Online payments are essential for small, independent businesses and larger multi-location enterprises. In an increasingly digitised world, online payment methods are now the norm for exchanging goods and services.
Following the pandemic, which saw many businesses adopt cashless payment methods, attitudes towards payments have changed. If you are a merchant, or someone considering setting up an online business, you may be wondering what online payments are, how they work and how they can benefit your business.
In this guide, we’ll cover:
- What does online payment mean?
- When did online payments start?
- What are the different online payment methods?
- What types of businesses can benefit from online payments?
- Pros and cons of online payments
- How secure is online payment?
What does online payment mean?
An online payment is the transfer of funds over the internet. The transaction is done electronically from your bank account, usually to the supplier of the goods or services you are purchasing from. These cashless payments are made without being in close proximity to the merchant and without a physical card.
When did online payments start?
The first widely recognised online payment system was introduced in 1994, when a purchase of a CD was made via a credit card. However, paying online has come a long way and what was once ground-breaking is now a simple part of our everyday lives.
What are the different online payment methods?
Debit card
Pros:
- Convenient if you don’t want to go to the ATM to withdraw money.
- No annual fees for using your card.
- No interest is charged as funds are taken out of your account instantly.
Cons:
- Limited fraud protection in the event of your card being stolen.
- Overdraft fees can occur if you overdraw funds from your account without keeping tabs on your balance.
- Does not contribute to your credit score as funds are taken out instantly.
Credit card
Pros:
- Offers short-term financing as you don’t need to pay for purchases right away.
- Helps build your credit score by showing you can borrow and repay money responsibly.
- Higher fraud protection than debit cards due to funds not being withdrawn straight away.
Cons:
- You pay interest if you don’t pay off the balance agreed in your terms each month.
- Late payment fees can be costly.
- Can negatively impact your credit score if payments are not made on time.
Wire transfer/money transfer
Wire transfer is an electronic money transfer method that uses the network of the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Pros:
- A secure way to transfer money via a tracking ID so funds can be traced.
- A traditionally fast method of payment.
- Available globally, making it easy to collect your money wherever you are.
Cons:
- Processing fees are a condition of transferring money.
- Can be susceptible to fraud if hackers gain access to your transaction code.
- Transactions cannot be returned if there is a mistake made with the amount or recipient’s details.
Digital wallet (PayPal, Google Pay and Apple Pay)
A digital wallet is a device or software application that allows people to conduct electronic transactions. It saves payment information, such as credit card or bank account information, and consumers can make online payments with their mobile device or computer.
Pros:
- Convenient and easy to use as you can pay from anywhere, anytime.
- Enhanced security features like encryption, multi-factor authentication and fraud detection.
- Quick transaction speeds mean less time waiting in line or at the checkout.
Cons:
- Digital wallets are not accepted everywhere so users may still need to have debit or credit cards to hand.
- Hidden fees including transaction fees, foreign exchange fees and account maintenance fees.
- Technical issues can be caused by connectivity problems or system failures, which can slow the ease of payment.
What types of businesses can benefit from online payments?
E-commerce: online payments are vital for e-commerce businesses. Payment links are an online payment method favoured by e-commerce businesses for their speed, ease of use and security.
Downloadable services: if you offer a service that can be sent via the internet – for example, something that is downloadable like an e-book or guide – your business can also benefit from taking online payments.
Physical services: there is no limit to who can benefit from online payment methods, even if you offer a physical service. For example, as a hairdresser, you can take deposits or full payment online before the appointment.
Pros and cons of online payments
Online payments have revolutionised the way transactions are made between merchants and consumers, but no payment method is perfect. It’s important to familiarise yourself with the pros and cons of online payments and decide what works best for your business.
What are the advantages of online payments for businesses?
Taking payments online has several advantages for merchants and service providers, such as:
- Convenience and speed: online payments are quick and can be taken anywhere, at any time.
- Reduced costs: allowing customers to make purchases online reduces the need for extra staff or premises, depending on your business.
- Increased revenue: allowing customers to purchase products or services online expands your client base as you can sell to people globally.
- Security: trusted e-commerce platforms and transaction systems offer protection for both the customer and the merchant.
- Analyse consumer habits: when your customers pay online you can use this data to gain insights into the time of day, month and year that they are most likely to spend and use this to your advantage for promotions and email marketing.
- Recurring payments: if your business model is subscription-based, these payments can be taken much faster and easier via online payment.
- Targeted marketing: when purchasing online, a customer usually has to sign up and enter their details such as name and email address. You can then use these details for marketing purposes (as long as they have not opted out).
What are the disadvantages of online payments?
While online payment methods can work well for a range of businesses, some factors may make them unsuitable for some. Disadvantages include:
- Security: strict processes are in place to increase the security of online payments, however, as with any digital payment method, there is always a potential risk of being affected by cybercrime.
- Technical issues: anything online is vulnerable to unforeseen technical problems, such as a server going down. This could mean you are unable to take payments for a certain period, which may affect customer satisfaction. Online payments also rely on customers having internet access, so technical issues may affect their ability to pay.
- Processing fees: payment processing companies do charge a fee.
How secure is online payment?
As paying online becomes more prevalent, so does the need for robust security features. Common security processes include two-factor authentication, ID verification and 3D Secure. Provided you are using a legitimate and secure website (you can check this via sites like TrustPilot and Companies House), paying online is relatively low risk.
As a consumer, or business, ensure you thoroughly check any new website or app before entering any payment details and always use legitimate online payment methods as they offer more protection in the case of crimes such as fraud.
As a merchant, if you are taking online payments for your business you can decrease the likelihood of any breach and increase the safety of your customers by doing the following:
- Implement multi-factor authentication: this is when a user has to carry out multiple steps before a transaction goes through, such as receiving a text message, email or answering a security question.
- Ensure your website follows SSL (secure sockets layer) protocol: this encryption technology secures your customer’s data and can be obtained from a trusted hosting service.
- Choose a secure e-commerce platform and payment gateway: there are several e-commerce platforms on the market, so do your research to find the best and most secure one to fit your business needs.
- Avoid storing customer payment information: this means that if your customer’s payment details are not stored they cannot be accessed by a hacker if the worst was to happen.
- Ensure you are PCI DSS compliant: this is a requirement for all businesses in the UK that use, process, transmit or store payment card data.
