Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.

Key takeaways

  • Digital payments are a necessity for small businesses looking to stay competitive in today's market
  • Digital payments offer benefits such as improved cash flow, increased sales and improved customer experience
  • When choosing a digital payment service provider, businesses should consider factors such as cost, multi-state and global reach and data security

As a small business owner, you’re always looking for ways to streamline your operations, improve cash flow and broaden your customer base. One strategy you might consider is adopting digital payments to give your customers a variety of payment options.

According to Visa’s 2022 digital payment study, 41 percent of customers have abandoned their shopping in stores because the store didn’t take a digital payment. Similarly, McKinsey & Company’s 2023 Digital Payments Consumer Survey found that nine out of 10 customers have used some form of digital payment in the past year. Digital payments are becoming a necessity for small businesses wanting to stay competitive.

But deciding to go digital with your payments means you’ll need to know how your customers prefer to pay, your business’s needs and the advantages and disadvantages of offering digital payments.

What is a digital payment?

A digital payment is any payment method allowing you to purchase an item without a physical card or cash. Digital payments can include online shopping, in-app payments, digital or mobile wallets and digital currency.

You might even consider contactless payments. Contactless payments allow you to tap your card, phone or even a specialized ring or bracelet, like the Quontic Bank ring or Apple Watch, to pay.

Digital payments statistics

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  • 73% of small businesses say that digital payments are a vital part of their growth (Visa 2022 Back to Business Global Study)
  • 41% of consumers said they plan to use only digital payments within the next two years or are already cashless. (Visa)
  • 59% of small businesses said they plan to use only digital payments within the next two years or are already cashless. (Visa)
  • 73% of customers pay online, while another 58% make in-app payments. (McKinsey & Company Digital Payments Consumer Survey)
  • 31% of shoppers said they would rely on one mobile wallet in 2023 versus 21% in 2021. (McKinsey & Company)
  • 29% of shoppers have used buy now, pay later in the last 12 months. (McKinsey & Company)
  • 76% of adults globally now have a bank account as of 2022, versus 68% in 2017. (The World Bank)
  • Over 40% of adults in low- to mid-range economies used digital payments for the first time during the pandemic. (The World Bank)

Why consider digital payments as a small business?

The biggest reason to consider digital payments is that most customers use them daily. If you have the ability to take digital payments or offer online shopping, you attract customers who only use this method or a mix of digital and physical payments.

According to McKinsey & Company, 73 percent of shoppers use online shopping, 58 percent use in-app shopping and 25 percent use digital payments in-store. In-store digital payments have grown from 16 percent in 2022. And 44 percent of shoppers use peer-to-peer payments, like Zelle or Venmo.

As you adopt these popular payment methods, you’ll stay ahead of other small businesses that may be slow to adopt new trends. This makes your business resilient and helps you pivot to cater to your customers.

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Bankrate insight
According to Visa’s Digital Transformation of SMBs, small businesses took 542 hours to process $100,000 in non-digital payments versus 189 hours in digital payments. Those are tangible, cost-saving results for any small business.

What are the pros and cons of digital payments?

Digital payments offer a number of advantages over physical transactions, like cash or checks. You can automate sales with online and in-app shopping and track transactions more efficiently than physical money.

But digital payments also present challenges, such as compliance issues and the need for solid fraud protection policies. Let’s look at the main benefits and challenges of using digital payments for your small business.

Pros

  • Helps with cash and business flow. When you adopt digital payments, customers can pay quickly with the tap of a card, pay ahead using an app or buy entirely online. That efficiency may translate into potential savings in staffing.
  • Helps you stay competitive. If you offer digital payments, you will stay ahead of other small businesses that only accept traditional forms of payment.
  • Can lead to higher transaction amounts and more sales. As people grow more comfortable with digital payments, they are increasingly willing to make large payments digitally. By adopting digital payments, you may be able to attract high-value customers who prefer the convenience and security of cashless transactions.
  • Improves customer experience. Customers appreciate the convenience of cashless or cardless transactions, which can boost customer satisfaction and sales.
  • Reduces the cost of cash transactions. Non-digital payment methods, like cash and paper checks, can take days or weeks to process. But digital payments don’t require the same physical processing, helping you deposit transactions seamlessly.

