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Electronic Payment Systems: The Complete Guide

September 1, 2017

Electronic payments have emerged as one of the best ways to send money. Many businesses are choosing to use payment software because it is the easiest, cheapest, and most ideal payment method. In the old world of payments, your staff likely had to deal with paper checks that tend to be cumbersome, time-consuming, and expensive to process and manage.

Electronic payment systems on the other hand are much more efficient. Upgrading to epayments can save any business both time and money.

With this in mind, we’re taking a dive deep into electronic payments, exploring in detail how they work and how your business can join the digital payment trend.

Do you even remember the last time you wrote a paper check? Odds are you pay your rent or mortgage, utilities, and other bills using a card or online payment system. If you log in to a website to pay from your bank account, you are already using electronic payments.

Electronic payments, also known as e-payments, allow you to move cash directly from one bank account to another. There are a few systems behind electronic payments in the United States, most notably the Federal Reserve Bank’s Automated Clearing House, or ACH. For this reason, electronic payments in the United States are sometimes called an “ACH payment” or “EFT,” short for electronic funds transfers. While they go by different names, they are essentially the same thing: an electronic payment between bank accounts.

Compared to paper checks, electronic payments are superior for several important reasons: They are faster, offer better tracking, are more secure, and can ultimately lead to big savings compared to traditional offline payment methods. But surprisingly, many B2B payments are still made by dropping a check in the mail. You’ve upgraded from snail mail to email, isn’t it time for your payments to upgrade as well? In the next section, we will learn more about how to move to digital payments with electronic payment systems.

What Is An Electronic Payment System?

An e-payment system is a computer system used to manage electronic payments. In this case, a system is a computer application that can live on your company’s servers or an external server managed by your company, a third party vendor like AvidXchange, or a cloud-based system like Amazon Web Services (AWB) or Google Cloud Platform.

To deliver valuable benefits to your business and customers, electronic payment systems need the following features:

  • Ability for accounting or accounts receivable staff to track and review payments and update customer payment information
  • Ability for customers to log in to view, edit, and manage payments and customer details, including automatic payments, and preferred payment account
  • Automatic payments processed by the system after entry by customer or staff; no further exports, printouts, or manual processes should be required

Compare this to a manual system of invoicing and dealing with paper checks in the mail. Invoices must be manually created, printed, and mailed; then you wait for the customer to open the envelope, enter the invoice into his or her own system, process the invoice, print a check, and mail it to your company; then your staff has to open the envelope, deposit the check, and match the payment to the outstanding invoice. That’s a lot of steps.
Electronic payment systems come with two main payment features, cash equivalents and credit based payments:

  • Cash payment systems including electronic funds transfers (EFT) from one bank account to another. These can be performed as a direct debit, an e-check, an electronic bill, electronic cash or e-cash, or a stored value card like a gift card.
  • Credit payments include traditional credit cards, electronic wallet payments like Apple Pay or Android Pay, and smart cards such as the security chip credit and debit cards recently rolled out throughout the United States.

An all-in-one invoicing and electronic payment system takes out most of the hard work. With this type of system, you can enter an invoice, the customer gets an email and clicks approve, then the payment automatically moves from his or her bank account to yours. This saves time in payment processing, plus a lot of time for both companies’ staffs to handle payments. Not only do electronic payments help you get paid faster, they save you money.

Why Does Your Business Need Online Payments?

It’s 2017 and online commerce has proven that it is not going away. The rise of Amazon, eBay, Jet, and other online retailers are proof of the majority’s desire to do business online. It is easier, faster, and more secure for Internet users to pay online than pay with a manual payment method. Plus, it brings every product and service to a global audience rather than just a local one.
According to Statista, the United States had over $322 billion in e-commerce sales in 2016, of which Amazon alone accounted for $46.7 billion. The global e-commerce market is much bigger with an estimated $1.9 trillion for 2016.

It’s time for your business to get a slice of that online commerce pie.
Looking beyond the sheer size of the market, it is important to take into account how your target customers shop and spend today. As of 2014, many B2B buyers do online research when making purchasing decisions. And plenty of of shoppers conduct online research before making big purchases. If you are not making sales and taking payments online, you could be missing out on a huge market for both business and consumer purchases. And you should be mobile-ready, too, as Google reported in 2015 that 10 countries, including the United States and Japan, have more mobile searches than desktop.

