We've come a long way when it comes to paying for goods and services. From using barter-like methods dating back at least 100,000 ago to accepting online purchases with a card for the first time in 1994, the incredible evolution of payments is unquestionable. In this article, we will discuss the different types of payment methods that customers can choose from in 2022, and why merchants should aim to offer as many as possible.
What is a payment method?
Put simply, a payment method is a way in which customers can pay for goods and services. Common payment methods include cash, credit or debit cards, checks, prepaid cards, digital wallets, mobile payments and more. The earliest form of paying is barter, or the exchange of goods and services for other goods and services without the use of money.
As we mentioned earlier, payments have a long history that dates back to hundreds and even thousands of years ago. The first metal money was used for the first time around 1000 B.C. in China, represented in coins made from stamped pieces of valuable metals (for example, copper and bronze). The ancient Greeks were also using early variations of coins around 650 B.C.
According to Cashbook, paper money was used for the first time in China in the year 806, while the first printed cheque dates to 1762 - almost 1,000 years later. 252 later, in 2014, Android, Google and Samsung Pay released their digital wallets to the public.
Types of payment methods and their evolution over the years. Source: cashbook.com
Over the last decade, digital payments have undoubtedly been on the rise - according to the same study conducted by Cashbook, 90% of mobile owners in 2020 have made an online transaction.
Considering that 91.4% of the entire world's population own a mobile phone, and 83.72% own a smartphone, we can clearly see that mobile payments are among the most popular types of payment methods nowadays.
And now, let's take a look at the types of payment methods that merchants can offer in 2022:
1. Cash
While customers are switching more and more to online payments as opposed to cash, especially following the global COVID-19 pandemic, cash is still among the most used payment methods. According to Querysprout, 30% of people in the US prefer paying in cash, especially for items under $10. On average, Americans pay 14 transactions per month with cash.
According to Statista, however, cash (37%) will be at the bottom of the list of preferred payment methods in 2022 across the globe, higher just above digital currencies (15%) and check (4%).
Which payment instruments will dominate in 2022? Source: Statista.com
Pros of cash
• No hidden fees
• Accepted everywhere
• Convenient for smaller purchases
Cash is among the easiest and most convenient types of payment methods, and probably the only one that is accepted everywhere. In comparison, not all merchants accept credit or debit cards, especially when it comes to card-present transactions in local or street shops and vendors.
In addition, there is no hidden or credit card fees when it comes to paying with cash - the amount the merchant asks is the exact amount that you will pay.
Cons of cash
• Withdrawal fees
• Limitations
• Inconvenient for bigger amounts
On the negative side, you still get to pay fees when withdrawing cash from an ATM, and you may not have an ATM nearby if a merchant only accept cash and you don't have enough, which can be an inconvenience. From the perspective of businesses, one of the biggest inconveniences when it comes to cash is that customers don't always want to make big purchases with it.
This type of payment method also tends to be ineffective for optimizing internal processes and operations, slowing down businesses who needs to count money at the end of the day.
2. Credit and debit cards
Undoubtedly, one of the most common types of payment methods are credit and debit cards. With more than 2.8 billion credit cards in circulation, there is no doubt that they are highly preferred by customers, especially when it comes to online purchases or in-store purchases that are too big for cash.
Average number of credit cards by generation. Source: Experian.com
Pros of credit & debit cards
• Convenient for larger purchases
• Allow customers to pay online
• Make accounting easier for merchants
Credit and debit cards have become widely popular among customers, who prefer to carry cash less and less.
They are especially convenient for larger purchases, funds are quickly available (if you don't have enough cash, you would need to find the closest bank or ATM), and most importantly - they enable them to pay online. Which is something that they can't do with cash.
Credit and debit cards can be highly convenient for merchants as well, especially when it comes to accounting and keeping track of all transactions.
Cons of credit & debit cards
• Merchants don't always receive funds immediately
• Processing fees
• There is a risk of chargebacks
While credit and debit cards can be highly convenient for customers, considering how easy it is for them to make payments, the funds are not always readily available for merchants as it is the case with cash.
Usually, merchants have to wait until the transaction is fully processed to get the payment, which may take a couple of days. It may take even longer if the company is placing a pre-authorization hold to ensure that there are enough funds in the card.
When it comes to types of payment methods, this one is also typically associated with processing fees, although they can be lower with debit cards. And last but not least, sellers face the risk of chargebacks disputes, which was initially created as a method of protection for customers. but can be damaging for businesses if wrong or fraudulent.
3. Online payments
Talking about popular types of payment methods, online payment options became extremely popular in the last few years, especially following the global COVID-19 pandemic which forced millions of people to stay home. In fact, according to Statista, electronic payments are the preferred option for 39% of people.
Preferred payment methods of online shoppers worldwide. Source: statista.com
Some of the most common forms of electronic payment include Stripe, PayPal, and Square, but many more have been arising on the market.
Pros of electronic payments
• Fast & easy for customers
• Increased sales for merchants
• Great for international transactions
Unsurprisingly, electronic payments are extremely convenient for customers, enabling them to make payments online in a fast and easy manner without even reaching for their credit card. Because they are so convenient and so many users prefer them as opposed to other types of payment methods, this helps merchants boost their sales.
