Demystifying Digital Payments for your ISV and SaaS Platform
Payment methods today look a lot different than 20 years ago when cash and hard-copy checks were still king. Digital payments (also called electronic payments), such as credit and debit cards and eCheck / ACH, eventually unseated cash and checks. Today, digital payment options have grown substantially with terms like digital wallets, mCommerce and BNPL becoming standard lexicon.
Not surprisingly, COVID was a huge catalyst for the surge in digital payment adoption globally. McKinsey’s 2021 Digital Payments Consumer Survey found that more than four in five Americans used some form of digital payment in 2021, while Visa saw its tap-to-pay transactions grow over 30% year-over-year. In low and middle-income economies (excluding China) globally, over 40% of adults who made an in-store or online payment using a card, phone, or the internet did so for the first time during the pandemic. The high proliferation of smartphones enabling mobile commerce, internet penetration and an increase in paying online as the primary way to shop are all factors driving the increase in digital payments.
If you are an ISV that serves many merchants, you need to understand the types of digital payments available to you, their pros and cons and which is best for your business. Today we review some of the most popular forms of digital payments and considerations for adoption.
Primary payment methods
The first thing to know is “how” digital payments can be used. The three primary methods are at the point-of-sale (typically a brick-and-mortar store or restaurant), online or over the phone. Note that online purchases can be made through a computer, tablet or laptop (Ecommerce) or through a mobile phone (mCommerce).
- POS: Point-of-sale (POS) typically refers to the customer paying for a purchase in a physical location via a payment terminal (and can also be called card-present payments). Payment terminals should be equipped with chip card acceptance for credit and debit cards and near-field communication (NFC) technology for contactless credit and debit card payments (also called tap-to-pay) and mobile wallet payments.
- Online (Ecommerce and mCommerce): These are typically payments initiated via a computer or a mobile phone. These two pieces of hardware act as the “virtual” point-of-sale but because you are not purchasing goods in a physical location, they are card-not-present transactions. Credit and debit cards can both be used online, as well as mobile wallets, mobile apps, bank transfers (also called Automated Clearing House transactions or ACH) and alternative credit solutions, such as buy now, pay later (BNPL).
- MOTO (mail order / telephone order): These are typically payments initiated by the cardholder over the phone with a call center attendant or via physical mail. While the card is still not present with MOTO transactions, the difference here is that the merchant is keying in the data themselves and the cardholder is only speaking the number over the phone or writing it down on paper and mailing it in.
The different types of digital payments
The payment industry has no shortage of offerings for ISVs to provide their merchants. But adding too many options can be confusing for customers so it’s important to consider your vertical (government would be different than retail), your average transaction size, the frequency of transactions (whether they are one-time, recurring or a mix) and your demographics (millennials love mobile payments).
Credit and debit cards
Credit and debit cards can be used both online and at the POS and today remain as one of the top forms of digital payment. Credit cards are issued by Visa, Mastercard, Discover and American Express, while debit cards are issued by banks. The main difference between the two types is that credit cards extend credit to the consumer whereas debit cards deduct purchases directly from the consumer’s bank account.
What has primarily changed with credit and debit cards is how they can be used at both the POS and online. Customers can now use contactless at the POS so that they don’t need to touch the payment terminal, and credit and debit cards can now be loaded into a consumer’s mobile wallet, which can work both at the POS and online.
Mobile (digital) wallets
Mobile payments are quickly becoming one of the most popular forms of digital payment. This is because consumers can load more payment methods (credit, debit, ACH, payment apps, etc.) into their mobile wallet and they don’t have to carry physical cards. Additionally, these wallets can also manage rewards cards, memberships and even IDs. This flexibility in payment and document types is a prime motivator driving digital wallet usage.
The most popular mobile wallets include PayPal, Apple Pay, Google Pay and Samsung Pay and all can be used both at the POS and online. However, for ISVs to accept mobile payments at the POS, a payment terminal with NFC capabilities is required and the ISV’s processor must also be able to transact mobile payments. For online usage, the onus is on the processor to be set up to accept digital wallet payments.
ACH payments are an important part of the digital payment mix in many industries such as government, utilities, higher education and healthcare. ACH payments are directly debited from a consumer’s checking or savings account for things like electric or water bills, tuition payments, large healthcare payments, etc. ACH can also be used in B2B for very large transfers between vendors and payers. Almost all processors today offer the option of ACH payments but typically at an additional cost outside of standard merchant account fees.
Buy now, pay later solutions (BNPL)
Buy now, pay later (BNPL) solutions provide a type of short-term financing that allows consumers to make purchases and pay for them over time, usually with no interest. In essence, it is the online version of layaway for those who remember the days of Kmart and Sears.
BNPL is most popular in retail and industries where high-ticket consumer goods are sold, such jewelry, electronics and furniture. Additionally, millennials and Gen Z make up the highest proportion of BNPL users – a demographic most interested in alternative and mobile payments (and least interested in traditional credit cards).
Mobile payment apps
Mobile payment apps can often be defined to include mobile wallets but also include a segment of mobile payment “cash” apps that facilitate the transfer of money between a provider and a customer, or for P2P (peer to peer) payments. There are a variety of mobile cash apps including PayPayl, Venmo, Zelle, Cash App and more. Transactions are typically conducted using a mobile or smart device (a phone, a tablet or a watch). Whether you want to offer the ability to take cash app transactions will largely depend on your industry, your demographics and whether your processor offers cash app acceptance at the POS or online checkout.
Ensure the right payment mix
The key takeaways for choosing the right payment mix for your POS or Ecommerce checkout are evaluating your products, considering your industry, understanding your customer - as well as their buying habits - and ensuring that you have the right integrated payment processor for your business.
At Payfactory, we offer a variety of digital payment methods through our payment facilitation platform. Integrated directly into ISV and SaaS software, our platform provides fast onboarding and funding for your merchants, with white-glove customer service and a flexible revenue sharing program for all of our partners. Learn more about our platform or contact us directly for a free payment consultation.