What are Payment Methods Explained: Types and Functions for businesses

Learn about all the different payment methods and how to choose the best ones for your business.

Understanding payment methods may seem simple enough on the surface. After all, payment options are just different ways your customers can pay (online) for your products or services. However, with the number of payment methods exploding every year, keeping up with all the different types isn't as simple as it looks anymore. In this post, you'll learn about the various payment methods currently available and understand how to choose the best ones to suit your business needs.

What is a payment method?

A payment method is how customers are making a purchase of a product or a service. Standard payment methods include cash, credit and debit cards, or mobile payments in a physical brick-and-mortar retail store. However, things are a little different in the online world. Of course, many consumers still use credit or debit cards. Still, there are also many other options, including digital wallets, direct bank transfers, and much more. 

There are also a vast number of choices in each of these categories. For example, take credit cards. There is Visa, Mastercard, Discover, and American Express. There are also hundreds of mobile wallets available to use depending on the country, like Alipay, PayPal, Google Pay, and Apple Pay.

Learn more about Pay.com accepted payment methods.

What are the 3 main types of payment methods?

There are three methods of payment amongst all multiple payment methods that you need to know about as a merchant. These include online, physical, and contactless payments (POS).

Online payments

Online payments and all online payment options are methods of buying goods and services over the internet, where the customer is not present and is done most commonly with a credit or debit card. Online payments are used to purchase everything from everyday items to luxury goods, sports tickets, and airline tickets.

Physical payments

Physical payments refer to in-person payments using a physical object such as a cash, debit, credit card, or mobile phone. Physical payments occur in places like brick-and-mortar retail stores and restaurants.

Contactless payments (POS)

Contactless payments are payments made using a contactless-enabled device such as a debit, credit card, mobile devices as phones, or a smartwatch that hosts mobile wallets. These payments require the person to be present but doesn't require any physical contact between the buyer's smartphone or credit card and the POS

They rely on RFID technology and near-field communication, enabling a consumer to tap or swipe the payment card or device near a point-of-sale (POS) terminal. Today, contactless payments are necessary for brick-and-mortar merchants and merchant services, because they offer a fast, convenient, and easy way to pay and have become more prevalent in recent years due to the COVID-19 pandemic.

Preferred payment methods [full lists]

Accepting payments is one of the most crucial aspects of any online business. As a merchant, it's essential to know about all the available and multiple payment options and figure out what will work best for you and your customers. Here is an extensive list:

Cash

Cash includes notes, coins, and amounts on deposit in bank checking or savings accounts. Currency (cash) has been traced back to the ancient Sumerians in the 3rd millennium BC. Still, it was not until the Tang Dynasty of the 7th century AD that paper money was invented in China. The Song Dynasty printed the first paper money in the 11th century. Today, every country has its own currency used to pay for goods and services and make payments to the government.

Cards

There are two primary types of payment cards that you'll likely come across as an e-commerce merchant. These include:

Debit Cards

A debit card is similar to a credit card. It is a small plastic card with a magnetic strip that can be used to pay for goods or services online or by swiping, tapping, or inserting it into a card reader. The significant difference is that money is transferred in almost real-time to another bank account when using a debit card instead of getting charged to a line of credit, which can be paid later.

Credit Cards

A credit card is a small plastic card with a magnetic strip that can be used to pay for goods or services online or by swiping, tapping, or inserting it into a card reader. When using a credit card, charges are made against a line of credit with a set limit instead of actual current cash deposits. 

The first credit cards were created in 1950 by Diners Club and American Express — both started out as travel card companies. They gave the cardholder the ability to use the card for purchases like a traveler’s cheques. However, unlike travelers’ cheques which could be exchanged for cash, credit cards had to be paid off by the due date.

Bank transfers

A bank transfer is a process that allows a person or business to transfer funds from their bank account to another account anywhere in the world. It’s commonly used for payments between companies or for people to send money to family members or friends. A bank transfer must be initiated and authorized by the account holder and is completed through an online or mobile banking platform or via a bank teller.

Direct debits

Direct debit is a transaction where one person or business withdraws money from another person or entity’s bank account. Direct debit is a convenient payment option for businesses to regularly and automatically take payments from customers. It’s a popular payment method for subscription-based companies, utility companies, insurance firms, telecommunications providers, and any other business requiring customer payments at regular intervals. 

ACH and E-Checks

Automated Clearing House or ACH payments are a particular electronic bank-to-bank payment available in the US. ACH Payments are sent through the ACH network and enable people or businesses to directly transfer funds between two accounts. Because ACH payments do not use the card networks like Visa and Mastercard, ACH transfers have lower costs. 

An eCheck or electronic check is an electronic funds transfer (EFT) that utilizes the ACH network to process payments. EChecks are just a digital version of a paper check. However, instead of someone having to manually fill out and send a paper check, funds are electronically withdrawn from a payer’s checking account and deposited into a payee’s checking account.