This is especially true for platforms such as PayPal, which many people use for security reasons due to their customer protection policies. A lot of customers may not complete a purchase if they aren't able to pay with PayPal, especially when they are doubting the online merchant.
Electronic payments are also highly convenient for international transactions because of all the features that these platforms offer.
Cons of electronic payments
• High transaction fees
• Risk of fraud
• Disputed transactions
Of course, not everything is perfect when it comes to electronic payments. They are typically associated with higher processing fees, and there is a risk of online payment fraud as they can be subject to phishing attacks, in which hackers will try to steal payment data.
For this reason, it's really important that merchants use a powerful, highly-secure Payment Gateway for accepting payments online and ensuring that fraud is prevented in the best ways possible.
And last but not least, merchants also face the risk for disputes when it comes to online payments. For example, if a customer claims that the purchase has been made without their authorization (which, of course, can also be legitimate), they will take the dispute to the credit card issuer instead of communicating directly with you.
A high dispute (or chargeback) rate may not only lead to costly penalties, but can also damage a company's reputation. However, working with a good Payment Gateway such as MYMOID can seriously help businesses get less chargebacks and deal with them more effectively.
4. Mobile payments (e-wallets)
When it comes to types of payment methods, mobile payments essentially have similar pros and cons as electronic payments. They are currently used by more than 2 billion people globally, and they are expected to increase by 28% by the end of 2024.
Types of payment methods: The growth of mobile payments. Source: statista.com
Some of the most popular mobile wallets include Apple Pay, Samsung Pay, Google Pay and AliPay.
Pros of mobile payments
• Among the fastest types of payment methods
• No need to carry cash or cards
• Work with rewards programs
Mobile payments are among the fastest types of payment methods. For customers, they are mostly tap and go, meaning that they can complete the transaction quickly without the need to carry and look for their cash or cards. In addition, they often work with rewards programs which incentivizes customers to purchase more.
For merchants, mobile payment methods can also be highly convenient. They can practically convert their smartphone into a mobile PoS system, and bring it with them to conferences, shows, markets, etc.
Cons of mobile payments
• Not accepted everywhere
• Can result in higher processing fees for merchants
• Compatibility and update issues
Among all types of payment methods, this one is probably the most high-tech, and as such, it comes with some cons that both customers and merchants should be aware of. On one hand, mobile wallets are not always accepted, and if they are, not all of them will be accepted. For example, Walmart only accepts mobile payments from its own Walmart platform.
Apple Pay is the most widely accepted type of mobile payment, and even so, only 36% of US retailers support it.
For merchants, mobile payments can also mean higher processing fees than regular credit and debit card transactions. In addition, they may struggle with constant compatibility and update issues, which can also make payment system more vulnerable to security leaks.
5. Checks
Once being among the most popular types of payment methods, checks are far from what they used to be. In fact, they have been on the decline for the last 25 years, declining 7.2% per year by number and 4% percent per year by value according to data from The Federal Reserve.
However, they are still one of the types of payment methods that exist on the market and people can choose from, so let's take a look at their advantages and disadvantages as such:
Pros of checks
• No convenience fees
• Difficult to cash out by someone else
• Proof of payment
One of the biggest advantages of checks is the lack of convenience fees. Compared to fees that can go up to $10 for electronic payments, a stamp is typically below 50 cents. On the good side, they are also difficult to cash out by someone else in case you lose your check and somebody else finds it - as opposed to dropped cash bills that don't have your personal name on them.
As opposed to cash, checks are also a proof that the payment was made in case it's needed, for example in the case of disputes.
Cons of checks
• Processing time is longer
• Risk of fake checks
• They are inconvenient
While cash and credit transactions can be processed fairly quickly, delivering the funds into your account within hours or just a couple of days, this is not the case with checks. In this case, the amount doesn't leave the account until the recipient decides to cash out the check.
As a merchant, you also face the risk of being scammed with fake checks, which can be extremely damaging especially for larger amounts. Overall, checks are just not as convenient as the other types of payment methods that we described above.
6. Bank Transfers
I am an expert and enthusiast, and I have access to a vast amount of information on various topics. I can provide you with insights and answer your questions to the best of my abilities. Now, let's dive into the different types of payment methods discussed in the article you provided.
Cash
Cash is one of the oldest and most widely used payment methods. It involves the exchange of physical currency, such as coins and banknotes, for goods and services. While the use of cash has been declining in recent years, it still remains popular, especially for smaller transactions and in certain regions. Cash offers several advantages, including:
- No hidden fees: Unlike some other payment methods, cash transactions do not typically involve additional fees.
- Accepted everywhere: Cash is universally accepted, making it convenient for transactions in various settings.
- Convenient for smaller purchases: Cash is often preferred for low-value transactions, especially for items under $10.
However, cash also has its drawbacks, such as:
- Withdrawal fees: When withdrawing cash from an ATM, there may be associated fees.
