Types of Payment Methods: A Guide for Businesses
Types of Payment Methods: A Guide for Businesses
- What are the different types of payment methods?
- Payment method FAQs
- Setting up different payment types for your business
With so many different payment methods available, figuring out which method of payment to use as your main form of payment or for one-time payment needs can be extremely overwhelming. If keeping track of the many payment method options isn’t hard enough, learning how to effectively use these methods adds another layer of difficulty, especially as new forms of currency continue to emerge, complicating the management of payment methods even further.
To help you better understand not only the many types of payment methods you can use, but also how and when to use them most effectively, we’ve put together this payment method guide. We’ll guide you through a handful of the various payment methods currently available, how to use those payment methods easily and effectively, some of the frequently asked questions about payment methods in general, a few of the new currencies affecting payment methods that are popping up and finally, how to quickly set-up online and automatic payments for your business.
What are the different types of payment methods?
Simply put: there are a lot of different types of payment methods. Online payment methods, ACH payment methods, traditional payment methods (checks, credit cards, debit cards, etc.)–the list of payment methods currently available to you goes on and on.
Let’s get started by identifying some of the types of payment methods currently available to consumers and businesses alike:
1. What is a cash payment?
What else can we say? Cold, hard cash is the most traditional of payment methods, the bedrock of our financial system. Though advances in technology, the advent of new and alternative payment methods, and the ease and availability of modern payment types has diminished cash payments as a common type of payment method, it still offers a wide variety of benefits when used.
Benefits of Using Cash
Cash, on a global scale, remains the method of payment most recognized and easiest to use, with many vendors only accepting cash as a payment type. Also, paying with cash is a type of payment method almost never associated with processing fees.
Disadvantages of Using Cash
On the flip side of the coin, some customers can be reticent to carry large amounts of cash and thus less likely to use it as a payment method when making large purchases. There’s also a level of inconvenience when using cash as a payment method–having to go to a bank to get cash, the inherent danger of keeping cash on your person, stocking and maintaining a full register at your place of business, etc.
2. What is a check payment?
Paying by check is a commonly used method of payment that involves a payer writing a check–a signed and dated instrument–that informs a bank of a specific amount of money to be sent to a recipient. After delivery of the check, it is cashed–meaning the money is transferred from the payer’s bank account to the recipient’s bank account.
Benefits of Using Checks
Using a check as your preferred type of payment method is beneficial as it allows you to easily–and securely–pay for large purchases without having excess amounts of cash on hand. Again, using checks as a payment method eschews processing fees, meaning you’re not losing money every time you pay. Many businesses only accept cash and checks as methods of payment.
Drawback of Using Checks
Checks as a payment method come with a bulky, time-consuming process in both writing and tracking their journey from you to the vendor and then to the bank. Checks are a slow type of payment and a payment method that needs to be managed closely to ensure that when your check is cashed, you have the correct amount of cash within your bank account so the check can clear and the payment can be made.
3. What is a debit card payment?
When you use a debit card as a payment method–online or otherwise–the money you’re spending is yours. Where a credit card draws from a line of credit, a debit card is a payment method that allows you to draw money from an established checking account.
Benefits of Using Debit Cards
A debit card is a payment type that allows you make fast, secure payments online and in-person. A debit card can also be used to get money out from an ATM or a bank. Using a debit card as a method of payment is both convenient and typically devoid of service fees usually associated with credit cards. Because a debit card is a payment method that draws funds immediately from your bank account, they allow you to have a more immediate understanding of what funds you still have remaining in your bank account and allow you to better budget. Finally, debit cards can’t be used without first entering a four-digit pin, so if stolen they’re difficult to use as a payment method.
Drawbacks of Using Debit Cards
Debit cards are a great type of payment but do come with some fees. If you are using a debit card to get cash from an ATM that isn’t associated with your checking account, a fee is often charged. If your debit card is lost or stolen (another risk), you can, and often are, charged a small fee to replace the debit card as your payment method. Also, because a debit card is directly linked to your checking account, if you are using it as a payment type and you don’t have enough money when you make a purchase, you can be charged an overdraft fee. A list of fees commonly associated with debit cards can be found here.
4. What is a credit card payment?
A credit card is a payment method that gives the consumer–or business–the opportunity to use a line of credit to pay for their purchases. Meaning, when a credit card is used as a payment type, the user is ostensibly borrowing from a bank to make the purchase.