Mobile payments

E-Wallets: Financial transactions are much easier today, thanks to technology. An e-wallet, also known as a digital wallet or mobile wallet, is an online software service that enables a person to make electronic transactions in-store or online. An e-wallet basically performs the same function as a traditional wallet. It stores forms of payments that can be used to purchase goods and services.

Payment links: A payment link is a URL or QR code that merchants can share with their customers to enable them to pay for products and services. Payment links can be shared as many times as required and can be made unique for each product or service. When a payment link is clicked on, a person is directed to an online checkout page where they can complete the payment.

QR code payments: QR codes are barcodes that can be scanned by smartphones, and they’re becoming increasingly popular. They are usually square black-and-white graphics that can contain links to websites, email addresses, or other information. When scanned, they can also be used to make quick and easy contactless payments.

Crypto

Cryptocurrency, often referred to as crypto or virtual currency, is a medium of exchange that uses cryptography to secure its transactions, control the creation of additional units, and verify transfers. When a customer pays using crypto, the payment transfers the set amount of cryptocurrency from one wallet to another. The merchant gets the funds in crypto to their designated wallet, which can be converted to USD or any other fiat currency later. Today, cryptocurrencies like Bitcoin and Ethereum have become a global phenomenon, with an increasing number of businesses starting to accept this form of payment. 

Payment Methods Category Table

Payment Method Description Online In-person Contactless
Cash (USD, EURO, etc.) Physical currency such as bank notes and coins.
Credit/debit cards (Visa, MasterCard, American Express, Discover) Small plastic card with a magnetic strip that can be used to pay for goods or services
ACH Processing e-checks(Electronic) Form of electronic funds transfer. Also called Direct debit.
Mobile/digital wallets (Google Pay, Apple Pay, Klarna, PaySafe, Skrill, Paypal, etc.) Online software service enabling electronic transactions
in-store or online.
Bank transfer Form of electronic funds transfer that transfers funds between bank accounts.
Direct Debit (known as ACH payments) Automatic transaction that transfers funds between bank accounts.
Cryptocurrency(Bitcoin, Ethereum, etc.) A digital or virtual currency that uses cryptography.

What are the main online payment methods used in online business?

The e-commerce market is developing quickly, with millions of businesses now accepting payments online. But what are the primary online payment methods for merchants?

Direct debit payments online

Direct debit is a transaction where one person or business withdraws money from another person or entity’s bank account. Direct debit is a convenient payment option for businesses to regularly and automatically take payments from customers. It’sIt’s a popular payment method for subscription-based companies, utility companies, insurance firms, and telecommunications providers, requiring regular customer payments. Merchants can use direct debit to accept online transactions. They are usually a less expensive way to accept payments and can help reduce the number of late payments from your customers. 

Credit or debit card

To accept debit and credit cards, you’ll need to set up your own merchant account and payment gateway or sign up with a full-service Payment Service Provider (PSP) that will do these things for you. 

A merchant account is a business bank account that allows merchants to accept customers’ debit and credit card payments. In the past, opening a merchant account was required to accept online payments. Today, it’s possible to accept credit and debit card payments without applying for a merchant account using a third-party provider known as a payment aggregator. A payment gateway is a software application linked to a merchant’s website that enables the processing of online debit and credit card payments. Payment gateways capture and send credit card data to a payment processor and communicate approvals or rejections to you and your customers.

If you require more assistance setting up your payments, you can always use a payment service provider. A payment processor (PSP) is a company that helps merchants accept and process online payments. They work to securely execute transactions behind the scenes by transmitting the card data received from a gateway between the merchant, issuing bank, and the acquiring bank. They also often offer other services besides payment processing, such as fraud protection and compliance. 

What payment method is the best to use?

There is no one best payment method. It really depends on the needs of your business. Start by reviewing the different payment methods available and understand how they work. Then, think about your customers. What is their preferred payment method? Not all payment methods can suit your business’ needs. The most common payment method is credit and debit cards in most countries, but this is not always the case, so you shouldn’t assume anything!

You should also consider issues of reliability. Depending on where your business is located, reliance on electricity and internet connection can be a critical consideration. For example, using a POS requires electricity and an internet connection or a mobile network. This payment method will not work if these systems are unavailable.

Lastly, it’s essential to understand the costs involved with each payment method and assess if it’s worth using. For example, credit card providers often charge high service fees, and banks might charge you transaction costs for each payment. Can you still afford to offer this payment method when considering these added costs? Maybe you need to increase the prices of your goods or services?

