What Your Business Needs to Know About Collecting Payments Online

How does your business collect payments? This answer typically varies from industry to industry. But with the advent of payment technology, many businesses see the benefit of collecting payments online.

How Do Businesses Typically Collect Payments?

Around 83% of polled small businesses say they will always accept cash. And around 66% of those businesses believe their customers would negatively react to going cashless. A decade ago, more than 50% of small businesses were cash-only.

Joe Coffee, a small chain in the New York Metro, epitomizes the story of cash-only businesses over the last decade. Joe Coffee only accepted cash, partly because it fits in with the ethical aesthetic of their business: a mom-and-pop establishment with hand-drawn signs.

However, a purview of the Yelp reviews revealed that customers were unhappy with the idea. Around 75% of the negative reviews were all about the fact that Joe Coffee did not take plastic. The business owners decided to try credit card transactions at a satellite location, and sales started taking off.

Wake Up And Smell The Coffee

The story of Joe Coffee ties into a landscape where 55% of the 27 million small businesses in the US refused to take credit card payments. Intuit estimated that these businesses were leaving $100 billion in sales on the table annually.

Fast forward to today, and 93% of businesses accept Visa. This is coupled with the fact that consumer cash usage is declining. The average American carries only $67 in cash, with most carrying less than $40. 

Another factor in the acceleration away from cash payments was the Covid Pandemic. Many consumers were quarantined during the Pandemic—either by choice or (somewhat) involuntarily. The shift away from cash illustrated the reality that it isn’t just about the mode of payment; it’s also about where the transaction takes place.

In-Person Versus “Remote” Transactions

The Covid Pandemic accelerated an already existing trend: processing payments through online transactions. Before the Pandemic, our societal norm was to conduct transactions in person. Despite how much eCommerce had eaten away at the traditional brick-and-mortar stores, shopping and dining in person were the norm.

Suddenly, consumers were forced to order delivery instead of eating out, stream all their entertainment, and order everything from Amazon. It was a good time to invest in tech companies, or at least a good time to copy what Nancy Pelosi was purchasing.

Even businesses that already accepted credit and debit cards had to learn how to accept online payments. Businesses that facilitated shopping through mobile applications—like DoorDash and UberEats—were poised for success. DoorDash revenue increased 83%, for example.

The Pandemic has since cooled down, and people have returned to normal life. The “in-person” economy is once again a powerful force. In fact, brick-and-mortar sales increased 11.4% in 2022. That same year, brick-and-mortar sales hit $3.6 trillion, more than three times the dollar amount of eCommerce sales.

So, do most businesses, especially those with in-person business models, need to worry about online payment collection? They most certainly do…and we’ll explore why.

Collecting Payments Online In The Hospitality Sector

Let’s build our case by first looking at one of the most “in-person” industries, the hospitality industry, particularly food and beverage. We have already established that the vast majority of small businesses have learned that interchange fees are a small price to pay for accepting credit card payments.

These businesses have a point of sale (POS) terminal where servers or bartenders can input payment information by collecting customer credit cards. If you’re a restaurant or bar owner, there is seemingly no reason to collect online payments for your services. Or is there?

A new piece of technology is taking the food business by storm: the QR code. A QR code is a checkerboard pattern of black and white squares that a customer scans with the phone on a mobile device. The customer’s phone then directs them to a website where they can survey the menu or make payment when the meal is done.

If you’re not in the food business, or you’ve never served that post-college rite of passage as a server, you might not see the impact of QR codes. But if you are, you can see the potential of this technology to reduce turnover times, free up tables, and keep “the floor” moving.

Other QR Code Benefits In The Food Biz

In the post-pandemic world, where consumers are more concerned about hygiene, QR codes also make a difference. That’s because consumers do not need to handle menus. They can peruse the menu from their phone, creating a “contactless” experience.

Enterprising restaurateurs can also use the phone menu as a springboard to make the ordering experience more dynamic. A digital menu can feature videos of food prep, playing into the excitement of “food culture.” Customers can be prompted to earn a discount for texting restaurant referrals to friends or following the restaurant on social media.