Benefits of Using Credit Cards
This allows those using credit cards as their primary payment method the opportunity to pay for goods and services they may need at the moment, but don’t have the cash on hand to immediately pay for them. Also, using a credit card as a type of payment almost always comes with credit card points that can be used to pay for travel, goods, etc.
Those using credit cards as a type of payment method must make monthly payments to pay off the accrued credit card bill. A credit card company allows you to pay off your bill in monthly installments and or all at once.
Disadvantages of Using Credit Cards
Using a credit card as a primary method of payment can be dangerous financially, because if you have a large amount of existing credit card debt, you can be charged interest. Even though credit cards are a convenient, fast payment method–online or in-person–to pay vendors and suppliers, many don’t accept credit cards as a payment type and they are oftentimes associated with fees.
There are companies, like Plastiq, currently working to provide all the benefits of using credit cards as a payment type, regardless of if they’re accepted or not.
5. What is a mobile payment?
Short and simple: mobile payments are an electronic payment method akin to using a credit card, but without the hassle of having to actually use your credit card. A mobile payment is simply a payment method that allows you to purchase goods or services through a mobile device–a cellphone, a computer, etc. Mobile payments are made through payment apps created by banks and/or fintech companies like Venmo and Square Cash.
Benefits of Mobile Payments
When you use mobile payments funds are extracted directly from your associated bank account. You can also use mobile payments as a payment method in-person by scanning a barcode on your mobile phone. Mobile payments allow you to pay vendors and suppliers from anywhere where a mobile phone–and in most cases, some form of internet–are available. This mobility makes mobile payments an extremely convenient and easy to use method of payment.
Disadvantages of Mobile Payments
Though convenient, mobile payments are also payment types heavily dependent on technology. To use a mobile payment as a payment type you have to not only have access to mobile phone, but have downloaded and signed up for whatever phone app is needed to make the mobile payment. And to accept mobile payments, merchants have to have access to terminals that can accept them. This can create issues in terms of cost and convenience for both payer and merchant.
6. What is a wire transfer?
Sending money via a wire transfer is an electronic payment method that involves transferring funds electronically from one location to another. When using a wire transfer as a type of payment, funds are passed through a network of banks and transfer services either domestically– any wire transfer that takes place between two financial institutions in the same country – or internationally– wire transfers that are initiated in one country but resolved in a different country.
Benefits of Wire Transfers
When money needs to be sent quickly and securely, a wire transfer is a surefire payment method. Typically using wire transfers as a method of payment, comes with high cap limits, so they are often the payment type used to transfer large sums of money. When making a wire transfer there is no exchange of actual cash, all funds are transferred electronically.
Disadvantages of Wire Transfers
Wire transfers are usually a payment method associated with high fees for both payer and receiver. A wire transfer is also a method of payment that is irreversible. Once you’ve made your payment using a wire transfer, there’s no going back. Wire transfers can be payment types with high security risks as financial criminals because of its anonymity, irreversibility and ease of acceptance.
7. What is an electronic funds transfer?
An electronic funds transfer (EFT) is a payment method that allows you move money between bank accounts using electronic payment methods (i.e. a computer, an ATM, mobile payment apps, etc.). Payment types that fall under the EFT umbrella are direct deposit, ATM, using your computer for personal banking, electronic check conversion, payment apps, and so much more
Benefits of EFTs
Secure, efficient and inexpensive, electronic funds transfers are types of payments that remove some of the burdensome process of paying via check or credit card or cash. EFTS are instantaneous payment methods, meaning your funds can get to where they need to get when you need to get them there. On the merchant side of the purchase, funds are accessible almost immediately. Electronic fund transfers also allow customers to make large payments without having to keep large amounts of cash on hand. When paying with an EFT, you can also dispute transactions–unlike using a wire transfer as a payment method–if something seems incorrect or unauthorized.
Disadvantages of EFTs
Though EFTs are safe, fast and generally inexpensive, some ATMs or payment apps do come with fees. Also, because of the fast, convenient nature of using this payment method, customers need to have working capital on hand when they make their purchase using an EFT. If customers don’t have the cash in their bank account, their payment can still be rejected. Finally, there can be high fees associated with EFTs, depending on which electronic payment method you’ve decided to use.
8. What are ACH bank transfers?
ACH banks transfer are payment types that are made through an electronic network (the Automated Clearing House). This method of payment allows funds to be transferred between upwards of 25,000 banks and financial institutions. When using ACH transfers as an electronic payment method, information is sent in pieces through the ACH and when it clears, payments are sent to recipient bank accounts.
