Electronic Payment: What Small Business Owners Should Know

Graphic reading "What are electronic payments"

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

What is an electronic payment?

An electronic payment is any means of transferring money that doesn’t require cash or a paper check. 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 payments
  2. ACH payments
  3. Direct debit
  4. Digital wallet
  5. Wire transfers

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

1. Credit card payments

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

Pros 

  • On the purchasing side, 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 could then use to pay all of the business’s operating expenses. Linking this card to an operating expense account helps make it easier to separate and track specific expenses. 
  • Accepting credit cards is also advantageous for business owners. Because many customers prefer using credit cards, businesses that accept credit cards have a competitive advantage over those that don’t. Customers may prefer to buy from companies that make it easy to pay by accepting their preferred payment methods. 

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 cardholders if the full balance of the card is not paid off at the end of every billing cycle. Interest on a rollover balance (calculated in the form of APR) averages around 16%. 

2. ACH payments

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

Pros 

  • ACH payments are secure and have a low per-transaction fee, 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 as either a flat fee per transaction, as a percentage of a transaction, or as a monthly cost. 
  • Transfers such as payroll direct deposits are often free of charge.

Cons

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

3. Direct debit

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

Pros

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

Cons

  • ACH direct debits take more time to process than many other types of electronic payment. ACH direct debit transactions are processed by the ACH network 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 an average one-to-three-business-dayprocessing period. 

4. Digital wallet 

Digital wallet is an umbrella term covering many methods of electronic payment (such as debit or credit card payments) stored on a user’s devices or in the cloud. 

Pros

  • Digital wallets make debit and credit card payments easier for customers—while adding a layer of security, since your credit card number isn’t visible. The tap-to-pay feature on an iPhone, for example, allows consumers to complete a purchase without even having a card on hand.

Cons

  • Digital wallets are dependent on a charged device (and sometimes on an internet connection) to work, and not all vendors accept digital wallet payments. For customers, having a physical credit card ensures a dead phone doesn’t mean an inability to make a purchase. 

5. Wire transfers

Wire transfers move money directly from one bank to another without the use of an intermediary like the ACH network.

Pros

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

Cons

  • Wire transfers have a higher per-transaction fee than ACH transfers do. 
  • Although wire transfers are a secure method of moving funds between bank accounts, they are also more often targets of fraud because they process quickly, which doesn’t allow a business or a bank to stop a suspicious payment.

What to consider when choosing electronic payment types

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

Electronic payments FAQ

What are electronic payment systems? How do they work with payment service providers?

Electronic payment systems allow businesses to send and receive electronic payments. A payment service provider (such as PayPal, Square, or Shopify) can allow you to accept credit cards and digital wallet payments.

Is it easy to set up electronic payments?

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

What is an example of an electronic payment?

Recurring electronic transfers from your bank account to pay bills are an example of electronic payments that happen through the ACH network. Making payments with your credit card is another form of electronic payment.

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