If you’re doing business online, whether selling goods via an e-commerce platform or sending invoices and processing payments for services, you’re going to need some form of electronic payment processing system.
From credit cards to electronic wallets to plain old wire transfers, electronic payments are an essential component of your system for receiving funds from customers.
In this article, we’ll be diving deep into electronic payments. We’ll explain what they are, discuss how they work, explore common methods, and cover five of the most important benefits that electronic payments impart.
What are electronic payments (e-payments)?
An electronic payment (or e-payment) is the transfer of funds or exchange of money across digital channels, eliminating the need for physical methods like cash or checks.
Such transactions take place via electronic systems (which look different depending on the type of electronic payment in question) that involve collaboration between banks, financial institutions, payment processors, and digital platforms.
Electronic payments are used across a variety of business purposes, from bill payments to online shopping to peer-to-peer money transfers.
How do electronic payments work?
Electronic payments use a combination of secure digital systems and processes to authorize, authenticate, and process transactions.
Here’s a simplified overview of what the workflow usually looks like:
- Initiation. The customer initiates the payment by providing the requested payment information. This could be bank account details, a credit card number, or digital wallet credentials.
- Authorization. The payment gateway verifies the payment details, checking for available funds and other authorization factors like 2FA (two-factor authentication).
- Processing. Once the payment has been authorized, it's over to the payment processor to orchestrate the transfer of funds between the two parties’ bank accounts.
- Settlement. After processing, the funds are settled, which means they are deducted from the payer’s account or card and deposited to the receiver’s account. Depending on the payment method chosen, this can happen instantly or it can take up to a few days.
- Confirmation. Both the payer and the payee receive a notification and/or receipt of the successfully completed transaction.
Common methods of e-payments
The term electronic payments can be applied to a wide variety of different systems and processes.
Here are the most common methods of electronic payments and how they differ.
ACH (automated clearing house) transfers
ACH payment is a type of electronic payment where funds are transferred between bank accounts located in the US, using a network managed by NACHA.
This is common for recurring payments like payroll, direct deposits, and utility bill payments. It's one of the slower forms of electronic payment, typically taking between one and three business days to settle.
Wire transfers
This is another form of electronic funds transfer through a network of banks or financial institutions, though it works on an international level.
It is typically used for larger sums and most commonly international transfers, and works faster than ACH payments with funds usually becoming available within a few hours to a day.
However, most wire transfers are irreversible and come with much higher fees.
Card payments
This is one of the common forms of electronic payment, where a customer uses a debit or credit card to pay for goods or services.
Actual settlement between the bank and the merchant can take a few days. But the transaction appears immediately for the cardholder, verifying that the transaction was successful.
Digital wallets
Digital wallets like Apple Pay and PayPal are become more widely used.
Payers can link credit and debit cards as well as bank accounts and other digital payment forms to the wallet for quick online and in-person payments using a mobile device. One of the major benefits of this payment format is that they often use additional layers of security like biometric authentication (fingerprint or facial recognition).
Mobile payment services
Peer-to-peer (P2P) payment apps like Venmo and Zelle allow users to send and receive money electronically via a smartphone or other mobile device.
These payments are near instant, but are more geared toward the consumer market, being more commonly used for small transactions between friends (like splitting bills) than for commercial transactions.
Are electronic payment systems secure?
Electronic payment systems are considered generally secure. However, it depends not only on the payment method chosen but on the technologies and protocols put in place by the payment gateway and processor.
Strong security measures are super important to protect against fraud, hacking, and data breaches, as well as to build trust between the vendor and the paying customer.
While no system is completely immune to attacks — hackers are constantly looking for workarounds for existing protections — electronic payment systems employ a range of security techniques to minimize risk.
Here are three of the most important.
1. Fraud prevention
As electronic payments are used more and more frequently, fraud has become a major concern.
Secure payment systems implement advanced fraud detection and prevention technologies such as:
- Machine learning and AI. Advanced algorithms are used to detect suspicious activity by analyzing transaction patterns.
