Getting paid is arguably crucial a part of operating a business. In any case, getting paid for the products you’re selling is how you possibly can pay for business expenses, grow revenue, and draw a profit.
Digital payments make growing your online business possible wherever you’re selling. As an alternative of forcing customers to go to an ATM to withdraw money to pay in-person, digital payments can help you accept money from anyone, anywhere. All customers must make a financial transaction is a smartphone, computer, or bank card.
While the technology behind them might sound complicated, modern digital payments providers allow almost any business owner to simply accept electronic payments without in-depth knowledge of payment processing. This guide breaks down how digital payments work, alongside the highest methods you need to consider if you must make commerce more accessible to your customers.
What are digital payments?
Digital payments are any sort of payment that happens electronically. As an alternative of taking physical money out of your customers, businesses can accept a digital payment when customers pay through a smartphone, computer, or their credit or debit cards.
Why use digital payments?
Studies estimate that folks will spend $16.62 trillion through digital payments by 2028. It is because digital payments offer the next benefits over money:
- More security. Digital payment methods have an additional layer of protection to maintain money protected. For instance, if someone desires to pay via their Apple Pay wallet, they should enter a security password or use biometric verification (resembling Face ID) to approve the payment. This protects business owners from fraud.
- Convenience. Digital payments take money out of 1 account and into one other. There’s no must physically go to the bank to withdraw or deposit money.
- Easier record-keeping. If you may have $50 money sitting in your checkout drawer, are you able to accurately say who it got here from? Digital payments are more traceable than money. It’s easier to trace income and spending, reconcile your accounts, and file tax returns should you pay digitally.
How digital payments work
1. Customer initiates a payment request
Step one in accepting a digital payment is to gather payment information out of your customer using a payment gateway.
When you’re accepting digital payments through your ecommerce website and brick-and-mortar store, for instance, you possibly can use Shopify Payments to securely collect the shopper’s payment details. This gateway tokenizes the information and transfers the data securely to the payment processor.
2. The digital payment is allowed
The payment processor contacts the shopper’s bank for authorization. The processor verifies that there are sufficient funds in the shopper’s account and that the digital payment transaction meets security requirements (resembling the payee’s identity matching the name of the checking account holder).
Sometimes, this requires extra authentication. The client might need to confirm their identity using biometric data, resembling fingerprint or facial recognition, or a one-time passcode.
3. Payment network transfers the funds
Payment networks are organizations that enable cashless transactions between businesses and individuals. They make up an ecosystem of entities like banks, bank card firms, and credit unions to maneuver money from one party to a different securely.
Once the payment is approved, the payment network acts as an intermediary between the shopper’s bank and your merchant account. This completes the digital payment: The client receives their goods, and also you receive their money.
Top digital payment methods
Credit and debit cards
Credit and debit cards have overtaken money when it comes to popularity. By 2027, it’s estimated that 28.44 billion people could have debit, credit, or prepaid cards that they use to purchase things, possibly since it allows them to make large purchases without withdrawing money.
Any money processed through a debit or bank card goes straight into your merchant account once the shopper enters their pin right into a card reader and the digital payment is approved.
The downside to this digital payment method is the payment processing fees that the majority gateways charge. You don’t get to maintain the entire money you’ve charged (like you’d with money). There’s also a delay within the time it takes for the funds to hit your online business’ checking account.
Contactless payments
A contactless payment works similarly to a credit or debit card payment. The predominant difference is that the shopper doesn’t must enter their card right into a card reader and enter their PIN. As an alternative, the cardboard uses near field communication (NFC) technology to encrypt payment details over a low-speed radio connection.
While contactless payment offers convenience for in-store shoppers, most banks have a maximum contactless payment limit of $100. And if someone picks up a contactless card that hasn’t yet been reported lost or stolen, anyone can use it to make fraudulent digital payment transactions.
Mobile wallets
A mobile wallet is a payment app that enables customers to buy goods from their mobile device, smartwatch, or tablet. Examples include Apple Pay, Google Pay, and Samsung Pay. They’re growing in popularity: digital wallets account for roughly half of all global ecommerce transactions.
What’s great about mobile wallets is you could process digital payments anywhere. When you’re selling online, use mobile apps like Shop Pay, which allows customers to securely save their payment information and checkout quickly. And also you’re taking digital payments in-person, customers don’t need their physical bank card to make a purchase order—just the smartphone that’s already of their pocket.
Cryptocurrency
Cryptocurrencies are a sort of digital currency that anyone can use to make a digital payment, provided the merchant accepts them. Examples include Bitcoin, Ethereum, and Litecoin. These payments work through the blockchain, a system that records financial transactions that are not government-controlled or operated by large financial institutions and central banks.
The most important downside to crypto is that it’s more complex than other digital payment methods because not everyone accepts it. Typically, you could buy the currency before you possibly can spend it. The retailer on the receiving end must also convert the crypto back into their very own currency in the event that they wish to spend it elsewhere.
Electronic bank transfer
If someone doesn’t have a physical technique of payment (resembling a bank card or smartphone with a mobile wallet) they’ll use electronic bank transfer to pay for goods and services digitally. They’re most frequently used for larger or one-off secure transactions.
When you were buying inventory from a wholesaler, for instance, you would possibly receive an invoice with the supplier’s payment details on the underside. To make the digital payment, you’d sign into your online banking app and transfer funds out of your checking account to the wholesaler’s using their account number and routing code.
Peer-to-peer payments
Peer-to-peer (P2P) payments occur when friends send money to one another over the web. The sort of digital payment service means that you can link your checking account or card with the payment app so you possibly can send easy payments with minimal fees. Examples include Venmo, PayPal, and Money App.
Tips on how to collect digital payments with Shopify
Shopify Payments supports local currencies so you possibly can receives a commission wherever you sell, each online and in-person, across the globe. You may accept your customer’s preferred payment method—physical bank cards, mobile payment apps, and contactless included. Customers may also use these electronic payment methods to pay in installments or opt into recurring payments.
The most effective part? Unlike other payment gateways, you won’t be charged third-party transaction fees for orders paid for through Shopify Payments or Shop Pay, so more profit stays in your pocket.
Digital payments FAQ
What’s an example of a digital payment?
Digital payments can occur each online and in-person. An example can be a customer using Apple Pay at a coffee shop to pay for a latte within the morning.
What’s the meaning of digital payments?
The phrase “digital payment” refers to any payment method that happens virtually. This includes contactless payments, cryptocurrency, electronic bank transfers, and mobile wallets.
How does digital payment processing work?
Digital payments are processed when a payment gateway securely collects a customer’s payment information and transfers it to a payment processor. Once the transaction is approved, the processor acts as an intermediary between the shopper’s checking account and your merchant account to transfer funds.
Are digital payments protected?
Digital payments are protected, so long as the digital payment provider encrypts and tokenizes the payment data you’re collecting. Digital payments are also safer for purchasers in comparison with money. Most digital payment methods require some type of authentication (resembling Face ID) before the payment gets approved.
