Table of Contents: What is an Electronic Payment? | What is an Electronic Payment System? | How do Electronic Payment Systems Work? | Types of Electronic Payments | Features and Benefits of an Electronic Payment System | Choosing an Electronic Payment Solution | Drivers of Electronic Payment Growth | Final Thoughts: What is an Electronic Payment System?
In today’s digital economy, the landscape of financial transactions is continuously evolving, and at the forefront of this evolution are electronic payment systems. From enabling online shopping to contactless payments, electronic payment systems have revolutionized the way we handle money.
But what is an electronic payment system? This article explains how electronic payment systems work, the benefits of adopting electronic payment systems and macroeconomic trends impacting the growth of electronic payment systems today.
What is an Electronic Payment?
Electronic payment refers to any transaction conducted electronically, without the need for physical currency exchange. This encompasses a variety of methods such as credit cards, debit cards, mobile wallets and online bank transfers.
What is an electronic payment? If you’ve purchased an item on Amazon or paid a bill online, you’ve conducted an electronic payment. Essentially, electronic payments digitize financial transactions, enabling the swift and convenient exchange of funds across platforms.
What is an Electronic Payment System?
An electronic payment system is a digital infrastructure that enables the electronic transfer of funds between individuals or entities. It replaces traditional cash or check transactions with the digital equivalent, offering convenience, speed and security.
Electronic payment systems utilize various technologies such as online banking, mobile payment apps and electronic point-of-sale terminals. Security measures like encryption and authentication protocols ensure the integrity of transactions, protecting sensitive financial data.
How do Electronic Payment Systems Work?
Electronic payment systems work by facilitating the exchange of funds between parties electronically.
When a payment is initiated, the system securely processes the transaction details via a payment gateway that verifies the payer’s identity and validates the transaction. The gateway transfers information between the electronic interface and the payer’s credit card or bank account. It uses security protocols and encryption along the way to make sure the transaction remains safe.
The bank or credit card company quickly verifies whether there’s enough money in the payer’s account to complete the transaction. If so, the gateway routes the funds from the payer’s account to the payee’s account.
Once the transaction is complete, both parties receive notification and the electronic payment is concluded.
Types of Electronic Payments
Businesses and individuals can choose from a variety of electronic payment methods. When selecting the type of electronic payment that best meets your needs, keep simplicity, speed and security in mind.
| Credit card | The payer borrows funds to pay for goods and services, which are then paid back, plus applicable interest, over time. |
| Debit card | Money is deducted directly from the payer’s checking account to pay for goods and services. |
| Virtual credit card | These function like physical credit cards but generate different card numbers and expiration dates for each transaction, limiting fraud risk. |
| Online banking | Transactions are completed online via the payer’s banking platform. |
| Electronic funds transfer (EFT) | Funds are electronically transferred directly from the payer’s bank account to the payee’s. |
| Automated Clearing House (ACH) | The ACH network electronically moves money between bank accounts in batches. |
| Wire transfer | Funds are electronically transferred between financial institutions. |
| Real-time payments | RTP and FedNow are platforms that allow instant transactions between businesses. |
| Mobile wallet | This includes mobile apps like Apple Pay or Venmo that store payment information to enable contactless transactions. |
| Contactless payment | Transactions are made by tapping or waving a card or smartphone near a payment terminal, transmitting the stored payment information using radio frequency identification (RFID) and near field communication (NFC) technology. |
| Cryptocurency | Digital currency transactions conducted on blockchain networks. |
Electronic payments can be one-time or recurring transactions. These include:
One-time payment: This is a single, non-recurring payment to purchase an item or service or to pay a bill.
For instance, a business needs a new HVAC condenser at its headquarters. It purchases the unit and pays the HVAC contractor via credit card for the unit and related installation.
Recurring payment: This is a payment between a payer and payee that happens on a regular, recurring basis.
For instance, a business pays an HVAC contractor to visit its facilities quarterly to change out air filters and maintain its heating and cooling systems. The business provides its credit card information and authorizes the contractor to automatically charge it each quarter when services are rendered.
Features and Benefits of an Electronic Payment System
Electronic payment methods offer a number of advantages for businesses in today’s digital economy. Key features of electronic payment systems include the following:
Speed: Electronic payments are typically processed in real time (or close to it), enabling fast payments and quick access to funds. This speed is especially beneficial for businesses with tight cash flow.
Accuracy: Electronic payments are more accurate due to automated processes that reduce human error. Systems instantly verify payment details, ensuring correct amounts are transferred. Additionally, digital records enable easy reconciliation, minimizing discrepancies.