Around 66% of restaurants already use QR codes for menus or collect payments. These restaurants are not online businesses, but they accept payments online from patrons’ phones.

Why Medical Businesses Should Collect Payments Online

Let’s review another very “in-person” industry: healthcare. The payment landscape of healthcare is certainly more nuanced than ordering an awesome blossom or a pint of local craft brew. That’s because medical insurance complicates the picture.

A practitioner will need to collect the payment for patients who have a copay or pay entirely out of pocket. Most healthcare practitioners do this by sending an invoice. For one, collecting payment in person can complicate the quality of rendered care. Patients may be embarrassed about having to linger in the waiting room. They may be distressed and just want to go home.

Sometimes, the office does not know how much to charge the patient until they have worked out the insurance details. Sometimes, that may require days or weeks of back-and-forth haggling about what they’ll cover. Then, some patients cannot afford to pay for everything all at once.

Bad Debt And Installment Plans

These patients need installment plans. Around 9% of the adult population has medical debt of at least $250, with around 50% of those in debt owing more than $2,000. Considering that the average consumer already has a home mortgage, car or student loans, and credit card debt, the prognosis of collecting large healthcare payments is dim.

This is where online payments once again save the day. Healthcare practices can follow up about payment by sending an email or a paper invoice that directs the patient to a payment page. Once on the payment page, the patient can select an installment plan that allows them to pay for the care rendered. 

An online payment processing company (usually the same one that can service your in-person card transactions) can facilitate these payment plans. The payment processor will collect and store payment information from the patient, such as a credit card or debit card number or bank account information (for ACH payments).

Online Payment Processing And Patient Engagement

With this payment information captured, the processor can run a charge every month on an agreed date for an agreed amount. These automated payments will prevent a patient from forgetting to pay one month or deciding they don’t want to. The payment can also be linked to automated text and/or emailed reminders to keep patients in the loop.

Storing customer-patient payment information is subject to many rules and regulations in the PCI DSS codes promulgated by Visa and Mastercard. Allowing a payment processor to store and manage this data is far easier and more cost-effective. From your end, bill payment is automated. 

Bad debt is a problem of pandemic-sized proportions in the healthcare industry, with 36% of healthcare systems carrying more than $10 million in unpaid bills. However, companies using digital engagement can significantly reduce their bad debt. For example, LifeBridge health systems reduced theirs by nearly 20%. Digital engagement includes automated billing facilitated by collecting payments online.

Should Online Retailers Use Shopify, Square, Or Stripe?

We have discussed two industries that involve many in-person B2C payment interactions—and shown how even these businesses would benefit from collecting online payments.

Now, let’s look at an industry that can only collect online payments—eCommerce. The first truly eCommerce store was The Boston Computer Exchange, which opened in 1982. It was a dial-up exchange for people to buy and sell used computers.

There was no World Wide Web then, so The Boston Computer Exchange was a prototype online store. However, it laid the foundation for the next generation of online stores in the 1990s.

Today, online business is booming. Companies like Shopify have created platforms allowing individuals to open online boutique storefronts. There are over 6.3 million Shopify stores “based” in 175 countries.

Shopify is a decent solution for small businesses that are truly in the nascent stages of development. A similar thing could be said of payment processors who can embed a payment button in a website—like Strip or Square. 

However, these payment processors are no longer reasonable solutions once a business arrives at a substantial sales volume where the business moves from being a “hobby” or “side gig.”

Payment Processors Versus Payment Aggregators

When a business registers to accept credit card payments, banks, and credit card networks treat the merchant as its own unique entity with its own merchant ID. This helps them distinguish one business from another and eliminate any businesses that are “bad apples.”

If you’re wondering what could make a business a “bad apple,” it’s typically chargebacks. Chargebacks are when a customer wants a refund, but instead of contacting the business, they just contact their bank or card company.