Pros and cons of the payment methods & their types

Payment Method Pros Cons
Cash (USD, EURO, etc.) + Widely used
+ Privacy
+ No transaction fees
+ Instant access to funds
- Low security
- Hard to track
- Easy to lose
Credit/debit cards (Visa, MasterCard, American Express, Discover) + Convenient
+ Widely used
+ High security
- Fees
- High initial setup costs (card terminal hardware)
Debit cards (Visa, MasterCard, American Express, Discover) + Easy to use
+ Widely used
+ High security
- Limited fraud protection
Electronic transfers: ACH Processing (direct debits), e-checks + Low fees
+ Lower risk of chargebacks
+ Popular with B2B
- Complex processing and tech
Mobile/digital wallets (Google Pay, Apple Pay, Klarna, PaySafe, Skrill, Paypal, etc.) + Reduced friction
+ Faster payments
+ High level security
- High fees
- Low adoption rates in some markets
Bank transfer + Secure and reliable
+ Trusted
+ Fast
- High fees (international transfers)
Direct Debit (known as ACH payments) + Low cost
+ Automated/recurring
- Delay for initial payment
- Requires trust levels from customers
Cryptocurrency(Bitcoin, Ethereum, etc.) + Increasing popularity
+ Low transaction fees
- Difficult to use
- Security
- Price volatility

What is the most common method of payment?

If you're a merchant operating in different geographic markets in different countries, it can be challenging to understand the most used payment methods. Knowing which method is the most popular in each market you operate in is critical. Customers are 70% more likely to finalize a purchase if their preferred payment method is available. 

What's pretty clear from the public research is that debit and credit cards remain the most popular payment method in the US and other western markets. However, digital wallets are an increasingly popular payment method worldwide, with estimates that they will account for over 50% of e-commerce transactions worldwide. by 2024.

Different online payment categories where payments occur?

Today's consumers expect ease of use, speed, and security when purchasing online every time and wherever they are in the world. Here are three different online payment categories you need to be able to handle if you want to keep your business growing.

Recurring

Recurring payments, also known as recurring billing or automatic payments, refer to payments processed on an ongoing basis. These payments are primarily used for subscription services and businesses like Spotify and Netflix and can be charged to a credit card or direct debit. Recurring payments can be either fixed or variable. Fixed recurring payments charge the same amount each time over a set period, whereas variable recurring payments can charge a different amount for each payment.

Local 

Local payments refer to payments made within the same country. For example, you may have a US business that caters to customers living within the US. Whether credit, debit card, or bank transfers, local payments usually have fast settlement times and arrive the same day. They are also generally low-cost, especially when compared to cross-border transactions. 

International

International or cross-border payments refer to payments between entities or people in different regions and countries. For example, you may have a US business with customers worldwide making payments from other countries like Australia or Germany. International bank transfers and credit card payments usually carry hefty processing and currency conversion fees and can take several days to settle. There is also an increased likelihood of decline due to fraud concerns when using a credit card.

Main online payment methods for small businesses?

The number of online payment options for customers is growing every year. Today, however, the top five leading online payment methods for small businesses include:

  • Credit and debit cards
  • Mobile payments
  • Bank transfers
  • Direct debits
  • ACH transfers and e-checks

How to accept multiple payments online

Today's merchants face a real challenge. Consumers expect to be able to checkout using the newest and most convenient payment methods. However, integrating and building relationships with each new payment company is slow, costly, and simply not an option for most merchants. 

The easiest way to accept multiple payment methods and keep customers happy is to use a payment gateway like Pay.com, which works with many of the best payment providers and easily and quickly add new methods as required in just a few clicks.

The easiest way to accept multiple payment methods and keep customers happy is to use a payment gateway like Pay.com, which works with many of the best payment providers and easily and quickly add new methods as required in just a few clicks.

What does Pay.com offer?

Pay.com is an advanced payment gateway that enables merchants to adopt the latest payment methods. It provides a full-service gateway service providing complete control over customizing checkout pages and everything you need to give your customers the smoothest and most convenient payment experience. 

With Pay.com, merchants can choose from dozens of payment methods, including all major credit cards, PayPal, Google Pay, Apple Pay, Klarna, Skrill, Paysafe, and much more. Adding new and popular local payment methods is quick and easy! What's more, Pay.com offers advanced payment routing capabilities to ensure transactions are approved wherever they are worldwide. To find out more, contact our sales team.

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FAQs

What are the different payment methods?

Today's consumers can pay for goods and services using various methods. The most commonly used payment methods include cash, ACH and E-checks, direct debit, debit cards, credit cards, e-wallets, mobile payments, and electronic bank transfers.

Are credit cards a form of payment method?

Absolutely. In fact, credit cards are one of the most popular payment methods worldwide.

How to choose a payment method?

When choosing a payment method, think about your business needs. Start by reviewing the different payment methods available and understand how they work. Then, think about your customers. What is their preferred payment method? You should also consider issues of reliability and the costs involved with each payment method.

What are 5 examples of different payment methods?

Five examples of payment methods include cash, debit cards, credit cards, e-wallets, and electronic bank transfers.

What is the best payment method?

There is no one best payment method. It depends on the needs of your business and customer preferences.

What is the safest method of payment?

Today, most payment methods are relatively safe, but accepting online payments always comes with some risk. It is best to use a secure payment provider that's compliant with the latest industry standards and regulations to reduce these risks. It's important to check for SSL, PCI DSS compliance, tokenization, and additional layers of security like 3D Secure.

What are the ways to pay electronically?

There are several ways to pay for goods and services electronically, including credit and debit cards, bank transfers, direct debits, ACH payments, and e-wallets.

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