Payment Methods: The pros and cons

Hold on! Have you even thought about that? I mean…

• What methods are there?

• What are the pros and cons of each method?

• Are some easier for me to implement and deal with than others?

• Will my customers prefer some methods to others?

• Are there costs to the different methods?

There are so many questions!

The good news is, taking payment doesn’t have to be difficult and we’re here to help. In this blog we’ll answer all those questions and, whilst we can’t tell you which are the best methods for you, we can help you make an informed choice. We’ll look at each payment method in turn and try and answer the above questions as we go through.

Cash

The first and the oldest by far is of course cash. It’s been around for literally hundreds of years but as the world has become increasingly digital and banks have disappeared from the high streets, it’s become increasingly difficult to deal with for businesses, with many turning to other options. Cash will, of course, always have a place and shops selling small value items, maybe sweets and other confectionery, will always use it, but for larger purchases customers have come to prefer other options.

Let’s deal with the pros of cash first:

• It’s easy to accept, no set up required, you just do the work and get paid

• No credit risk as you’re not waiting for your payment

• All customers, young or old, will have access to cash so can easily make payment

• No fees at the point of payment

And now the cons:

• Many of the newer banks only exist online, so cash may not be an option

• Banks with branches may charge a fee to deposit and process the cash

• Transactions will need to be manually entered into your accounting system

• Risk of theft or fraud if large volumes of cash are held on the premises

Cheques

Cheques have been around almost as long as cash, did you know the first one was written in 1659. However, cheques are disappearing faster than cash, particularly among the younger generation who may not even know what a cheque is. The older generation still rely a lot on their cheque book and so it’s worth accepting them if they are a large part of your customer base. Also, as banks have drifted from the high street, they have updated their apps to enable users to deposit cheques easily by just taking a picture, although there maybe a limit to the amount that can be deposited this way.

Now let’s deal with the pros of cheques:

• Again, they are easy to accept, only a bank account required

• Easily deposited via online apps

• Most customers will have access to cheques

• Older customers may be nervous of card fraud so will welcome the opportunity to pay this way

• As with cash, there are no fees at the point of payment

And now the cons:

• Banks may charge a flat fee to deposit and process cheques either in branch or via the app

• There may be 2-5 working days before the deposit is cleared to use

• Risk of fraud if the customer doesn’t have the funds and the cheque ‘bounces’

Bank Transfer/Faster Payments

For most businesses this is the cheapest and one of the least risky ways to get paid. You can issue your invoices and include your bank details on them and, as if by magic, the payment arrives. As the banking network has improved, they say the payments can take up to 2 hours but, in reality, the funds arrive in your account almost instantly. Also, there is no clearance time, as soon as the money is in your account, it’s yours to use. An added bonus is that most banks include free electronic transactions both in and out of your account so there are no additional fees to pay other than your monthly charge.

So, let’s look at the pros of bank transfer:

• Easy to set up and include on your invoices

• Usually free for the business and its customers

• Instant payment and instant availability of funds

• No risk of the payment ‘bouncing’

And now the cons:

• Relies on the customer manually making the payment

• Risk that they will forget or deliberately delay the payment

• The requirement for a credit control function may add to your business costs

Credit/Debit Cards

Credit and debit cards are a popular payment choice for consumers of all ages. In the past they were mainly used for high value purchases but with the introduction of contactless payments they are now used for purchases of all values in all types of businesses. If your business deals mainly with consumers, rather than other businesses, you will almost certainly need to consider some method of taking card payments.

To offer any form of card payment facility you will need to partner with a payment processing provider and there are many to choose from. Some of the providers, such as Stripe and Paypal, specialise in online transactions whilst others, such as Worldpay and Barclaycard, provide card readers for ‘in person’ transactions. There will be fees involved with all of them so it’s wise to spend some time considering a few options.

Once you’re set up with a provider you can start to take card payments and the money will arrive in your bank account, usually in 1-2 days depending on the provider. As already mentioned, there are fees for every transaction and there may also be rental fees or outright purchase fees for the terminals to accept the payments. The fees can vary, typically ranging from 0.5% to 3% of the value of the transaction and there may also be a fixed fee per transaction with some providers, fees can also vary depending on the type of card used. Note that you are not allowed to increase your price to cover card fees so this cost has to be absorbed by the business.

Let’s take a look at the pros of taking card payments

• Most customer prefer card payments these days

• Credit cards provide insurance so provide peace of mind on high value purchases

• The ability to process recurring payments

• Card machines available with some providers

And now the cons

• A fee is charged for each transaction

• Payments will not be received immediately

• You may have to enter into a contract that ties you in for a minimum period

• You may have to pass credit checks to be accepted

• You may have to pay a security bond initially

Buy Now, Pay Later

There are becoming a common choice particularly for high value purchases. The larger providers will require you to have large turnover before considering you but there are many other who will be able to help. The main providers to small businesses are Klarna, Clearpay and Payl8r.

All the companies we’ve looked at pay you the full amount up front and collect payments from the customer over time. In addition to the interest that the customer pays there maybe fees that the seller has to pay for each agreement.

The pros of buy now, pay later

• It can increase the conversion rate and order value

• Spreading the cost can be convenient for the customer

• Can be integrated with most online sales platforms

• Full payment up front so no risk to the seller

Downsides

• Payments maybe delayed by a few days

• Set up with the provider is required and may take some time

• Sales may fall through if the customer fails credit checks

So, which payment options should you use?

You don’t have to decide on one type of payment and most business will offer at least 2 or 3 different options. The main advice is do your research and be sure to check out at least 2-3 providers for each method. The things you need to consider when choosing are:

• What methods appeal most to your customer base and how would they expect to pay? You can check out your competitors to help with this, see what they do.

• What are the fees for each method, are they acceptable and can they be absorbed by the business? You should get quotes from a few competing providers

• Does your payment system needs to work with other systems such as your order system or website? Check with your chosen provider whether it will work

• Does the provider have a good reputation? Check out their reviews on Google or Trustpilot

Hopefully that’s helped a bit but if you need any more advice, just get in touch and we’d be happy to help.