- Limitations: Cash has limitations in terms of the amount that can be carried and used for larger purchases.
- Inconvenient for bigger amounts: Making large purchases with cash can be inconvenient due to the need for carrying and counting large sums of money.
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Credit and Debit Cards
Credit and debit cards have become increasingly popular in recent years. These cards allow customers to make electronic payments by accessing funds from their bank accounts or borrowing money from a credit line. Here are some key points about credit and debit cards:
- Convenient for larger purchases: Credit and debit cards are commonly used for larger transactions, as they provide a convenient way to access funds without carrying large amounts of cash.
- Allow customers to pay online: Credit and debit cards enable customers to make online purchases, expanding their options for shopping.
- Make accounting easier for merchants: Credit and debit card transactions can simplify accounting processes for merchants, as they provide digital records of transactions.
However, credit and debit cards also have some disadvantages, including:
- Merchants don't always receive funds immediately: Unlike cash transactions, merchants may have to wait for the funds from credit and debit card transactions to be fully processed before receiving payment.
- Processing fees: Credit and debit card transactions are often associated with processing fees, which can vary depending on the payment processor and the type of card used.
- Risk of chargebacks: Merchants face the risk of chargebacks, which occur when customers dispute a transaction and request a refund from their card issuer.
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Online Payments
Online payment options have gained significant popularity, especially with the rise of e-commerce. These payment methods allow customers to make purchases and payments electronically through various platforms and services. Here are some key points about online payments:
- Fast and easy for customers: Online payments provide a quick and convenient way for customers to make purchases without the need for physical cash or cards.
- Increased sales for merchants: Offering online payment options can help merchants attract more customers and boost sales, as many people prefer the convenience of online shopping.
- Great for international transactions: Online payments are particularly beneficial for international transactions, as they eliminate the need for currency conversion and can be processed quickly.
However, online payments also have some drawbacks, including:
- High transaction fees: Online payment platforms often charge transaction fees, which can vary depending on the platform and the nature of the transaction.
- Risk of fraud: Online payments can be vulnerable to fraud, including phishing attacks and unauthorized use of payment data.
- Disputed transactions: Merchants may face disputes and chargebacks from customers, which can lead to financial losses and potential damage to their reputation.
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Mobile Payments (E-Wallets)
Mobile payments, also known as e-wallets, have gained popularity with the widespread use of smartphones. These payment methods allow customers to make payments using their mobile devices. Here are some key points about mobile payments:
- Among the fastest types of payment methods: Mobile payments are often quick and convenient, allowing customers to complete transactions with a simple tap or scan.
- No need to carry cash or cards: Mobile payments eliminate the need for physical cash or cards, as customers can store their payment information securely on their mobile devices.
- Work with rewards programs: Many mobile payment platforms offer rewards programs, incentivizing customers to make more purchases.
However, mobile payments also have some limitations, including:
- Not accepted everywhere: Not all merchants accept mobile payments, and compatibility can vary between different mobile payment platforms.
- Can result in higher processing fees for merchants: Mobile payment transactions may be associated with higher processing fees compared to traditional credit and debit card transactions.
- Compatibility and update issues: Mobile payment platforms may require regular updates and can be subject to compatibility issues, which can impact the user experience and security.
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Checks
Checks have been used as a payment method for many years, but their usage has declined in recent times. Here are some key points about checks:
- No convenience fees: Checks do not typically involve convenience fees, making them a cost-effective payment method compared to some electronic payment options.
- Difficult to cash out by someone else: Checks are more secure than cash, as they require the payee's endorsem*nt and identification to be cashed.
- Proof of payment: Checks provide a paper trail and serve as proof of payment, which can be useful in case of disputes.
However, checks also have their drawbacks, including:
- Processing time is longer: Unlike electronic payments, checks require processing time, as the funds are not immediately transferred from the payer's account to the payee's account.
- Risk of fake checks: Checks can be subject to fraud, including the use of counterfeit or fraudulent checks.
- Inconvenient: Checks are generally considered less convenient than other payment methods, as they require physical handling and may involve additional steps, such as writing and mailing.
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Bank Transfers
Bank transfers involve the direct transfer of funds from one bank account to another. They can be initiated through various channels, such as online banking platforms or in-person at a bank branch. Bank transfers offer several advantages, including:
- Secure and reliable: Bank transfers are considered secure and reliable, as they involve direct transfers between bank accounts.
- No need for physical cash or cards: Bank transfers eliminate the need for physical cash or cards, as the funds are transferred electronically.
- Suitable for various transaction sizes: Bank transfers can be used for both small and large transactions, depending on the available funds in the payer's account.
However, bank transfers also have some limitations, including:
- Processing time: Bank transfers may take time to process, depending on the banks involved and the nature of the transfer.
- May involve fees: Some banks may charge fees for certain types of bank transfers, such as international transfers or expedited transfers.
- Account information required: Bank transfers require accurate account information from both the payer and the payee, which can be a potential source of errors.
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I hope this information provides a comprehensive overview of the different types of payment methods discussed in the article. If you have any further questions or need more details, feel free to ask!