The payment is reversed through the multi-part payment landscape, creating an avalanche of fees, fines, and penalties that mostly get dumped on the merchant. What adds insult to injury is that if you get too many chargebacks, Visa and Mastercard will blacklist you.

What does that have to do with Stripe, Square, and PayPal? These companies are payment aggregators. They aggregate or bundle all their merchants under one ID—their own. As such, they cannot afford any “bad apples” that sour their apple barrel’s reputation.

If a merchant turns out to be a bad apple (e.g., too many chargebacks), the aggregator will toss them out unceremoniously. You could accept credit card payments one day, then the next day, find your services canceled because one of your customers pushed you over the “allowed” chargeback ratio.

Contrast this to payment processors. These companies do not bundle you under their own name. Because their reputation is less “on the line,” they can work with you to find a solution if you get too many chargebacks.

Do Online Chargebacks Occur More Frequently?

Online transactions are more susceptible to chargebacks for several reasons. For starters, all online transactions are by default card not present (CNP) transactions. These types of transactions are more generally subject to malignant and friendly fraud because the card is not in front of you.

Malignant fraud occurs when someone uses a cardholder’s financial information against their will. Firewalls and AI-powered security measures are important for preventing these occurrences.

Friendly fraud occurs when a customer does indeed make a purchase—and then files a chargeback. They may not know they should request a refund from you directly. Unfortunately, many consumers purchase, enjoy, and claim they did not revive the goods or services sold.

Sometimes, these claims are legitimate, and that’s because another pitfall endemic to eCommerce is that sold goods require delivery. If an item is defective, damaged during shipping, or lost entirely, a customer may (out of frustration) file a chargeback.

The customer may also intend to request a refund or replacement. However, they may not know how to go about this. Online merchants should make their contact information very conspicuous and be available on multiple channels, including social media.

Subscription Services: Delivery And In-Person

If your business is a subscription model, that’s another reason to accept online payments. It is dysfunctional at best and logistically impossible at worst to ask customers to manually pay you every month—especially if they need to pay in person. Calling over the phone isn’t so bad—after all, this is how many consumers regularly pay their bills—but there’s a better way.

An online payment gateway can automate payments. All it takes is collecting payment information (card or bank account numbers) at the time of the initial purchase. The payment processor can store these numbers for you and periodically run the transaction on the day and for the amount specified in your contract.

Online and automated payments are necessary for online business models such as software and streaming services. But what about subscription or membership businesses that do involve in-person interactions? Gyms, shopping clubs (like Costco), and services (like landscaping) all facilitate moments where an in-person payment could occur.

Ideally, you should allow subscribers to pay in person. However, you should also have the option to pay online or to automate payments. For starters, this can allow you to capture some additional foot traffic. You can motivate potential clients to make a fast checkout before the apathy factor kicks in.

Examples Of “In-Person” Businesses Accepting Online Payments 

Take gym memberships, for example. In January, you can run social ads that tap into the prevalent “New Year’s Resolution” mentality. You could ask potential gym members to come in and sign up. But what happens if they become apathetic a few minutes later? After all, the average consumer is bombarded by 10,000 ads per day (you read that right).

You can direct the potential member to a web purchase transaction. On this page, you can give them the option of a monthly, annual, or periodic membership, like three months or six months. A best practice is to motivate customers to pick annual memberships by promoting them with a discount.

Let’s take another example of a service-based business. Landscaping, insect control, and pool maintenance are examples of service-based businesses where they could potentially be an in-person payment. However, directing subscribers to an online payment processing center (e.g., a payment page on your website) is a better practice.

For starters, what happens if the customer is not home when you mow the lawn, clean the pool, or spray insect repellent? If they are subscribed online, this won’t matter. Directing the customer to an integrated online payment can also minimize the number of phone calls you must take.

Can You Add Subscriptions To Your Business Model?

