Getting paid is arguably the most important part of operating a business. After all, getting paid for the products you’re selling is how you can pay for business expenses, grow revenue, and draw a profit.
Digital payments make growing your business possible wherever you’re selling. Instead of forcing customers to head to an ATM to withdraw cash to pay in-person, digital payments allow you to accept money from anyone, anywhere. All customers need to make a financial transaction is a smartphone, computer, or credit card.
While the technology behind them might sound complicated, modern digital payments providers allow almost any business owner to accept electronic payments without in-depth knowledge of payment processing. This guide breaks down how digital payments work, alongside the top methods you should consider if you want to make commerce more accessible to your customers.
What are digital payments?
Digital payments are any type of payment that happens electronically. Instead of taking physical cash from your customers, businesses can accept a digital payment when customers pay through a smartphone, computer, or their credit or debit cards.
Why use digital payments?
Studies estimate that people will spend $16.62 trillion through digital payments by 2028. This is because digital payments offer the following advantages over cash:
- More security. Digital payment methods have an extra layer of protection to keep money safe. For example, if someone wants to pay via their Apple Pay wallet, they need to enter a security password or use biometric verification (such as Face ID) to approve the payment. This protects business owners from fraud.
- Convenience. Digital payments take money out of one account and into another. There’s no need to physically go to the bank to withdraw or deposit money.
- Easier record-keeping. If you have $50 cash sitting in your checkout drawer, can you accurately say who it came from? Digital payments are more traceable than cash. It’s easier to track income and spending, reconcile your accounts, and file tax returns if you pay digitally.
How digital payments work
1. Customer initiates a payment request
The first step in accepting a digital payment is to collect payment information from your customer using a payment gateway.
If you’re accepting digital payments through your ecommerce website and brick-and-mortar store, for example, you could use Shopify Payments to securely collect the customer’s payment details. This gateway tokenizes the data and transfers the information securely to the payment processor.
2. The digital payment is authorized
The payment processor contacts the customer’s bank for authorization. The processor verifies that there are sufficient funds in the customer's account and that the digital payment transaction meets security requirements (such as the payee’s identity matching the name of the bank account holder).
Sometimes, this requires extra authentication. The customer might have to verify their identity using biometric data, such as fingerprint or facial recognition, or a one-time passcode.
3. Payment network transfers the funds
Payment networks are organizations that enable cashless transactions between businesses and individuals. They make up an ecosystem of entities like banks, credit card companies, and credit unions to move money from one party to another securely.
Once the payment is approved, the payment network acts as an intermediary between the customer’s bank and your merchant account. This completes the digital payment: The customer receives their goods, and you receive their money.
Top digital payment methods
Credit and debit cards
Credit and debit cards have overtaken cash in terms of popularity. By 2027, it’s estimated that 28.44 billion people will have debit, credit, or prepaid cards that they use to buy things, possibly because it allows them to make large purchases without withdrawing cash.
Any money processed through a debit or credit card goes straight into your merchant account once the customer enters their pin into a card reader and the digital payment is approved.
The downside to this digital payment method is the payment processing fees that most gateways charge. You don’t get to keep all of the money you’ve charged (like you would with cash). There’s also a delay in the time it takes for the funds to hit your business’ bank account.
Contactless payments
A contactless payment works similarly to a credit or debit card payment. The main difference is that the customer doesn’t need to enter their card into a card reader and enter their PIN. Instead, the card uses near field communication (NFC) technology to encrypt payment details over a low-speed radio connection.
While contactless payment offers convenience for in-store shoppers, most banks have a maximum contactless payment limit of $100. And if someone picks up a contactless card that hasn’t yet been reported lost or stolen, anyone can use it to make fraudulent digital payment transactions.
Mobile wallets
A mobile wallet is a payment app that allows customers to purchase goods from their mobile device, smartwatch, or tablet. Examples include Apple Pay, Google Pay, and Samsung Pay. They’re growing in popularity: digital wallets account for roughly half of all global ecommerce transactions.
What’s great about mobile wallets is that you can process digital payments anywhere. If you’re selling online, use mobile apps like Shop Pay, which allows customers to securely save their payment information and checkout quickly. And you’re taking digital payments in-person, customers don’t need their physical bank card to make a purchase—just the smartphone that’s already in their pocket.
Cryptocurrency
Cryptocurrencies are a type of digital currency that anyone can use to make a digital payment, provided the merchant accepts them. Examples include Bitcoin, Ethereum, and Litecoin. These payments work through the blockchain, a system that records financial transactions that aren't government-controlled or operated by large financial institutions and central banks.
The biggest downside to crypto is that it is more complex than other digital payment methods because not everyone accepts it. In most cases, you need to buy the currency before you can spend it. The retailer on the receiving end must also convert the crypto back into their own currency if they want to spend it elsewhere.
Electronic bank transfer
If someone doesn’t have a physical means of payment (such as a bank card or smartphone with a mobile wallet) they can use electronic bank transfer to pay for goods and services digitally. They’re most often used for larger or one-off secure transactions.
If you were buying inventory from a wholesaler, for example, you might receive an invoice with the supplier’s payment details on the bottom. To make the digital payment, you’d sign into your online banking app and transfer funds from your bank account to the wholesaler’s using their account number and routing code.
Peer-to-peer payments
Peer-to-peer (P2P) payments happen when friends send money to each other over the internet. This type of digital payment service allows you to link your bank account or card with the payment app so you can send instant payments with minimal fees. Examples include Venmo, PayPal, and Cash App.
How to collect digital payments with Shopify
Shopify Payments supports local currencies so you can get paid wherever you sell, both online and in-person, across the globe. You can accept your customer’s preferred payment method—physical credit cards, mobile payment apps, and contactless included. Customers can also use these electronic payment methods to pay in installments or opt into recurring payments.
The best part? Unlike other payment gateways, you won’t be charged third-party transaction fees for orders paid for through Shopify Payments or Shop Pay, so more profit stays in your pocket.
