Automating Accounts Payable

Electronic Payment Systems: Everything You Need to Know

You’ve probably heard of electronic payment systems and actually used them. But you may not have explored what these systems mean, which types are most relevant to you, how they work and ways they can help your business grow.

You’ll find answers to all these questions here:

What does electronic payment mean?

An electronic payment simply means you’re paying for products or services via the Internet, which most people do daily. Purchased an item on Amazon lately? Paid a bill online? Then, you’ve used an electronic payment.

How does it work? Electronic payments are routed through an electronic “superhighway” system that ultimately delivers the payment into the bank account of the person or business being paid. Not only is it more convenient than cash or paper checks, it’s also less expensive and more secure.

“When it comes to payment options, nothing is more convenient than electronic payment,” notes an article in How Stuff Works. “You don’t have to write a check or handle any paper money. All you have to do is enter some information into your Web browser and click your mouse. It’s no wonder that more and more people are turning to electronic payment – or e-payment – as an alternative to sending checks through the mail.”

What are the types of electronic payment systems?

The types of electronic payment systems include one-time payments from customer to vendor, recurring payments from customer to vendor and automatic payments from bank to vendor. Let’s take a look at each:

A one-time payment from the customer to the vendor

A one-time payment is a single, non-recurring payment. You can use it to purchase a consumer item or pay a bill.

For instance, you’re looking online for a book covering the latest AP insights to learn the latest trends, tips and tricks. You click, add it to your cart, type in your credit card information and check out. Then, the vendor processes your payment and sends a confirmation email.  

The bookseller then verifies whether it can authorize your payment through your credit card bank account. If approved, the bank then executes an electronic payment funds transfer.

You’ve now made a one-time payment from the customer (you) to the vendor.

A recurring payment from the customer to the vendor

A recurring payment works the same way as a one-time payment, expect it happens on a consistent, regular basis — like monthly. For example, you can schedule a recurring payment to pay your mortgage loan.

What’s behind the process?

You provide the vendor, like the mortgage lender, your checking account number. The vendor then accesses your bank account once a month and automatically withdraws your mortgage payment.

An automatic payment from the bank to the vendor

An automatic payment from a bank to a vendor is when a bank sets up a recurring, scheduled payment. It works the same as a recurring payment from vendor to customer, except that money is coming straight from the bank.

Other popular types of electronic payment transactions include:

  • Automated Clearing House
  • Virtual credit cards

Here’s more on each of these:

Automated Clearing House (ACH)

ACH payments transfer money electronically between bank accounts. For example, if you want your company’s bank to send your payment for $20 for the book you ordered directly to the vendor’s business bank account, that could be an ACH transaction.

Virtual credit card

Unlike conventional credit cards that contain a security code and expiration date, virtual credit cards enable you, as the vendor, to log in to your online banking portal and create a one-time use card. This method gives an extra layer of security over standard credit cards because the card number never gets typed in online.

How do electronic payment systems work?

Electronic payment systems work when people and electronic technologies work together to move the payment information instantly through a logical progression of steps – usually in just a few seconds.

Let’s walk through these steps using the book buying example. When you use your credit card to order the book on the vendor’s web site, you’ll be asked to enter your credit card information, including the expiration date, three-digital card verification value code and address.

Once you hit the submit button, a payment gateway comes into play. Its main job is to approve or deny payment requests.

The gateway transfers information between a website or smartphone and your credit card bank account.

It validates the accuracy of the payment information and uses security protocols and encryptions to make sure the transactions remain safe.

The payment gateway forwards your purchase request to your company’s credit card company. This company, in turn, verifies whether there’s enough money in your credit card account to pay for the book.

If so, the gateway sends the payment to the vendor.

What are the features of an electronic payment system?

The features of an electronic payment system include credit paying systems and cash payment systems. Credit paying systems use credit cards and e-wallets. Here’s more detail on each of these:

Credit cards

Financial institutions such as banks give credit cards to people for use in business and personal financial transactions.

Your transaction goes through the e-payment system that verifies your identity and that you have the money in your credit card account to pay. If so, the system approves your purchase.

