What is an electronic payment? How and when to use them

Say goodbye to jingly pockets, wallets stuffed with creased bills, and checkbooks. Payments are trending away from cash and paper checks. Electronic payments are becoming more and more prevalent, and businesses that fail to accept these payment methods risk losing customers and falling behind. The contactless payments market was valued at $1.2 billion last year, according to Contrive Datum Insights. It’s expected to grow at over 20% per year to 2030 and hit $5.4 billion. 

Many businesses can use e-payments to allow customers to pay online or make in-person payments. But what do you need to know about electronic payments? Let’s look at how electronic payments work, the different types you may encounter, and how to start accepting digital payments:

How electronic payment processing works

The gist is that money electronically moves from one checking account² to another, especially if you use Automated Clearing House (ACH) transfers or electronic checks (eChecks). But there are a few more moving parts for card payments. 

Here are the necessary components for electronic payment processing: 

• Payment gateway: Think of this as the messenger between where the sale is made and the bank. The payment gateway encrypts payment information and passes that information between the payment processor and the merchant account.
• Payment processor: This receives the payment details from the payment gateway, analyzes that information, and then approves or rejects the payment. Many payment systems combine a payment processor and gateway in one.
• Merchant account: You’re required to have a merchant account to process card payments. When a customer pays with a card, the money lands in your merchant account, where a third party processes it. Once that’s processed, the money moves from the merchant account to your normal business bank account.

As an example of how payment processing works, say you have an e-commerce store where you sell homemade candles. Here’s how a sale would work using your e-pay processor: 

1. A customer submits their credit card information on your website to purchase various scented candles.
2. Their payment information is submitted to the payment gateway.
3. The payment gateway encrypts the customer’s credit card information to securely send it to the payment processor.
4. The payment processor reviews those details to ensure everything is in order and then approves (or rejects) the payment.
5. The payment processor tells the payment gateway that the payment is approved.
6. The payment processor notifies the customer with a confirmation page or “success” message, and then you fulfill their candle order.
7. You’ll then receive the payment (minus any fees) into your account after a set period (depending on the method). 

It sounds like a lot of information bouncing back and forth, but amazingly, this entire payment process happens in just a few seconds. 

Types of electronic payments

Let’s start by looking at electronic payments more broadly. Typically, e-payments fall into one of two categories:

• One-time payments: As the name implies, this is a single, one-time payment. For example, if a customer uses a credit card to purchase a cake at a bakery, that’s a one-off e-payment.
• Recurring payments: Electronic payments can also be on a repeating schedule, meaning a customer payment is made automatically on a set date. For example, say you offer monthly website maintenance to clients. You set up a recurring payment, deducting an agreed-upon payment from their business bank account¹ on the last business day of each month.

Regardless of which electronic payment method you’re using, they all technically work the same way. Electronic payments are processed using an electronic funds transfer (EFT). There are four key types of e-payment methods most small businesses use: 

Credit and debit cards

Payment method that cancan come with higher processing fees relative to other e-payment solutions. 

Credit and debit cards are two common types of electronic payments that offer convenience and security for financial transactions. For these payments, payment details are entered manually during checkout, or the physical card is processed at a point-of-sale (POS) system.

There’s usually a debit or credit card processing fee, which the seller needs to pay. Fees are typically a percentage of the transaction. 

ACH transfers

Payments are simple and convenient once you link accounts, but many banks have limits on the amount you can send through this method.  

ACH transfers, also known as online banking payments, are another common form of electronic payment. With an ACH transfer, money moves directly from one bank account to another using a centralized system called the ACH network. For example, if your employees have direct deposit, that’s a form of ACH transfer—the money moves from your business account to your employees’ accounts. 

To initiate an ACH transfer, the sender provides their bank with the recipient's bank account information. The sender's bank then communicates with the ACH network to electronically move the funds from the sender's account to the recipient's account. This process typically takes a couple of days. 

Note that there is a fee for processing ACH payments, but it’s typically cheaper than credit or debit card processing fees. These fees are typically either a flat fee per transaction, a percentage fee, a monthly fee, or a batch fee. The fees are generally lower than those for card payments, however.

eChecks

Typically have lower fees than ACH transfers and card payments but are likely not as familiar to the customer. 

An eCheck is a lot like when a customer pays with a paper check—similar to traditional paper checks, eChecks use the ACH network. To initiate an eCheck payment, the recipient typically requests authorization from the payer to debit their bank account for the specified amount.

The money is then taken directly out of their bank account to pay for the purchase, so this is also sometimes called a “direct debit.” Be aware that banks can take several days to process and clear this payment type, but they are one of the cheapest options.

One key difference between ACH transfers and eChecks is the form of authorization. ACH transfers require the account holder's permission, usually in the form of an authorization form or through online banking. In contrast, eChecks are similar to traditional paper checks, but instead of physically being printed and mailed, they are processed electronically through the ACH network.

On the downside, eChecks may not be suitable for international transactions, as they typically only operate within the domestic banking system. Additionally, processing delays may occur on weekends and holidays (similar to ACH transfers).

