By: Michael Keenan
Introduction
You need to give yourself as many opportunities for success in your business as possible. One of the ways to do this is by keeping up with the latest preferred payment methods of your customer base.
It’s common to accept cash and credit cards from customers. But if these are the only options you accept, you may be shutting out new customers and missing opportunities to deepen relationships with existing customers.
By understanding the benefits of the many payment options available, you can make an informed decision about which option is best for your store and your customers. Then, with the help of a flexible retail point of sale system, you can begin to accept most payment options easily, creating better customer experiences and driving repeat business.
Types of Payment Options
According to CustomerThink, nearly 50% of customers who cannot use their preferred payment method abandon their purchase. And the other 50% who go through with the purchase? They are not experiencing the best customer experience you can provide.
In other words, the best option for sellers is to accept as many payment methods as possible. Let’s take a look at all the types of payment options:
Cash
Cash is, of course, the simplest payment method you can accept. Cash also doesn’t require you to search for payment processors or worry about fees.
The pandemic has slightly changed payment behavior. McKinsey reported that cash payments declined by 16% globally in 2020, with a 24% decrease in the U.S. in cash transactions. McKinsey indicates that cash payments will rebound, depending on how the economy recovers from COVID-19.
While there are some nuances in handling and managing cash transactions, there are very few downsides to allowing your customers to pay in cash. On the other hand, there are many benefits for you and your customers:
- Cash is easy and convenient: This is especially true for customers who prefer to use cash regularly (which is particularly important if you offer cash-on-delivery payment options).
- Speed: When customers pay in cash, their payment is in your hands (although not in your bank account) immediately.
- No transaction fees: When accepting cash payments, you keep more actual money since you don’t have to pay processing fees and other fees typically incurred by credit cards and other types of payment.
In short, accepting cash payments is still expected as a basic requirement in retail, and there are almost no downsides to it.
Checks and Electronic Checks
Besides cash, paper checks would be the most straightforward payment method. Like cash, this method does not require any searching for payment processors or merchant fees.
While the number of checks written is decreasing by 1.8 billion checks annually, the Federal Reserve Bank of Atlanta reported that 25% of consumers aged 65 and over still prefer to write paper checks. Therefore, while accepting paper checks for your business may seem outdated, there are some benefits to keeping them as an option:
- No transaction fees: When accepting a paper check, there is no need to worry about most merchant fees and processing fees, so you can keep most of the payment’s value.
- People tend to use checks for larger purchases: On average, checks tend to be of higher value (approximately $300 compared to other payment methods averaging $87).
An electronic check is the digital version of a paper check. Electronic checks use the Automated Clearing House (ACH) routing number to pull funds from the customer’s checking account and deposit them directly into the merchant’s business bank account. Electronic checks work more similarly to direct bank transfers, so there will be fees when using electronic checks, but they are considered among the lowest fees across all payment options.
According to
To study the payment methods of the Federal Reserve, ACH was the only one among three major payment systems that grew in the number of transactions in 2020. This was likely due to the increase in online sales. People are moving from paper checks to electronic checks, so despite the slight fees associated with using electronic checks as a payment system, they provide benefits to offer them as an option to your customers:
- Fewer restrictions on transaction amounts: Money transfers between banks generally have no significant limits in terms of amounts. Therefore, there is no need to worry about your customers’ credit limits or them reaching their debit card limits.
- Low fees: Compared to credit and debit cards, the fees incurred for accepting electronic checks are usually much lower than other electronic payment services.
Paper checks and electronic checks are payment solutions that require little to no fees to accept in your business. Accepting them as a payment option will only increase your business without costing you much.
Credit and Debit Cards
Credit and debit cards (issued by banks) have been around for a long time, but their usage is still on the rise. In fact, research conducted by BAI Research and Hitachi Consulting shows that 41% of consumers frequently eliminate cash, and 97% of survey participants resort to paying with credit and debit cards instead.
An integral part of figures like these is that accepting credit/debit cards has become the norm. It’s the minimum that merchants need to keep up with customers and competitors.
In fact, data shows that consumers tend to spend more when paying with credit cards instead of cash. This is what American Girl Scouts learned when their annual cookie sales quadrupled from the previous year simply by implementing portable credit card readers.
In addition, credit and debit cards provide:
- Some credibility to stores. Accepting credit cards (specifically Visa, MasterCard, Discover, and American Express) is so common that stores unable to accept credit card payments may be viewed as “behind the times”.
- Overall increased sales. With the growing number of consumers completely abandoning cash, accepting credit card payments means you can avoid losing sales when customers don’t carry cash.
- Cash flow benefits. Credit card payment amounts are usually automatically deposited into your bank account. While the exact timing may vary from one payment processor to another, you can generally expect the funds to be in your account shortly after the sale is completed.
The only requirement for all those benefits? Fees. Processing credit cards means you will have to accept the processing fees charged by payment processors. While these fees can vary, they typically range from 1.5% to 3% of total sales.
Mobile Payments
There is another payment method that has seen rapid growth in recent years: mobile payments and smartphones, also known as wireless payments. Common methods include smartphone payment applications like Apple Pay, Google Pay, and Samsung Pay.
In 2021, more than four in ten smartphone users in the United States used wireless payment at least once. Mobile payment app usage, such as Apple Pay and Google Pay, is expected to double between 2020 and 2025. There are several reasons for this growing interest, including: mobile payments are faster and easier for customers who generally carry their phones.
Additionally, there are some optional benefits for sellers who accept mobile payments and smartphones as well:
- Convenience
- Customers. As mentioned, it is easier and faster for customers to pay you this way.