Benefits of ACH Transfers
ACH transfers are usually relatively inexpensive payment methods when compared to wire transfers or other types of payment. They’re also extremely safe methods of payment and can be securely used to make large purchases, and can be reversed (unlike wire transfers) in case of fraud.
Disadvantages of ACH Transfers
There can be a lack of convenience when using ACH transfers as they are only available to be used between US bank accounts. Furthermore, ACH transfers are payment types that are processed in batches so they aren’t as instantaneous as other payment methods. ACH transfers can have limits imposed upon them by banks, meaning you can’t always use them as a payment type for large purchases.
9. What are website payments?
Website payments are another payment method under the umbrella of electronic funds transfers. A website payment is, simply put, a payment type that allows a payment to be made via a vendor or supplier’s website. The payment is electronically extracted from the buyer’s associated bank account before being deposited into the seller’s associated bank account.
Benefits of Website Payments
When a buyer uses a website payment to purchase goods or services, the transaction is managed by an online service that securely manages the transfer of funds from the customer to the merchant. Website payments are fast, secure, convenient and reduce costs. Using website payments as a method of payment also allows you to have more control over your cash flow, as you can make them any time of the day. Many website payments can also be set to a recurring schedule so you spend less time and worry making sure the payment has been made. In general website payments help to simplify the process reporting and reconciliation.
Disadvantages of Website Payments
Customers using website payments as their method of payment will oftentimes incur fees from the payment gateway and/or third parties associated with the payment method. Website payments are also inconvenient when making in-person payments. Vulnerability to fraud is also an issue when using website payments as a payment type. Finally, if the company who you are attempting to pay via website payments is experiencing technical difficulties, using website payments as a payment type can be inconvenient.
10. What is buy now pay later?
Buy now pay later–often referred to as BNPL–is a payment type that allows you to purchase a product in the moment, but pay for it over time incrementally. For all intents and purposes using BNPL as a type of payment is using a installment loan, where your purchase cost is split into a decided upon number of payments and the payments are then billed to your preferred payment method–almost always the buyer’s credit or debit card.
Benefits of BNPL
BNPL can be a great electronic payment method as it allows a buyer to purchase something upfront and then pay for it slowly over a longer period of time, allowing buyers to make larger purchases. Also, BNPL allows customers to receive an item before they’ve finished paying for it. Using BNPL as a method of payment is usually a zero-interest payment–or extremely low interest–so it’s much cheaper than other types of payments. For those struggling with credit score issues, BNPL is an accessible method of payment.
Disadvantages of BNPL
Like any credit-based payment method, if payments aren’t made on time, interest can accrue and the buyer using BNPL as a payment type can end up paying much more than sticker price. BNPL payments can also be difficult to track, and if a consumer misses a payment it can do damage to their credit score. Unlike credit cards–and some debit cards–using BNPL as a method of payment doesn’t allow a customer to accrue rewards of any kind.
11. What is online bill pay?
Online bill pay is an electronic payment method offered by many banks or other financial institutions. The way online bill pay works as a type of payment is that the financial institution of your choosing allows you to automatically organize and schedule payment of your bills–mortgage, gas, electric, etc.–directly through your bank.
Benefits of Online Bill Pay
Online bill pay is a convenient means of paying bills. By using your bank’s online pay as your preferred payment type you can easily pay all of your recurring bills from a single, easy-to-use platform. Because payments are scheduled automatically, online bill pay helps solve for forgetfulness when it comes to paying your bills on time. When using this payment method to manage your bills, you are less likely to miss payments and thus avoid any unnecessary late fees.
Disadvantages of Online Bill Pay
Setting up bill pay is a simple process but every bank may have different rules, so be sure to read the small print before setting up online bill pay as your electronic method of payment for your bills. Different financial institutions can level different amounts of fees when you use them to pay your bills online. Paying bills online is also a payment method that requires some amount of organization, as losing tracking of recurring payments can result in overdrafting your account and the fees associated with it. Finally, though online bill pay can be easily set up, canceling bill pay can be an arduous process.
12. What is a virtual payment?
A virtual payment is an electronic and online method of payment that involves a “virtual” credit card. A virtual credit card is a super secure, computer-generated 16-number used to pay a specific amount to a specific vendor. This payment type can be accepted by any vendor or supplier whom accepts traditional credit card payment types.
