How your small business handles payments was once a basic decision: cash, checks, credit cards via a merchant account, and you were done. But while the digital age has given customers a lot more flexibility in how they can pay, it’s made the process significantly more complicated for merchants, especially small shops or online retailers.
Most merchants already know about traditional credit card processing services that now also power a long list of online payment and e-commerce solutions. But over the last few years, that list has gotten even longer because of the rapidly multiplying number of mobile payment methods that can use proprietary processing devices, smart cards, and touch-less terminals.
All these options are great for consumers, but this payment evolution also means that small businesses now have to wade through a lengthy requirements gathering and cost-benefit process for each new payment method with which they engage. Those requirements vary depending on both the payment method as well as your particular business situation, so it can be a heavy lift. In the past, setting up payments solutions was a far more straightforward process. You had to have a landline, rent a credit card machine, and then calculate processing fees and other charges into the cost of doing business. While mobile payment providers are working to make the implementation process easier for small businesses, the sheer number of choices can be daunting.
Additionally, now that most point of sale (POS) services have gone digital as well, even choosing your store’s cash register can be tricky. Especially so if, as with so many merchants these days, your brick-and-mortar store is backed up by an online outlet, since the two payment systems will need to communicate. That’s so they can share not only revenue data, but also inventory and customer information.
Those are just the options available right now. According to a study by research firm Markets and Markets, payment processing solutions are expected to grow to $120 billion by 2025. This includes debit cards, credit cards, electronic wallets, ACH payments, and other methods, some of which have yet to be released. The report cites a number of economic drivers affecting this shift, but at the end of the day, the primary driver seems to be changing consumer needs.
“Today’s consumer is all about convenience,” states Frank Pagano, Executive Sales Director of VizyPay, a small business credit card processing provider. He maintains that offering multiple payment options will be vital for every small business, particularly mobile payment systems, and especially those that carry big brand names, like Apple Pay. That conclusion seems supported by current market data as compiled by market research firm, Statista:
“Smartphones are continuing to become more universal,” continues Pagano, “and this helps eliminate the need to carry around cash or credit cards.” That kind of convenience will be very attractive to your customers, and convenience is the focus of most emerging payment methods. That means very few, if any, small businesses can afford not to plan for these new trends.
So What’s The Future of Payment Tech?
“The future of payments looks less about consolidation than it does competitive cooperation,” said C. Eric Smith, CEO and co-founder of AppBrilliance, a payment technology company based in Austin, TX. He points out that the rate of innovation in this space has accelerated dramatically, which means you’re facing added complexity, but also opportunity.
“Alternative payment rails can provide significant cost savings to businesses in a retail economy that has transitioned in a blink to cashless operations,” explains Smith. He points out that payment processing costs for both retail POS card-present transactions and card-not-present payments through mobile apps and e-commerce systems have skyrocketed. That’s driven small businesses to look favorably on any payment innovations that can promise to reduce those costs.
Card-not-present transactions usually carry higher processing costs than card-present transactions. Additionally, merchants are on the hook for fraud if they’re unable to accept a customer’s EMV (chip-enabled) credit or debit card for in-person transactions. “That means you need to make sure your payment processing is compliant with all of the appropriate regulations,” said Ted Rossman, credit card analyst at Bankrate.com, a financial services provider.
“Another big trend has been ‘buy now, pay later’ with the emergence of companies like Affirm, Afterpay, and Klarna. PayPal has a couple of ‘buy now, pay later’ options in PayPal Credit and PayPal Pay in 4,” continues Rossman. According to his research, this is likely because the data shows that customers spend more when using these kinds of services.
One recent and significant influence on payment trends is, of course, COVID-19. “Because of the pandemic, contactless payments have become essential,” says VizyPay’s Pagano. This isn’t only because businesses need to react to worried customers, but in many places it’s actually mandatory due to safety regulations imposed by either state or municipal governments around measures like contact tracing. If you’re operating in one of these locales, you’ll need to meet those requirements if you want to keep your doors open for at least the next year. That’s caused a big increase in the demand for contactless payments systems, and once customers get a taste for its convenience, it’s unlikely those systems will go away even after the COVID-19 threat fades.
Buying Your Payment Solution
While banks try to respond to the needs of small business owners in their aim to serve as intermediaries for payment solutions, you’re likely going to have to figure out what works best for your business yourself. The big challenges here for small businesses are twofold: First, you have to determine which combination of payment solutions will work best for your business today; and, second, you need to make sure that whatever choices you make now don’t lock you into a single set of services so you can’t react quickly to new payment opportunities as they emerge.
When it comes to figuring out what’s best for you right now, a big consideration needs to be cost. Emily Chung, owner and operator of AutoNiche, an auto repair shop in Ontario, Canada, says this was her biggest challenge overall. “These are costs that the end user doesn’t see,” she says. “We’re not allowed to refuse premium cards, nor can we add a surcharge to accept credit cards.” That means her business faces mandatory costs imposed by credit card processors whether it wants to or not.
And those costs can be significant to the business while being invisible to the customer. Chung says her business spends less than $3 per month to process all its debit card transactions, but it spends hundreds of dollars per month to process credit card payments.
“When evaluating payment solutions, businesses must consider the total cost of ownership. For example, sometimes a ‘free’ payment terminal comes with higher processing costs or an expensive long-term contract,” said Bankrate.com’s Rossman.
“Leasing a terminal can also be more expensive than buying one outright,” he continues. “You should put together an apples-to-apples comparison of the per-transaction processing cost as well as the cost of any applicable hardware, along with any other fees or subscriptions. Then evaluate whether you’re making a long- or short-term commitment.”
You’ll probably also be strongly guided by the way you do business. For example, stores that operate online only won’t need a processing terminal, while stores that operate both online and in a physical location will need a service that supports both environments. Customer interaction is another good indicator, especially in physical stores where payment systems that support mobile terminals attached to tablets or smartphones are becoming more popular because they let sales staff interact more freely with customers.
“Many businesses may be tempted to search for a specific payment solution right off the bat. However, it’s important to step back and look at what you’re solving for,” explains Pranad Sood, VP Small Business for GoCardless, which helps small businesses get paid through direct debit. He advises that you should identify how your business operates. That means factoring in where your customers are located and how they like to interact with your operation. Then decide how you need to bill and collect payments. Once that’s determined, you can start searching for solutions that match. Below, we’ve listed six popular business payment solutions that can help.
