those stores? The answers to your questions will inform what types of payments you should accept.
- What can you afford? It costs money to accept payments via credit card, which requires a payment terminal and gives credit card companies a cut of your profits. It also costs money to accept BNPL transactions or to safely process checks. Decide where you can afford to invest in your payment system, and use this decision to determine the specific payment options.
- How and where do you want to do business? Where will your business operate? If you are online, you have little need to handle cash or checks, but you’ll need to be set up for credit cards, debit cards, and perhaps BNPL. If you run a brick-and-mortar store in a place with spotty internet, you’ll see immense value in cash. If you believe in decentralized finance, you might go for crypto. Let your business plan and your values guide the payment options you offer.
There are many types of payment options available to small businesses today. Card-based payment processing is the most common option. Yes, the card companies will charge you a fee, but the purchase amounts made with credit cards routinely exceed the purchase amounts made with cash. A BNPL service may also lead to large purchase totals. Handling cash may let you serve customers who don’t participate in the credit market—particularly very young or elderly customers.
Given the wealth of options, retailers have more choices than ever when it comes to accepting payments. By identifying customers’ payment preferences and budgeting for the necessary hardware, small business owners can choose a precise combination of payment options that suit the unique needs of their company.
Payment options FAQ
What are the three main types of payment options
The three most common types of payment in today’s market are credit cards, debit cards, and cash. Credit and debit card transactions involve fees paid by merchants to the card companies, but they tend to involve larger purchase amounts than cash transactions.
What should you consider when choosing a payment option?
Consider three main things when choosing what payment options to offer: How your ideal customer typically makes purchases, how much money you’re willing to invest in equipment like payment terminals, and how much your business will be in-person versus online.