Benefits of Virtual Payment
This is a popular method of payment as it allows you to make a credit card payment without exposing any of your banking information. Virtual payments are a payment method that provides much higher security against fraud than if you were using a credit card as a payment method. To ensure security when using virtual credit cards, payments can be set to a specific amount and directly associated with a specific invoice. Each card has a one-time use, 16-digit number that ensures it can only be used as an electronic payment method for the associated payment.
Disadvantages of Virtual Payment
Using virtual payments can be inconvenient because of their limited availability and the small amount of set-up involved with using them as a payment type. Furthermore, many virtual payments can incur a fee if the transaction being made is international. For a purchase made using US dollars, this fee can average roughly 3% of the payment.
13. What is a QR code payment?
A QR code payment is an electronic and online payment method that uses a computer generated QR code to quickly send payment information to a buyer.
Benefits of QR Code Payment
A QR code is a safe, inexpensive payment method that allows a seller to print a QR code and place it in their business where customers can–using a cellphone or computer-based device–to scan the QR code and then quickly make a payment. QR code payments can be sent on invoices–electronic or otherwise–and are considered to be a secure, contactless means of allowing customers to pay in person. Even better, they’re extremely useful methods of payment that are nearly tech-free–simply print them and place them in an easily accessible place.
Disadvantages of QR Code Payment
Using a QR code as a payment does come with some concerns about security, especially in terms of personal privacy. The convenience of a QR code is balanced by the fact that business owners can see much more information than with other types of payment. Criminals also are discovering new ways to hack QR codes all the time. Also, though QR code’s help to minimize human contact, this isn’t always preferable.
Payment method FAQs
How do you accept credit and debit cards?
To accept credit and debit cards as a type of payment method, you can either hire what’s referred to as a “payment service provider”, open a merchant account, or set up a payment gateway to take credit cards online.
A payment service provider is, simply put, a middleman between a credit card and a bank account. When a customer uses their credit cards as a method of payment, the credit card details are reviewed, processed and accepted digitally. All of this is done by the payment processor. There is typically a small fee associated with this accepting credit cards as a method of payment with payment processors having a relatively smaller fee.
A merchant account–another means of accepting credit cards as an electronic payment method–is simply an account opened with a bank that allows you to accept credit cards as a payment type.
To accept credit cards online as a method of payment, a seller can set up a payment gateway in their digital storefront. Know that setting up either of these things, or both as means to accepting credit cards as a type of payment usually comes with some cost.
So now you know how to accept credit cards as a method of payment, but how exactly do credit card payments work?
How do credit card payments work?
When you use a credit card as a payment method, you are borrowing money from a bank or a similar financial institution that you are required to pay back on a monthly basis (though these payments can be incremental). Each month you’ll receive a credit card balance that shows how many times you’ve used your credit card as a type of payment method and how much you’ve spent using it as a method of payment. You will then be asked to make either a monthly payment agreed upon by the bank and yourself or you will be able to pay the entire amount in one payment. If you are using a credit card as payment method and you fail to make the minimum payment you can, and will, accrue interest and late fees based on your credit card balance.
Which payment method typically charges the highest interest rates?
With so many payment methods, it can be difficult to choose just one. But different payment methods have higher or lower interest rates and this can be a deciding factor when managing your payment methods. Credit cards typically have an extremely high interest rate that carries over from month-to-month and is based on a number of factors–type of credit card, credit history, etc. Because interest accrued when you use credit cards as your payment time is based on how much you owe including the addition of that interest rate, credit card interest compounds daily. Meaning, using a credit card as a primary payment method can get expensive quickly if you’re not paying off your credit card balance. There are other methods of payment–payday loans, etc.–that may come with higher levels of interest, but in general, for commonly used methods of payment, credit cards have the highest interest rates.
What payment methods require you to pay upfront?
Upfront payments are a type of payment that requires a customer to pay for a part or all of an invoice prior to the work being completed. Meaning, instead of business waiting around to be paid until after a project is completed, upfront payment types allow them to be paid–to some degree–for services and not have to wait. This allows your business to control their cash flow and provides working capital for expenses related to the project and/or any other project in the pipeline.
Payment methods that require customers to pay upfront:
- Credit cards
- Mobile payments
- Online payments
- Virtual payments
- Wire transfer
What type of payment method is typically used in B2B?