Your prospective customers now expect the ability to purchase and pay online, and if you are not participating in the online market you are losing out. Even existing customers are at risk if you don’t use online payments, as they may prefer to move to a more convenient vendor for their needs rather than stick with a company that requires the use of paper checks or cash to pay.

At a high level, expect these benefits when you move to accepting online payments:

  • Increased sales thanks to reaching a global audience
  • More efficient transactions for customers and staff
  • More convenient payments for customers
  • Improved payment security
  • Lower transaction costs

Online payments are no longer as optional, they are more the norm. If you are not yet onboard, it’s probably time to get moving.

How Many Forms Of Electronic Payments Are There?

While many online payments ride on the ACH system, there are multiple kinds of digital payments to be aware of.

The previously mentioned ACH payment is one of the primary forms of electronic payment in the United States. These payments require the customer’s bank routing number and account number to securely move funds from the customer account to your account. Each bank has a unique routing number so the Federal Reserve knows where to send or draw the funds, then the bank uses the account number to ensure the right customer’s account is debited or credited. This is the same numbering system used for paper checks. You can find your routing number and account number in the encoded MICR data at the bottom of every check.

An EFT, or electronic funds transfer, is a term used to encompass ACH and other payment methods. The term can be used interchangeably with ACH in the United States, but EFTs can include other electronic payments as well. Other examples of an EFT include electronic point of sales (POS) transactions, e-checks, and online bill payments.

An e-check is a digital capture of a paper check. When you snap a photo of a check with your smartphone to deposit online, you are converting the paper check to an electronic check, which is processed using the ACH system. Check scanners at the grocery store or warehouse club offer the same functionality, as do some desktop check scanners businesses connect to a computer for digital imaging and deposit.

Online bill pay, or e-billing, also uses the ACH system, but the billing works differently so it can be considered its own payment category. With online bill pay, the vendor can electronically deliver a bill directly to a customer’s online banking account using bill pay standards. Electronic data interchange (EDI), a popular form of mass online payments for businesses, works similarly to online bill pay through its own standards.

Virtual credit card (VCC) payments are another form of electronic payment. Rather than using a traditional credit card number, expiration date, and security code, purchasers can log into their online banking to generate a one-time card number used for one transaction. This gives added security over regular card payments, as the card account number is never entered online. In some cases, the VCC remains active for long-term use on a specific website or with a specific vendor.

Digital wallet providers Apple Pay, Android Pay, and Samsung Pay expand on virtual credit card technology with a newer technology called tokenization. When you pay with a credit or debit card through a participating linked digital wallet provider, the digital wallet creates a one-time “token” representing your card account for the transaction. Like with a VCC, the actual account number is never transmitted online for added security.

While they have yet to rise to the forefront of payments, virtual currencies are an upcoming and noteworthy commerce option that may gain traction in the future. The most popular virtual currency—often called cryptocurrencies—is Bitcoin. Bitcoin can be bought and sold as an investment like a stock, or it can be used to make payments using a virtual currency wallet. These are not popular for business payments today, but it is worth being prepared for what the future may hold.

How To Make An Electronic Payment

Consumer and B2B electronic payments are fundamentally similar, but any business manager knows that they do not work exactly the same. While businesses can tap into many of the same tools consumers use, businesses have much more powerful options as well.

For consumers, electronic payments are typically outgoing to a business that provided a product or service. For businesses, payments go both in and out and at a much higher volume. Because of this, electronic payments have even bigger benefits in a B2B environment than the typical consumer usage.

The most basic option to send an ACH payment is through your existing bank’s online banking system. Business and consumer accounts typically both have access to a free online bill payment system, which may be sent as an electronic payment if the vendor is set up to accept them.

If you deal with a high volume of payments, you will want to upgrade to something better. B2B focused electronic payment systems tend to offer more robust features, options, and flexibility to handle payments efficiently.
As you likely work with a vendor that uses electronic payments, you can log into their system to test out paying online. Accepting payments digitally takes more work than sending them, which is why testing the waters by sending electronic payments to your existing vendors is a great way to get started.

If you work with any large companies or have any vendors that give an option to pay electronically rather than by check, walk through the steps to get everything set up and working. You will likely enjoy the experience and all of the time-savings compared to 1980’s style payments.

Major Differences Between Online and Offline Payments

Offline and online payments have many noteworthy differences. While the end result is the same, the method your business uses to get paid can have a dramatic impact on the bottom line. A change in invoicing and payment methods can lead to improved payment speeds, lower payment processing costs, and even an improvement in bad debt and unpaid invoices.

