When it comes to payment options, nothing is more convenient than electronic payment. You don’t have to write a check, swipe acredit card or handle any paper money; all you have to do is enter some information into your Web browser and click your mouse. It’s no wonder that more and more people are turning to electronic payment — or e-payment — as an alternative to sending checks through the mail.
In this article, we’ll look at the types of electronic payment, discuss its benefits and limitations and explain how to add e-payment capability to your Web site.
An electronic payment is any kind of non-cash payment that doesn’t involve a paper check. Methods of electronic payments include credit cards, debit cards and the ACH (Automated Clearing House) network. The ACH system comprises direct deposit, direct debit and electronic checks (e-checks).
For all these methods of electronic payment, there are three main types of transactions:
- A one-time customer-to-vendor payment is commonly used when you shop online at an e-commmerce site, such as Amazon. You click on the shopping cart icon, type in your credit card information and click on the checkout button. The site processes your credit card information and sends you an e-mail notifiying you that your payment was received. On some Web sites, you can use an e-check instead of a credit card. To pay by e-check, you type in your account number and your bank’s routing number. The vendor authorizes payment through the customer’s bank, which then either initiates an electronic funds transfer (EFT) or prints a check and mails it to the vendor.
- You make a recurring customer-to-vendor payment when you pay a bill through a regularly scheduled direct debit from your checking account or an automatic charge to your credit card. This type of payment plan is commonly offered by car insurance companies, phone companies and loan management companies. Some long-term contracts (like those at gyms or fitness centers) require this type of automated payment schedule.
- To use automatic bank-to-vendor payment, your bank must offer a service calledonline bill pay. You log on to your bank’s Web site, enter the vendor’s information and authorize your bank to electronically transfer money from your account to pay your bill. In most cases, you can choose whether to do this manually for each billing cycle or have your bills automatically paid on the same day each month.
Next, we’ll discuss some of the benefits of electronic payment.
Electronic payment is very convenient for the consumer. In most cases, you only need to enter your account information — such as your credit card number and shipping address — once. The information is then stored in a database on the retailer’s Web server. When you come back to the Web site, you just log in with your username and password. Completing a transaction is as simple as clicking your mouse: All you have to do is confirm your purchase and you’re done.
Electronic payment lowers costs for businesses. The more payments they can process electronically, the less they spend on paper and postage. Offering electronic payment can also help businesses improve customer retention. A customer is more likely to return to the same e-commerce site where his or her information has already been entered and stored.
With all the benefits of electronic payment, it’s no wonder that its use is on the rise. More than 12 billion ACH payments were made in 2004, a 20 percent increase from 2003 [ref]. The 2004 Federal Reserve Payments Study noted that from 2000 to 2003, electronic payments grew as payment by check declined, which suggests that electronic payments are replacing checks.
In order to better serve their customers, banks are swiftly moving to offer online bill pay services. Grant Thornton’s 2005 survey of bank executives found that 65 percent of community banks and 94 percent of large banks offer 24/7 online bill payment [ref]. Most of these services are free to members and coordinate easily with personal software programs such as Quicken or MS Money. Alternatively, consumers can subscribe to online bill pay services such as Paytrust or Yahoo! Bill Pay. These services charge a monthly fee in exchange for the convenience of paperless bill paying.
In the next section we’ll discuss the concerns that some people have about using electronic payment.