Which payment methods you accept are an essential business decision that trickles down to all aspects of your tech-enabled company – especially how much you sell.
The world of payment processing evolves each day and has a tremendous impact on how you do business. As more and more payment methods come to prominence, integrating them with your business systems can be complex if you’re working with incorrect or outdated information.
Let’s dig into the importance of payment methods, the payment method types available, and what this all means if you’re evaluating a new payment processing solution or considering adding functionality to your existing one.
Every buyer has an impulse window, and it’s the most powerful moment in the buyer journey. Sometimes it’s emotional, other times it’s carefully researched. Whether it’s five minutes or five months evaluating your product, this is when your customer decides if your product is worth the price.
If you don’t accept your customers preferred payment method, you risk shattering their impulse window and losing the sale at the last second. Accepting only a limited amount of payment methods causes friction as your customers move along the “buyer’s journey” (sometimes called the purchase journey).
By increasing the number of payment methods you accept, you can help your customers to complete their purchases and decrease cart abandonment rates. However, integrating new payment methods into your payment processing solution can be a complex task. It’s a business decision that comes with a cost and downstream implications that require careful attention.
As we discussed in our Payments 101 overview article, you can find plenty of standard payment processing platforms out there with varying merit to help your business accept more payment methods. If you’re lucky, you might find one that has everything you need. But many lack the flexibility to accept the payment methods you want or the ability to effectively integrate with your other existing systems.
Either way, it’s worth exploring what methods are available and which ones fit the needs of your target customer and your business before you determine if you need help with custom payment systems development.
Credit cards are the most common payment method for electronic/online payments. When you buy that new couch with a credit card, you are simply borrowing money from the credit card company with the expectation that you’ll pay this money back (plus interest).
For payment systems and payment system developers, credit card data contains many parts – some is sensitive and protected by PCI DSS (Payment Card Industry Data Security Standard), and some is not as sensitive. Typically, when anyone talks about “cardholder data,” they’re talking about the sensitive data, such as the card number, CVV (card verification number), and cardholder PII (personally identifiable information) often used to validate the person making the purchase is who they say they are.
To a developer, these data fields, or identifiers, might look like card_number, cardholder_name, expiration_date, billing_address, and billing_zip, among others.
Debit cards are very similar to credit cards in terms of how a customer uses it to make a purchase. However, most debit cards are directly pulling funds from your customer’s existing checking or savings account. It’s liquid money they have on hand instead of money borrowed on “credit” from a card network such as, American Express®.
On the backend the data fields for debit cards and credit cards are very similar.
A card-not-present (CNP) transaction is when the cardholder and credit card are not physically present when they make a purchase. For example, most online shopping involves CNP transactions and many of us do it every day.
Other instances include making purchases over the phone, through the mail, or via fax. These transaction types are referred to as MOTO (Mail Order Telephone Order), and while they’re becoming less prominent due to online shopping, it’s worth nothing that some payment gateways will still reference MOTO.
Card-present (CP) transactions occur when your customer’s card is on hand and used in person. This is the traditional, brick-and-mortar shopping we’re all familiar with, where we swipe, insert, or tap our credit or debit card to make a purchase.
CP transaction processing costs and fees are much lower than CNP transactions because they require a higher level of security. For instance, when buying something in person, you may need to enter your zip code or PIN to complete your transaction. Most payment processors require these additional steps because they decrease their exposure to fraud risks and chargebacks.
But, business owners need specific card-processing equipment to accept CP transactions. This equiptment may include include card, contactless, and EMV (Eurocard®, MasterCard®, and Visa®) readers that require maintenance and software updates as payment technology changes.
Types of CP Transactions
ACH (Automated Clearing House) is a U.S. financial network used for electronic payments and money transfers. Also known as “direct payments,” ACH payments, made with services like Zelle®, transfer money from one bank account to another without using paper checks, credit card networks, wire transfers, or cash.
ACH is a very common payment method online, but tends to be most commonly associated with recurring payments. Payment processors and gateways impose lower transaction fees/rates on ACH, but it comes with more potential “points of failure” than traditional credit card processing.
ACH has two key data elements:
ACH transactions are quite limited in how they can validate a bank account. You can verify if a routing_number matches but have few other options to know up-front if the bank account is valid, in good standing, and has sufficient funds to cover the purchase. And while some payment gateways and processors can check accounts against a watchlist of fraudulent ones, there’s no guaranteed way to validate ACH up front.
It also takes longer to settle ACH payments than other payment methods – typically up to three business days which can disrupt payments due to issues such ass:
When these issues arise, the processor will usually record a returned check. This is very similar to what happens if you write a bad check: your bank rejects and returns it with a fee. Most processors provide a way for merchants to pull in any returned checks received after a purchase to know the status of the ACH transaction.
PayPal® is the first major player in buyer- and internet-centric consumer payment technology. It enables CNP transactions through an online payment portal customers can use to send money, make purchases and receive money from others in a seamless, digital process. They do this by managing credit card and/or ACH payments behind the scenes, allowing consumers to connect their preferred payment method, including credit cards, debit cards, bank accounts, or rewards balances.
For many merchants, PayPal is a popular payment method to accept within their payment process. It provides an embedded browser experience where your customers make their selection and click the “PayPal Button.” This eliminates any need for your customer to search for their credit or debit card and type in their information.
Apple Pay is a contactless payment technology for Apple iOS devices that enables card reader CP and CNP transactions through a digital wallet – even when the card is not physically present. Apple designed this technology to move consumers away from physical wallets into a world where your debit and credit cards are on your iPhone or Apple Watch, allowing you to pay using your mobile device instead of a card.
Google Pay is another form of CP and CNP transaction technology enabling payments through digital wallets represented on mobile devices. A competitor to Apple Pay, Google Pay enables users to make in-app, in-store, and online purchases, as well as send and receive payments on their mobile device from other Google Pay users..
Both Apple Pay and Google Pay are incredibly consumer-driven in terms of convenience, but they also deliver more security than your typical CNP transaction. While consumers don’t need to key in their credit or debit card number, payment gateways and processors still run it as credit and can have the opportunity to refund or void payments.
Venmo is a mobile wallet app for peer-to-peer (P2P) money transfers and payments among friends and family. Similar to PayPal, Venmo connects to users’ credit/debit cards and/or bank accounts, enabling P2P money transfers from a digital wallet stored in an application on their mobile device.
Since 2017, Venmo also functions as an online payment method accepted nearly everywhere PayPal is accepted – making it another CNP transaction type available when shopping online.
The list of ways people pay online is rapidly growing, and so is the back-end complexity when integrating these methods into your processes. Generally speaking, the more payment options you have available means the least possible friction between your customers and your product. Bear in mind that choosing to support additional payment methods is an important business decision that weighs the cost of implementation against the potential for more sales.
On the other hand, relying exclusively on legacy payment methods has its downfalls as well:
Whether you’re just getting your company off the ground or a seasoned business looking to improve your sales, Clear Function is always available to help you make the best foundational business decisions around payment platforms to set you up for success 10 years from now.
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