Not that long ago, it was common to see personal checks used for payment on most large transactions. Business checks are still used often. In the case of payment by check, there are a few small benefits, but many more downsides.

For example, when paying by check, many businesses and individuals would count on the “float” time it takes to send a check, deliver it to the bank, manually process the check, and finally transfer the funds.

Nowadays, even paper checks are digitally captured as e-checks and routed through the ACH system for next day processing. The days of “floating” checks to time your expenses are behind us. Even if you can buy a day or two of float time in the mail, there is no major benefit. With online payments, you can just wait and make your payment two days later with a more dependable timeline for the transaction to hit your bank account.
Because paper checks cost so much more to process, there is no surprise that checks have been on a downward trend in business. AvidXchange found that 81% of payments were made by check in 2004, 74% in 2007, 57% in 2010, and about 50% today.  Nineteen percent of organizations currently make a majority of their payments to major suppliers using something other than a check, an increase from 13% in 2010.

Paper checks are also much more difficult to track and understand than electronic payments. Due to the nature of the electronic payment world, every digital payment leaves some form of a digital paper trail. With digital payments, this digital trail can be plugged into business accounting and finance systems for fast, accurate reporting with very little manual effort. In the age of paper checks, this type of reporting was cumbersome, inaccurate, and inefficient. With digital payments and modern systems, reports can generate as fast as you can double click the mouse.

Digital payments are also much more secure than paper. If you send a paper check, there is a chance it can be lost in the mail. It could be destroyed in transit. Even worse, it could be stolen from a mailbox and used for fraudulent purposes. While many traditional business managers are concerned about of the security of digital payments, they are much more secure. No one can grab your payment from a mailbox and it will likely never be lost in the mail. When you use an electronic payment, you can track it from end to end without worry thanks to modern online security technologies.

Digital payments also align better with the overall workflow today. Both small and large offices have moved from paper mail to email. While you used to have to send invoices in the mail, you can now send them right from your integrated invoicing software with near instant delivery. Your customer can click a link in the email and submit their payment, which is directly deposited in your business bank account and added to your accounting system. This is a lot different than paper, and a major improvement.

Why Isn’t A Bank Bill Pay System Right For My Business?

For the smallest businesses with only a few invoices to pay each month, bank bill pay is likely sufficient. But for larger businesses, software packages are a much better fit.

Bank bill pay systems are typically outsourced or built by an internal development team. While functional, they are optimized for individual consumers, not business customers. This means that while you can send checks and digital payments through the bank bill pay system, it is not optimized for business needs.

AvidXchange offers a platform designed with businesses in mind. The entire process flow from the moment you open your dashboard until every payment is sent or received is optimized for efficiency and accuracy. Payments can be handled many times faster with this type of system. Imagine processing three or four payments in the time you used to spend processing one. That is one the biggest benefits of a dedicated payment processing application.

Payment processing software also integrates directly into accounting systems to remove hours of manual steps every month. Whether your business uses Quickbooks, Oracle JD Edwards, SAP, Oracle NetSuite, or one of dozens of other accounting and enterprise resource planning (ERP) packages, your payment application should directly integrate. This means every payment is automatically recorded on the general ledger. No manual imports, exports, or recording required.

Dedicated electronic payment suites also have more extensive integrations with other partners. For example, AvidXchange recently entered into a $300 million partnership with Mastercard to expand AP and payment automation options for small and mid-size businesses around the country.

What Are The Benefits Of Electronic Payment Systems?

If your business enjoys the status quo of how you handle invoices and payments today, you might be wary of moving to electronic payments. The cost and effort of upgrading is not insignificant, so upgrading to more automated payments has to offer a compelling business case to inspire the switch. Fortunately, the benefits of electronic payments are extensive.

An upgrade to electronic payments can affect both accounts receivable and accounts payable departments, as the system used to manage payments may be shared between the two functions.

These savings can add up fast. Imagine your company’s accounts payable and accounts receivable departments running with 80% fewer staff. That alone is a big savings, but it does not have to mean layoffs. Many companies find that as they ramp up their use of electronic payment systems, they can slowly reassign staff to more productive and useful tasks, like financial analysis, process improvement, and further cost-savings.

