What Are Electronic Payments Systems (2024)

Small BusinessPaymentsPayment Processing

PayPal Editorial Staff

PayPal Editorial Staff

May 8, 2024

May 8, 2024

Gone are the days when shoppers had to count out bills at a cash register. Today, electronic payment systems, also known as digital payments, have reshaped the financial transaction landscape, ushering in an era of convenience, speed, and security.

While adopting these modern payment solutions can seem like a no-brainer, taking the time to understand the different types and features can help you maximize potential advantages. Read on as we dive into some essential considerations when exploring electronic payments.

What is an electronic payment system?

Electronic payment systems allow your customers to pay for goods and services electronically without the physical use of checks or cash. Safe, secure, and convenient, electronic payments may be carried out using a credit or debit card or via a digital payment wallet.

Types of electronic payment methods

Today’s economic climate may be one of uncertainty, but if your business accepts electronic payments, you could increase your reach at the same time you keep loyal customers coming back for more.

Here are some of the most popular types of electronic payments today.

Card payments

Credit cards and debit cards are estimated to comprise 34% and 23% of all in-store payment methods respectively in the U.S. in 2027.1 That said, they serve unique roles within the financial ecosystem.

Credit, debit and store cards remain three of the most popular types of e-payments globally. However, their popularity is diminishing among younger consumers – only 39% of Gen Z say they use their credit cards frequently, compared with 51% of older generations.2

Debit card payments, on the other hand, have solidified their status as a staple in everyday transactions. By directly deducting funds from the user's checking account, they offer a real-time payment solution without the potential for accruing debt.

Contactless payments

Contactless payments, also known as tap-to-pay, involve contactless cards that can be tapped or waved over a payment gateway, using near-field communication (NFC) to transfer the data wirelessly.

Thanks to their security and efficiency, their use has surged in recent years – analysts predict that the value of digital wallet tap-to-pay transactions will increase by 150% by 2028.3

Digital wallet payments

Financial apps that store the customer’s account information electronically are called digital wallets. Digital wallets like PayPal, Apple Pay, Google Pay, and Samsung Pay allow customers to pay for goods and track their payment history using their phones and tablets.

Internet banking payments

An Internet bank transfer or banking payment enables funds to be moved electronically from one account to another via any computer or device with Internet access.

QR code payments

A QR code is a type of barcode that stores information as a series of pixels. When scanned via the camera on the customer’s smartphone, the code directs the user to access the relevant payment page to make a hassle-free payment via their chosen method.

Fast, frictionless, and relatively low-cost to implement, retailers continue to pivot to QR codes as a contactless payment method. QR code payments let consumers pay with ease, no matter the point of sale or country they’re in.

Learn more about how QR codes work as a payment method.

ACH payments

ACH payments facilitate the electronic transfer of funds between bank accounts. Differentiated from traditional bank transfers by potentially lower transaction fees, ACH transfers operate through a national network. This system supports various transaction types, including direct deposits, bill payments, and business-to-business transactions, making it a versatile tool.

How electronic payment systems work

To illustrate how electronic payment systems work, let’s take the example of a contactless transaction. Your customer pays for something by tapping or waving their contactless credit card, debit card, or smartphone over a reader, which then wirelessly transmits the payment information using near-field communication technology, similar to radio frequencies. This data is encrypted and sent on to a customer’s bank which processes the payment using a payment gateway.

A payment gateway is a software application that encrypts financial data and authorizes transactions, communicating with electronic payment processing systems to enable the transfer of funds from buyer to seller.

Benefits of electronic payment systems

What are the benefits of electronic payment systems, and how might they apply to your own organization?

Electronic payment systems can save you time

Checks take days to clear, while cash involves frequent visits to the bank. But today’s electronic payment solutions can also automate many of your most repetitive manual accounting processes, so you and your team can get on with the work that really matters to your business. Of course, electronic check cashing is possible these days, and it also falls under electronic payments.

Electronic payment systems can help save you money

Historically, cash and check fraud have been notoriously difficult to trace; luckily, protecting you against fraud is another major financial advantage of electronic payment systems. Best-in-class electronic payment solutions are highly secure and often backed by machine learning, while digitized systems provide business owners with real-time metrics for accurate audit trails.

Electronic payment systems can help you find new customers and retain the ones you have

New customer acquisition and existing customer retention are critical to the success of your business. Yet, 59% of businesses say their customers have abandoned a shopping cart when their preferred payment was unavailable.4

Friction-free electronic payment solutions that offer multiple payment options and minimize card declines play a critical role in creating an engaging customer experience, ultimately reducing cart abandonment.

Drawbacks of electronic payment systems

Despite these advantages, it’s also important to keep in mind the potential drawbacks of electronic payment systems.

Technical issues

Electronic payments rely on technology, which can be prone to downtime, glitches and server outages. They also require unlimited, reliable access to the Internet. If there is a problem with the payment system, transactions can be delayed or fail.

Security risks

While payment gateway providers invest heavily in security systems, there is always the risk of fraud and theft. Cybercriminals can use a variety of methods to steal payment information, including phishing scams and malware. That’s why it’s important to invest in reliable risk management systems.

Payment transaction fees

Some electronic payment methods charge fees for transactions or chargebacks, which vary depending on the payment method and the payment amount.

Upfront costs

Implementing electronic payment systems usually entails a hefty initial investment in technology and resources. For businesses transitioning to or integrating these systems, upfront costs can include the purchase of specialized hardware, such as payment terminals, secure servers, and software capable of processing digital transactions.

Tips to help enhance security while accepting online payments

With fraudsters employing increasingly sophisticated tactics, fortifying the security of your online transactions is key. Use these tips to securely store payments and safeguard your business:

  • Prioritize PCI DSS compliance.Ensure adherence to the Payment Card Industry Data Security Standard (PCI DSS) to protect customer card information and mitigate the risks of fines and potential reputational damage from data breaches.
  • Implement strong authentication.Basic passwords are no longer enough to ward off threats. Strengthen login procedures by encouraging two-factor authentication (2FA) and integrating 3D Secure for extra verification during transactions.
  • Encrypt sensitive data.Protect financial databy encrypting it both at rest and in transit, making it unreadable to potential interceptors.
  • Update software regularly.Keep your operating systems, payment processing applications, and security software up-to-date to close off vulnerabilities that could be exploited by attackers.
  • Utilize a secure payment processor.Choose a reputable payment processor with a robust security infrastructure and a track record of fraud detection and prevention.

Optimizing security: The future of electronic payments

As electronic payments rapidly become the favored method for transactions among consumers, businesses must adapt to stay competitive.

That said, the future of electronic payments hinges on the balance between convenience and security. Given the prevalence of digital threats, businesses need to enhance their cybersecurity measures and protect customers’ sensitive financial data.

While the decision to accept payments electronically will depend on the needs of your business, PayPal'enhanced fraud features and low transaction costs let you enjoy the benefits of electronic payments while minimizing the potential downsides. Learn more today.

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