The most popular methods of payment in the world of B2B range from cash to wire transfers to credit card. That said, credit cards are handily the most popular methods of payments used in B2B. Over 530 million Americans use credit cards as one of their payment options. Credit cards are a payment method that allow businesses to float cash and control their cash flow with relatively few fees if the payment method is managed effectively. Credit cards are an electronic payment method that give businesses the ability to make large purchases without fully depleting their working capital. For these reasons, credit cards are, commonly, the most popular method of payment for B2B.
Other popular payment methods include: ACH, write transfers, digital payment platforms, checks and cash.
Setting up different payment types for your business
How to take payments for small business - what methods of payment are best?
Clearly, there are many methods of payment for businesses of all sizes. If you are running a small business, certain types of payment are better methods of payment than others. As stated above, credit cards provide a bevy of benefits for businesses, especially small businesses. Nearly 75% of all customers prefer paying via credit card so accepting credit cards as a form of payment is crucial for most small businesses.
Mobile payments are another payment type that can be good as a method of payment for a small business as they can expedite the payment process on both sides of the payment coin, while saving businesses time through automation that can be used on more important goals.
How to accept bitcoin and cryptocurrency as methods of payments
The advent of bitcoin and crypto as acceptable forms of currency have added new complications in terms of payment acceptance. And though no small business loves further complications when it comes to getting paid, there are companies today already working to make accepting bitcoin and crypto as electronic payment methods easy and secure.
To accept crypto as a type of payment, businesses must first set up a cryptocurrency wallet or an online bank account that allows you to send and receive digital money. To do so, and to start accepting crypto as a viable type of alternative payment method, simply sign up for a safe, secure cryptocurrency wallet and get started sending and receiving cryptocurrency as a type of electronic payment method.
Another important step in accepting cryptocurrency as a type of a payment is to integrate cryptocurrency payment into your website. Many ecommerce processing sites already feature plug-ins that allow you to simply integrate crypto as an acceptable method of payment. If your current ecommerce platform doesn’t feature plug-ins that allow you to process crypto as a type of payment, you can set up a payment gateway that will provide buttons and invoice generators so crypto and bitcoin can now be seen as acceptable electronic payment methods.
Once you start accepting cryptocurrency as a method of payment be sure to read up on common sense steps that will help you successfully and effectively manage crypto currency as a means of payment and protect you from fraud.
How do you set-up online payment for your business?
Online payments are a fantastic method of payment for any business of any size based on their speed, convenience, and level of security. To start using and accepting online payments as an electronic payment type you have to first set-up a secure online payment gateway.
Much like accepting crypto as a method of payment, accepting online payments is best done with a payment gateway in place. A payment gateway will save you time by reducing the need for manual processing and allow you to accept, and manage, a variety of payment methods. Make sure that whatever payment gateway you use allows you to accept credit/debit cards as a payment method as they are, and look to be for the foreseeable future, the most popular payment type.
How do you set-up automatic payments for business?
Setting up automatic payments saves you time. This method of payment is a surefire way to eliminate the drudgery of manual payment processing, allowing you more time to focus on bigger and better goals and to cut back on the errors typically associated with the manual processing of payments. Using automatic payments as a There are three ways to set-up automatic payments:
1. Through a bank’s online bill payment service
To set-up automatic payments as a type of payment, you’ll have to login into your online bank account and let your bank know exactly what bills you’d like to have paid through the electronic payment method of automatic payments. From there the bank will act as your method of payment for any bills you’ve set up to be paid automatically. Make sure you have the proper funds in the associated bank account and then sit back and relax, never having to worry about late fees ever again.
2. Directly through the biller
Similar to setting automatic payments as an electronic payment method with a bank, setting up automatic payments as a payment type directly with the biller is fast, easy, and will help cut back on wasted time and errors. To do you simply have to communicate your financial information–bank account numbers, etc.–with your trusted biller and they’ll set it up within their financial system so your bills can be paid via the payment method of your choice on a recurring schedule.
3. Use a credit card
Again, simply communicate with your biller (ensure that they are a secure, trustworthy vendor before doing so) all of your credit card payment method information. The biller will then set your card up within their system, so your invoices will be paid with your preferred payment method on a recurring basis. Or, use a platform like Plastiq, to set up recurring billing for virtually any vendor, if they accept credit cards or not. By using a credit card as your electronic payment method of choice, you not only eliminate stress, wasted time and late fees, you’ll remove any concern about overdraft fees while reaping the benefits associated with using a credit card as your method of payment.
There are many payment methods to use and many ways to use those payment methods. We hope this simple guide provides you a helpful overview of the many methods of payment available and how you can best use them as a consumer and as a business.