- Cash flow. Mobile payments, similar to credit and debit cards, typically reach your business account within three days of the sale.
- Data availability. When customers pay using their smartphones, you can receive and track customer data, including how often they shop with you and how much they spend, and you can interact with customers throughout their in-store journey (by sending location-based updates about sales, discounts, and more).
- First, gift cards and store credit encourage customers to spend more because they typically spend more than the value of the gift card or credit. Furthermore, customers feel more comfortable spending more money in your store when they know you offer a great return policy – it’s like a safety net. When it comes to returns and exchanges, you can issue gift cards or store credit instead of cash refunds, allowing you to be more flexible and creative. For example, Kylie Moore, a marketing expert, shared an exciting experience when she returned a product to a retail company: the company offered to give her 120% of the original purchase price if she chose store credit instead of a cash refund.
- Above all the benefits, store credit and gift cards allow you to keep money within your ecosystem. Even if the gift card isn’t spent or the item isn’t returned or exchanged, that sale remains with your business.
- Split Payments. The classic example here is when a group wants to split their restaurant bill among multiple credit cards. In a retail environment, this may look like a shared purchase among shoppers buying a gift with two credit/debit cards.
- Partial Payment. Shoppers may prefer to pay part of their order in cash and put the rest on a credit card.
- Partial Payments. For some merchants, it makes sense to accept a partial upfront payment and offer credit or payment plans (like payment over time) to collect the rest. Alternatively, merchants can accept an initial payment in-store and have the customer pay the remaining bill online, which can increase the average order size.
- No upfront payments or debts. Similarly, some merchants may offer payment plans or installments without any upfront payment. Your point-of-sale system should be able to handle these transactions.
- More secure than credit cards. In 2020, the FTC reported 4.7 million reports of credit card fraud and identity theft. 34% of those who filed reports experienced losses. With cryptocurrencies, there’s no need to worry about data breaches or identity theft because customer information isn’t stored in any centralized location; it’s stored only in their cryptocurrency wallet.
- Low fees and no international charges. Cryptocurrency exchanges generally have lower fees than most merchant fees; for instance, PayPal charges up to 4% per transaction, while some Bitcoin exchanges have fees under 1%. Additionally, there are no fees for cryptocurrencies during international payments since they are not tied to any one country.
- Refunds in the company’s hands. Cryptocurrency transactions can only be refunded by the party receiving the funds. Customers cannot cancel the payment on their end or change their credit card number, making it easier for the company to track cash flow.
- Cash is easy and convenient.
- Money goes directly into your hands. There’s no waiting time for cash deposits to become available in your bank account.
- There are no transaction fees with cash. All you need to do is go to the bank and deposit it.
- Customers can carry only a limited amount of cash.
- You need a safe on-site, or you need to go to the bank frequently.
- Having a lot of cash on-site can make you vulnerable to theft by employees and outsiders.
- There are no transaction fees for payment by check.
- People tend to write checks for large purchases.
- E-checks have lower transaction limits.
- You need to go to the bank to deposit the check, and it may take a few days for that money to become available in your account.
- People can write fake checks or stop payment, leaving you unpaid for your product or service.
- Make your store appear more credible.
- Increase sales.
Integrating alternative payment methods like digital wallets, mobile transfers, and bank transfers increases customer loyalty and purchase rates because people are more likely to shop where it is most convenient for them. Jason White, a retail investor and CEO of All About Gardening
Gift Cards and Store Credit
Gift cards and store credit are one of the payment methods you may not hear about much, but they are one of the strongest retail tools for merchants. Simply put, store credit allows you to deepen and continue existing relationships with customers, while gift cards help attract new people to your store in a low-risk way.
Gift cards, store credit, and discounts are tools you can use to enhance customer retention and loyalty. Additionally, there are several key benefits for merchants:
You may not hear about gift cards and store credit often, but they are powerful tools you can use to build long-term customer relationships. Ultimately, accepting all the payment options your customers want to use has no downsides.
Custom Payment Methods
As previously mentioned, a good point-of-sale system gives you the flexibility to accept many payment methods that you and your customers need. This includes custom payments such as:
The benefit
The main advantage of dedicated payments like those above is that they allow merchants to be more flexible, which is often beneficial for both the store and the customer.
For some merchants in physical stores, dedicated payments such as split payments and installment payments may be necessary to meet customer preferences and keep up with competitors. However, paying with multiple credit cards may mean that your store incurs higher credit card processing fees, so it’s important to consider the costs of offering these dedicated payment options.
Cryptocurrencies
Cryptocurrencies are digital currencies protected by encryption, relying on secure communication technology that transfers information in encrypted content. They are nearly impossible to counterfeit as they exist on a decentralized network called the blockchain. They cannot be manipulated by any government or organization.
Cryptocurrencies are being increasingly adopted. Between 2018 and 2020, the number of global users of all cryptocurrencies increased by nearly 20 million people in just the past year. Now, even commercial companies like Whole Foods and Home Depot accept cryptocurrencies as a payment method.
Although cryptocurrencies are a newer type of payment option, they offer advantages for adoption:
In 2020, there was a 13% increase in the number of people aged 18 to 34 interested in buying Bitcoin. These are the people who will potentially be your customers in the future. Part of creating a successful and sustainable business is staying ahead. Providing a payment solution like cryptocurrencies that will meet future customer needs is part of this equation.
Advantages and Disadvantages of Different Payment Methods
Cash
Advantages:
Disadvantages:
Checks and E-checks
Advantages:
Disadvantages:
Credit and Debit Cards
Advantages:
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