Cost: Compared to traditional payment methods like checks or cash, electronic payments often cost less to process. Additionally, they help an organization save money by eliminating the expense of paper checks, envelopes and postage.
Security: Robust security measures such as encryption and multi-factor authentication better safeguard sensitive financial information, reducing the risk of check fraud and other types of financial fraud.
Convenience: Electronic payment systems enable transactions anytime, anywhere. They streamline payments, reducing the need for manual handling of cash or checks.
Reporting: Users can easily monitor transaction history and account balances, which enables transparency and accountability.
Accessibility: Digitally stored in the cloud, financial pros can easily and quickly find the payment data and reports they need. This accelerates both payment and related internal processes.
Scalability: Electronic payment systems are highly scalable, capable of accommodating a large quantity of transactions without compromising performance or reliability.
Compatibility: Seamless integration with platforms including accounting software and enterprise resource planning (ERP) systems enhances user experience as data easily flows between systems, eliminating the need for manual entry.
Choice: Electronic payment systems support various payment methods, including credit cards, debit cards and electronic bank transfers. Businesses can choose the most convenient option based on their preferences and needs.
Choosing an Electronic Payment Solution
When selecting an electronic payment system for your business, consider the following elements to ensure you make the best choice.
Software Integrations
If your electronic payment solution doesn’t integrate with your other financial systems including your accounting software and ERP, your business won’t be able to experience its full benefits. Choose a solution that works with existing systems, minimizing disruptions to your business operations and facilitating smooth communication between platforms.
Security Features
Look for electronic payment solutions with robust encryption and fraud detection mechanisms that comply with security and card industry standards. It’s essential to protect vulnerable financial information from cyberattacks and fraudsters to maintain stakeholder trust and avoid significant financial losses.
Transaction Fees
Review the fee structure of the electronic payment solution, evaluating factors such as per-transaction fees, monthly subscription costs and chargeback fees. The solution you choose should deliver a value for your business.
Support
Choose a solution with dedicated support resources that can be reached 24/7 – payment issues aren’t limited to business hours on weekdays. Check with existing customers to ensure the electronic payment provider promptly addresses technical issues or questions.
Scalability
As your business develops, so will the number of payments you process. Select a payment solution that can accommodate growth, offering scalability in terms of transaction volume, expansion and additional services as your business evolves.
Ease of Use
Prioritize a solution that’s intuitive and easy for your team to use. Ultimately, this will encourage adoption.
Payment Options
Look for an electronic payment solution that supports a variety of payment methods to ensure the system you choose meets the requirements of your suppliers.
Reviews
Research the reputation of the electronic payment solution you’re considering. Ask to speak to customer references and check out reviews that discuss important considerations such as network uptime, security incidents and responsiveness of support personnel.
Drivers of Electronic Payment Growth
According to McKinsey, electronic payment adoption is steadily growing. In 2023, more than nine out of 10 consumers reported using some form of digital payment. This trend is reflected in the business realm, with check usage rapidly declining for B2B payments. The Association for Finance Professionals found that only 33% of U.S.- and Canada-based businesses used paper checks for payment in 2022, compared to 81% in 2004.
The rising popularity of electronic payments is likely a result of several macroeconomic drivers:
The Spread of E-commerce
E-commerce, the market for buying and selling products and services online, has steadily grown since its inception. E-commerce fuels the electronic payments market because consumers buy more products and services using the internet. Many consumers consider e-commerce and electronic payments more convenient than other options.
Declining Use of Cash
The Pew Research Center reports that 41% of Americans say none of their purchases in a typical week are paid for with cash. Similarly, the number of Americans who say they use cash to pay for all or almost all of their purchases in a typical week has steadily decreased from 24% in 2015 to 14% in 2022.
A Gallup poll underscores this, with 64% of respondents saying they believe the U.S. will become cashless in their lifetime.
The Rise of Smartphones
Mobile phones are practically ubiquitous today. Consumer Affairs reports that since 2015, cell phone ownership has increased 20%. In 2022, about 97% of Americans owned a feature phone or smartphone, compared to 81% in 2015.
As smartphone usage continues to rise, so do electronic payments conducted with these devices. Payments via digital wallets in particular are increasing. A recent Forbes Advisor study found that 53% of Americans use digital wallets more often than traditional payment methods such as cash or a physical credit card.
Final Thoughts: What is an Electronic Payment System?
Electronic payment systems offer businesses many benefits, including streamlined financial operations and enhanced security. By adopting these systems, businesses can improve efficiency and reduce errors. Embracing these systems aligns with digital transformation trends, positioning businesses competitively in a shifting marketplace.