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Online Payments for Small Business Owners: An Overview

online payment methods

Choosing an online payment processing system that doesn’t accept the payment methods your customers prefer is much like speaking Chinese at a Marrakech market: both approaches are unlikely to result in a successful transaction. 

Similarly, a merchant’s point-of-sale system needs to be able to speak the same language as their customer’s payment method. Brick-and-mortar stores speak a different payment language from online stores. That’s why it’s critical for ecommerce businesses to be fluent in online payments.

What are online payments?

Online payments are types of payment submitted and processed over the internet. These include credit card payments, ACH payments, wire transfers, and payments made using a mobile wallet

While online and in-store payments may use the same payment processors, the point of sale (POS) differs between them. For an in-store payment, POS is your physical checkout counter. For an online payment, POS is an online payment interface, and your software payment solution is your point-of-sale system. 

In addition to accepting customer payments via online payment methods, businesses may also use online payments to pay bills or payroll expenses. 

How do online payments work?

Online payments involve a customer, a vendor, and the financial institutions of each party. They may also involve payment processing partners such as PayPal, Zelle, or Square. 

Online payment processes differ by payment method. Here’s a sample breakdown of how an online payment using ACH debit (automated clearing house debit) works:

  • A customer purchases a good or service and elects to pay by ACH debit.
  • The merchant or third-party payment processing partner sends an ACH debit request to the merchant’s financial institution.
  • The merchant’s bank batches the transaction along with other ACH transfers
  • An ACH operator receives the batched transactions, sorts them, then submits the transactions to the customer’s bank.
  • The customer’s bank processes the transaction and credits the payment amount to the merchant’s account.

5 types of online payments

  1. Credit card payments
  2. ACH payments
  3. Direct debit
  4. Wire transfers
  5. Digital wallets

Different types of online payment offer different benefits for businesses and customers. Variables include cost, speed, security, and popularity with your customer base.

1. Credit card payments

Both businesses and individuals frequently used credit cards for online payments. The credit card company settles the purchase debt with the vendor, and the cardholder either pays off their total credit card balance at the end of each billing cycle or accrues additional interest debt in the form of an annual percentage rate (APR) fee. APR reflects the annual cost of the loan, including the interest rate plus other charges.

Because many customers use credit cards as their primary means of payment, businesses that accept credit cardsonline and in-person have advantages over those that don’t. Many credit card processing partners charge merchants a per-transaction fee, which can range from between 2% and 5% of the total transaction cost. 

2. ACH payments

Automated Clearing House (ACH) transfers are a type of online payment sent through the ACH network, an electronic network that serves as an intermediary between financial institutions. 

ACH transactions are processed in batches. This keeps fees down but can make ACH payments slower to process than other types of online payments. ACH payments typically process in one to three business days, while wire transfers and credit card transfers complete within 24 hours. Businesses frequently use ACH direct deposit to pay employees, and many financial institutions offer this type of transaction free of charge.

3. Direct debit

Direct debit is a form of ACH payment that transfers money from one bank account to another through the ACH network. When customers pay for goods or services using ACH direct debit, the merchant’s financial institution instructs the ACH network to take money from the customer’s bank account and put money into the merchant’s bank account.

The ACH network processes direct debits within one business day, but the receiving bank often holds transactions for an additional one to two business days, bringing the total transfer time to one to three business days.

4. Wire transfers

Wire transfers are online payments from one bank to another without the use of an intermediary like the ACH network. Wire transfersmove money quickly, and tend to have higher per-transaction limits than ACH transfers. They also carry higher per-transaction fees, which frequently range between $20 and $30 per transaction. Although wire transfers themselves are secure, they are more often targets of fraud than ACH transfers because they process more quickly. The one-to-three-business-day payment processing period of ACH transfers allows a business to stop payment if fraud is suspected.

5. Digital wallets 

Digital wallet is an umbrella term referring to any method of electronic payment (such as a debit or credit card) stored on a user’s devices (e.g., Apple Pay or Google Pay) or in the cloud. Digital wallets are not payment methods in themselves; rather, they allow customers to use existing payment methods without access to a physical card. Digital wallet purchases can be made both online and in person.

What to consider when choosing online payment options for your business

Ideally, online payment solutions make it easy for customers to pay you and are within your technology budget. A best-fit online payment system for your business is one easy to set up so your online store is up and running quickly.

When choosing an online payment solution, consider the needs and preferences of your customer base. Younger customers, in particular, are likely to use digital wallets and be familiar with a range of payment processing partners, while older customers may be more comfortable using credit and debit cards. 

Another consideration is how much in fees you are willing to pay.

Online payments FAQ

What is an online payment?

An online payment is any payment made over the internet. Many ecommerce businesses accept online payments to make it easier for customers to purchase goods and services. They also frequently use online payments to pay vendors and employees.

What are different types of online payments?

Online credit and debit card payments, ACH payments, wire transfers, and digital wallet (e.g., Apple Pay, Google Pay) payments are all types of online payments. Third-party payment providers like Zelle, PayPal, Apple Pay, Venmo, and Square also offer online payments that are reconciled via debit or credit card, or through ACH transfer.

What are examples of online payments?

There are many types of online payments. Examples include:

  • A customer uses a credit card to purchase a Martha Stewart–signed spatula from your online store.
  • Your business uses an ACH credit transfer to pay employees through direct deposit.
  • Your business uses PayPal to pay the invoice of a contractor for painting a life-sized portrait of a hot dog stand in your lobby.
  • A customer uses credit card information stored in their digital wallet to purchase a 90-minute scalp massage.
  • Your business sets up a recurring bill pay through ACH debit to cover utility expenses out of your operating expense account.
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