To summarize the major benefits of electronic payments, you can put everything in one of a few categories:

  • Cost-savings from more efficient operations
  • Faster and more accurate payment processing
  • Better data access and reporting
  • Improved company and customer financial security.

What Is The Difference Between an E Payment System and Online Bill Pay?

Online bill pay systems are bank-based systems that bank customers can use to receive bills and make payments online using the same account used for online banking. Electronic payments are a piece of that puzzle.
With online bill pay, users can enter a payment recipient anywhere in the United States. If the person or company being paid is not registered with the bill pay provider, a paper check is automatically mailed. If the payee is registered, the payment is automatically sent as an electronic payment.

Are Online Payments Safe?

Security and compliance issues are a part of doing business, and as a manager your role is to ensure risk is managed as well as possible. For large businesses, this includes a dedicated internal audit department looking for security holes, compliance issues, and a lack of audit trail. For small and mid-size businesses, this is generally taken care of in house or outsourced to a security and compliance expert.

While some payment industry veterans may argue otherwise, online payments are safe and in most cases safer than traditional paper payment methods. As previously mentioned, paper payments are subject to getting lost in the mail or stolen by a mail thief, which opens up both the payer and payee to fraud and losses. Digital payments are far more difficult to intercept.

There are several reasons digital payments are more secure than paper. Much of this comes down to how digital payments are encrypted and transmitted between banks, businesses, and consumers.

The security process for electronic payments begins with the Web browser you use to access the Internet. The most popular browser today is Chrome from Google, which offers frequent updates and powerful security features. Any other major, modern, and updated browser including Microsoft’s Edge, Apple’s Safari, and Mozilla’s Firefox should all offer similar benefits.

However, using older browsers like Internet Explorer versions prior to version 10 may not be not safe. Just clicking the “update” pop-up on your PC every time it appears ensures the majority of risks are blocked.

The next step in the encryption and security process comes from the website you are visiting. Look for the letters “https” at the start of an address rather than simply http. The letters https indicate that your browser is connected to the website using secure sockets layer (SSL), an industry standard encryption tool that scrambles data as it crosses the Web, so even if it gets into the wrong hands, the data received will be useless.

The next layer of security happens inside the business computer systems. This can be in-house, hosted by a third party vendor, or a cloud-based system. In either case, all data is encrypted using complex keys to ensure only those intended to have access can view customer and company data.
Businesses use more tools, such as corporate firewalls, router-based firewalls, online security filters, and digital tools that look like something from a movie about the NSA. But this is not a movie, this is real life. In 2017 and beyond, electronic payments tend to be the most secure payments. As long as everyone involved uses strong passwords and the application is kept up to date, there is little to worry about in terms of security.

Are E-Payments Right For Your Business?

Even if your business only deals with one payment per month, electronic payments are likely the best option. Bigger companies get bigger savings and process improvements than smaller ones from switching to digital payments, but all businesses can benefit from electronic payments regardless of size.

Because electronic payments are faster, more secure, and less costly, there are few downsides of upgrading to a digital payments platform. Businesses that receive just a few payments per month can turn on electronic payments by filling out a form in a participating accounting application.

Larger businesses require more work to integrate electronic payments, but the long-term payoff is almost always worth the effort.

If you run a business that gets paid for providing a good or service, your business can almost certainly profit from electronic payments.

Tips For Choosing The Right Electronic Payment System

Just as there are many banks and vendors to choose from for different aspects of managing your business, there are many options for electronic payment application. If you are ready to upgrade to electronic payments for your business, it is important to choose the best fit for your needs.
Review the criteria your business requires from all sides before you make a decision. Implementing an electronic payment application can be both expensive and time consuming, so it is important to ensure you don’t have to go through the process twice.

  • Cost savings – The first criteria to look at is potential cost-savings from upgrading to a new payment program. While it is almost certain you will save money by upgrading to electronic payments, you don’t know exactly what you may save until you do the math.
  • Integration – If your company uses an accounting system or ERP, it is important that your new payment application integrates with your existing accounting software. This can be a deal breaker, so check out integrations before moving forward with any vendor.
  • Ease of use – Once installed and integrated, your team has to use the application often to process payments. A functional, productive, efficient, easy-to-use interface is vital for success.

While there is no black and white answer when it comes to electronic payments, there are likely some systems that would work efficiently and many others that would not meet your needs. If you take the time to understand your unique requirements, it is much easier to pick the right solution. Once you implement your technology of choice, you are on track for big process improvements and even bigger savings.

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