- Multi-factor authentication (MFA). Many systems require an additional verification step like a biometric verification or a one-time code sent to an authorized device in order to ensure that the person initiating the transaction is authorized to do so.
- Tokenization. This is a technique that uses randomly generated tokens to replace sensitive information like personal data. The tokens are useless if intercepted because they don’t reveal actual account details.
- Chargeback and refund systems. Credit card providers allow consumers to dispute fraudulent transactions which provides an additional safety net for the end user.
2. Encryption
Encryption is a fundamental layer of security in electronic payments. Its role is to protect sensitive data such as card details and bank account numbers.
Common protocols include SSL (Secure Sockets Layer) and TLS (Transport Layer Security) which create secure communication channels between the user, banks, and payment processor.
3. Compliance with regulations
Electronic payment systems must maintain compliance with a number of important regulatory frameworks.
These include:
- PCI DSS (Payment Card Industry Data Security Standard): This is a set of standards designed to ensure that all companies that process, store, or transmit credit card information maintain a secure environment.
- KYC (Know Your Customer) and AML (Anti-Money Laundering) Regulations: These regulations require financial institutions and payment service providers to accurately verify the identity of the users involved and monitor transactions for illicit activities like money laundering.
- GDPR (General Data Protection Regulation): This is a European data privacy law that is generally applied in some form internationally, which mandates strict guidelines on how companies can collect, store, and process personal data.
Tips to help improve security when accepting online payments
Thinking of accepting online payments? Here are a few important tips to keep in mind:
- Use SSL or TLS encryption to protect customer information
- Ensure you remain compliant with PCI DSS guidelines to secure card transactions
- Enable two-factor authentication to enhanced security and prevent fraud
- Use tokenization to replace sensitive payment data
- Install advanced fraud detection tools that leverage AI and machine learning
- Conduct regular security audits and vulnerability assessment
- Only use trusted payment processors and secure payment gateways
- Actively monitor for suspicious activities and unusual transaction patterns
- Regular update your website, payment system, and related software
- Avoid storing unnecessary payment details to reduce your exposure to risk
5 benefits of electronic payment systems
Since electronic payments are becoming ever more popular, it begs the question:
What’s so good about them?
Here are five important benefits that businesses and customers receive from using electronic payment systems:
1. Speed and efficiency
Electoral payments can be processed much faster than paper-based methods like checks or cash. This is especially true in the context of e-commerce transactions (imagine having to mail cash to pay for an online purchase).
2. Enhanced security
Electronic payments use advanced encryption, fraud detection systems, and authentication technology to significantly reduce the risk of fraud compared to physical transactions.
3. Cost savings
By eliminating paper checks, postage, and the labor costs associated with manual processing, you can reduce overhead costs.
You’ll also reduce errors and enable faster reconciliation, further lowering the administrative burden and reducing costs.
4. Improve cash flow management
Electronic payments enable real-time payment tracking and offer greater transparency.
By integrating payment information into your financial operations platform, you’ll be able to better manage cash flow by accurately forecasting income and expenses in a more timely manner.
Additionally, you can make use of automatic payments and scheduled transfers to avoid late fees and penalties.
5. Automation of accounts payable and receivable
Many e-payment systems enable businesses to automate repetitive recurring tasks like invoicing, payment tracking, and reconciliation, which can free finance teams up to focus on more strategic work.
This leads to faster payment cycles, keeping vendors happy and ensuring you have a healthy inflow of cash to your bank account to invest in further growth initiatives.
Secure electronic payments with BILL
There’s no denying that electronic payments are the future of business transactions.
As a company doing business online, it's essentially a necessity that you offer some form of electronic payment method. If you can offer several, it's even better from the customer’s perspective.
BILL, our financial operations platform, offers integrated electronic payments via ACH, credit card processing, and more.
You can also send out invoices, track payment statuses, and monitor and forecast cash flow in real time, giving you ultimate control over business spending and income visibility.