E-wallets

E-wallets store your financial data such as credit card information. In this application, you could use your smartphone to buy groceries. The system recognizes who you are and that you have the money in your credit card account to pay.

Cash payment systems

There are three features of cash payment systems: direct debit, e-check and e-cash. Here are descriptions of each:

A direct debit is when a person or company directly withdraws funds form a bank account. Most of us have and use debit cards.

An e-check is simply a paper check that is in an electronic format. Just like a paper check, payments are made by accessing checking account and routing numbers from your bank. The benefits? They cost less, are more efficient and more secure than a paper check.

E-cash is a digital currency that can be leveraged through online platforms like Apple Pay and Venmo. E-cash essentially lives in a digital wallet and can be transferred from account to account electronically.

What are the advantages of electronic payment systems?

The advantages of electronic payment systems include faster and more accurate payments, reduced processing costs and increased security, to name a few. Here’s a closer look.

Faster and more accurate payments

You can start and execute a complete electronic payment transaction in seconds (or less). In contrast, it takes several days to send a paper check through the mail and complete a transaction.  

Reduced costs

Electronic payment systems reduce processing costs. They save money by eliminating the costs of paper checks, stamps and postage.

Read More: 7 Misconceptions About Switching to Paperless AP Processes

Safer and more convenient

During the pandemic last year, we learned about the importance of corporations having the flexibility to make electronic payments because so many of their workers started working remotely.

Paying electronically means workers don’t have to take on unnecessary health risks by going to corporate offices to touch and process checks. 

Better data access and reporting

When businesses use paper to make payments, they often spend a lot of time (and therefore money) searching for invoices and purchase orders. With documents scattered in different places, it takes hours or even days to find and organize the documents and locate the pertinent data to make the payments.

Electronic payment systems avoid these problems. Digitally stored in the cloud, financial pros can easily and quickly find the payment data and reports they need. It’s also faster, accelerating both approvals and payments.

Read More: Data and Machine Learning – Goldmine of Growth Opportunities in AP Automation

Reach new audiences/increase sales

When your company sets up a website where customers can go buy your products or services electronically, you’ve opened a new population of potential customers and revenue-generating opportunities.

Even while you’re not working, customers in other countries can log on to your website and make electronic payments for your products or services.

“When it comes to payment options, nothing is more convenient than electronic payment,” notes an article titled How Electronic Payments Work published in How Stuff Works. “You don’t have to write a check, swipe a credit card or handle any paper; all you have to do is enter some information into your Web browser and click your mouse. It’s no wonder that more and more people are turning to electronic payment – or e-payment – as an alternative to sending checks through the mail.”

What are the main drivers of electronic payment growth?

The main drivers of electronic payment growth include the spread of e-commerce, movement away from cash and rising use of mobile phones.

The spread of e-commerce

The market for buying and selling of products and services online, often called e-commerce, has been steadily growing for at least 20 years.

E-commerce fuels the electronic payments market because consumers buy more products and services using the Internet. Why? Because it’s more convenient, faster, less expensive and more secure than paper payments.

Movement away from cash

For many consecutive years people have been using credit cards and online payment systems instead of cash. “The global shift away from using cash is a rising tide that is lifting all boats within the payments industry,” a Seeking Alpha article notes.

The report, citing sources such as The World Economic Outlook, Nilson and corporate reports, also points out that over a five-year span from 2012 to 2017 use of credit or debit cards to make global payments rose by 6 percent while the percentage of transactions using cards jumped from 34 percent to 42 percent.

Rising use of mobile phones

As smartphone usage continues to rise, so do electronic payments using these mobile devices. The younger, more tech-savvy generation has spearheaded this trend extensively using online payment systems to buy online games, make person-to-person payment systems such as Venmo and order ridesharing services such as Uber.

“Digital payment is one of the primary growth imperatives for a country’s economy,” notes a Markets and Markets report. “It can help boost productivity and economic growth, improve transparency, increase tax revenue, expand financial inclusion, and open new economic opportunities for end users.”

The global digital payment market projects to grow from $79.3 billion in 2020 to $154 billion by 2025 – a growth rate of 14.2 percent, the report indicates.

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