Cons

  • Payment provider fees. While digital payments can streamline operations and reduce costs, businesses should be aware of potential hidden costs. These may include statement fees, Payment Card Industry (PCI) compliance fees, chargeback fees, termination fees, batch processing fees and additional service fees for features like virtual terminals, recurring billing or fraud protection.
  • May encounter technical issues. When you adopt digital forms of payment, you have to plan for technical problems that might keep your customers from using them. For example, your website might go down, or contactless payments might not always work.
  • Requires tight security practices. Businesses need robust security measures to safeguard customer data and protect the business’s reputation. This includes continuous activity monitoring, a well-defined incident response plan, firewall and network security solutions and regular security updates and patches.
  • Adopting digital payments may not be worth it. Depending on your customer base, you might not see a direct correlation between digital payments and profitability in your business.
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Bankrate insight
The FDIC found that approximately 4.5 percent  — 5.9 million — of U.S. households were unbanked in 2021, meaning no one in the household had a checking or savings account.

Additionally, the use of nonbank online services, such as PayPal or Venmo, by unbanked households was only 18 percent compared to almost 48 percent for banked households. When deciding whether to adopt digital payments or go cashless, consider that it may risk isolating unbanked customers.

How to choose a digital payment service provider

Choosing a digital payment service provider is a critical decision that can impact your business operations. It requires careful consideration of a variety of factors, from costs and global coverage to payment card industry (PCI) compliance and platform integration. The digital payment service is also called a payment gateway.

When choosing a payment gateway, it’s important to consider:

  • Total cost, including any hidden fees. Weigh the cost of the service provider and per-transaction fees against any cost-savings or increased sales you might have.
  • National reach. The provider should be able to process payments across different states if you sell nationally.
  • PCI compliance. It’s also critical to ensure that the gateway complies with PCI DSS level 1 requirements for data security. These requirements set standards to help businesses process a large amount of card transactions securely.
  • Performance. The gateway should perform well on different operating systems and platforms and offer round-the-clock customer support if you run into technical problems.
  • Easy integration into your current business. The payment gateway should be compatible with your existing business systems and platforms. If the integration process is complex or requires significant resources, you’ll have to weigh the pros and cons of the service.
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Bankrate insight
You can evaluate the profitability of using digital payments by looking at the costs of the service. Then, compare it with how the digital payment method will either increase sales or reduce costs. If there are equipment or additional operating costs that are impacting your ability to adopt digital payments, you may want to consider an equipment loan or working capital loan to assist with the transition.

Bottom line

In today’s market, small businesses need to consider digital payments to stay competitive and attract customers. Despite some drawbacks, the benefits of adopting digital payment options, such as improved cash flow and customer experience, may outweigh the challenges.

When choosing a digital payment service provider, businesses should consider factors such as cost, global reach and security measures. Ultimately, when small businesses embrace digital payments, it can increase sales and efficiency.

Frequently asked questions

  • Customers may have concerns about digital payments, which can affect usage. Key concerns include potential overspending because they don’t see the tangible money they’re spending, fear of fraud or privacy breaches, lack of financial or digital skills and lack of access to the internet or a bank account.
  • Whether to go cashless is a decision that should be based on your business model and your customer’s preferences. Going cashless can speed up checkout, automate accounting, increase safety by reducing cash on hand and offer your customers convenience. But going cashless may exclude customers who don’t have access to electronic payment methods or don’t use a checking or savings account.
  • Digital payments use encryption and tokenization technology to secure transaction data. The sensitive payment information is replaced with unique tokens generated by a secure system. There are also secure payment gateways with encryption protocols that secure the communication between the customer’s browser and the payment gateway. This ensures that the data remains safe from interception or tampering.