Mobile wallets

Allow contactless payments and reduce the risk of fraud, as the user’s payment info is stored securely on their devices. 

Mobile wallets, also known as digital wallets, include services like Apple Pay and Google Wallet, allowing users to store their credit or debit cards on their mobile devices. They then have a convenient and more secure way to make electronic payments. 

With mobile wallets, users can simply tap their phones or scan a QR code to complete a transaction, eliminating the need to carry physical debit or credit cards—making it quicker and more efficient than traditional payment methods.

The fees for mobile wallet payments will vary depending on the wallet provider and type of transactions. Generally, they are in line with card payment fees and may even be cheaper in some cases.

How to accept electronic payments

Given today’s technology, accepting electronic payments is relatively simple. However, here are some of the things you’ll need: 

1. Sign up for a merchant account: If you plan on accepting card payments you’ll likely need a merchant account. Start by talking to your current bank about merchant account options for your business. You’ll also want to ask your bank about accepting ACH payments and if there are any fees associated with that.
2. Get the correct tools: You’ll need a payment gateway and a payment processor. Remember that many platforms combine both of these tools into one easy-to-use solution, including QuickBooks. 
3. Include e-payments in your checkout process: Once you have those core elements set up, you need to give customers the option to pay electronically. Depending on your type of business, this might include: Adding a card reader to your POS system so you can accept e-payments in person, creating an online storefront with the option to accept various types of e-pay methods, using an invoicing tool that lets you enable different electronic payment methods. 

When it comes to accepting electronic payments, many business owners understandably want to know how long they need to wait to get their money. The answer depends on the type of electronic payment that’s being processed. 

With all four e-payment types, they aren’t instantaneous, so make sure to keep that in mind as you manage your cash flow.

Benefits of e-payments 

Using e-payments, especially in your small business, comes with key advantages, including

Convenience and efficiency

Electronic payments are quick and easy for the customer. On the business side, electronic payments are easier for you as well. If you route those payments through your point-of-sale system or platform that integrates with your accounting software, you can simplify your bookkeeping and reduce manual data entry. 

If you run a physical store or location, electronic payment systems also offer shorter checkout lines. With the ability to make payments electronically, customers can swiftly complete transactions. Embracing electronic payment methods can improve business operations and enhance the overall customer experience.

Potentially higher revenue 

You’ll need to cover some processing fees when accepting electronic payments, but even with that additional expense, offering these payment methods can help boost sales. For example, customers might be willing to spend more when they can pay with a credit card. Overall, e-payments mean more payment options for your customers. To determine any added costs, use a credit card fee calculator beforehand.

One key aspect of electronic payments is the ability to set up recurring payments—with customer consent. By automating transactions through electronic payment systems, businesses can ensure timely payments without relying on customers to remember to make manual payments. This reduces the risk of missed or late payments and can improve customer retention.

Better customer relationships

More than ever, customers want options. That applies to payment options and choices between brands, products, and services. By embracing electronic payment methods, businesses can enhance the overall experience for their customers while fostering trust and reliability. 

Requiring your customers to use a certain payment method can lead to a negative customer experience. Meanwhile, customers may appreciate the ease and speed of making payments electronically.

Choose the best payment setup for your business

When looking for the best payment methods for your small business, be sure to look for options that integrate easily with your small business bank account. Note that some businesses charge monthly fees for integrations, while some only charge per transaction.

For example, if you have an online business, look for payment processing options like QuickBooks Payments that have no mothy fees and integrate with today’s e-commerce platforms—while also getting other key e-pay features, such as mobile card readers and “pay now” buttons right on your Invoices.³

QuickBooks Card Reader: Data access subject to cellular/internet provider network availability and occasional downtime due to system and server maintenance. Product registration and QuickBooks Payments account required. Terms, conditions, and features subject to change. 

Apple Pay: Apple Pay is a registered trademark of Apple Inc. 

Google Pay: Google Pay is a trademark of Google LLC. 

QuickBooks Payments: QuickBooks Payments account subject to eligibility criteria, credit, and application approval. Subscription to QuickBooks Online required. Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services. For more information about Intuit Payments' money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/.

QuickBooks and Intuit are a technology company, not a bank. Banking services provided by our partner, Green Dot Bank. 

¹  QuickBooks Money: QuickBooks Money is a standalone Intuit product that includes QuickBooks Payments, and currently does not connect with other QuickBooks products such as QuickBooks Online (and QuickBooks Checking), QuickBooks Self-Employed, or GoPayment. Intuit accounts are subject to eligibility criteria, credit, and application approval. Banking services provided by and QuickBooks Visa Debit Card are issued by Green Dot Bank, Member FDIC, pursuant to a license from Visa U.S.A. Inc. Visa is a registered trademark of Visa International Service Association. QuickBooks Money Deposit Account Agreement applies. Banking services and debit card opening are subject to identity verification and approval by Green Dot Bank. Money movement services, including Same Day Deposit, are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services.