One question that many business owners should ask themselves is: can we offer subscriptions? When you think of subscription services, you probably think of Netflix, Hulu, and Amazon Prime. You might think of Salesforce or Quickbooks if you’re a business owner. But what about businesses that sell goods or one-off experiences? Can they leverage the subscription model?

They most certainly can. Take subscription boxes as an example. The subscription box industry is currently valued at $23 billion and will grow to $65 billion by 2027. Subscription boxes involve goods that are delivered to customers. These goods could be food, personal care products, or boutique niche items.

Large, big-box retailers have recognized the value of subscription models and incorporated them into their online shopping platforms. For example, Target will ask online shoppers if they want to “subscribe” to certain items in their digital shopping cart.

This might be an item commonly purchased repeatedly (like personal care products) or an item the particular shopper purchases frequently. So Target will offer to deliver the item regularly and collect recurring payments. This is a great way to capture customers and prevent them from picking up items in a different store if they suddenly run out.

Subscription models are made possible by making yourself an online payment merchant. It is difficult to sell subscriptions on the phone and even in person. However, selling them online through simplified payment portals is fairly easy. It is also fairly easy to sell them to customers who regularly purchase the same item—as retailers like Target have discovered.

The Halo Effect

Merchants who are exclusively online and exclusively brick-and-mortar are probably wondering if they should cross over into unfamiliar territory. An interesting phenomenon called “The Halo Effect” has been observed, whereby retailers with both real and digital footprints see sales and revenue in both venues increase.

A study of “bricks and clicks” by the International Council of Shopping Centers revealed that online stores see a 37% increase in web traffic when a brick-and-mortar is opened. Additionally, they see a decrease in traffic when physical stores close.

There is a clear link between the two spheres—online and in-person. The interplay between the two creates a sort of “halo” of positive consumer perception of the brand. That said, brick-and-mortar retailers would do well to open an online version of their store.

Why Main Street Stores Should Also Collect Payments Online

First off, it would facilitate sales outside of store hours. It would allow for a much larger radius of sales. And locally (for small businesses), the brick-and-mortar presence in the community has already made an indelible imprint on internet shoppers.

One area where this halo effect is readily apparent is the good business (which was discussed earlier). Locals are familiar with their restaurant choices. If they are at home and want to order takeout, they’ll choose the restaurant that has provided the best dining experience.

In summary, if you’re a local brick-and-mortar, you should consider opening an online store in addition to your Main Street presence. It will boost your sales volume, capitalizing (in part) on your already established local presence. To set up that online store, you need to accept payments online. 

How Does Online Payments Work?

Hopefully, we’ve made the case for online payments for your products or services. Now, let’s talk about how to start collecting payments on your website. There are a few online payment fundamentals to cover, but the details can all be outsourced to your payment processor.

Your payment processor sets up the payment gateway on your website. Usually, customers need to provide card numbers, expiration dates, and possibly the CVV. They may be asked to provide an address, an email, and/or phone number for a receipt. That’s it, really.

On the backend, there is a lot more going on. To keep a long story short, once the customer makes the payment, the card network associated with that card (Visa, Mastercard, Amex, Discover) will communicate between the customer’s bank and your bank to move the funds from point A to point B. Overall, it is very similar to in-person transactions run through a POS.

What Is The Cost Of Online Payments?

Collecting payments online is much different than collecting them at a point-of-sale terminal. In-person transactions have some inherent security measures that online transactions do not have. The first layer of security is that a person won’t let someone use their physical card or mobile wallet without permission.

But things are different online. If a person gets hold of a card number, they can probably use the dark web to purchase the cardholder’s address or maybe even do some Facebook scrolling. Once they have what they need, they can shop online for what they want. Or can they?

Banks and card networks are leveraging the latest developments in AI to foil fraudulent purchases. They review your spending habits—how, what, when, where, and why. From this data, they learn what falls outside your typical purchasing patterns and will stop such transactions from going through.

In any case, there is still some inherent risk to online transactions because the actual card is not present. For this reason, online purchases often have a slightly higher transaction fee than card-present, in-person transactions. These additional fees are meant to defray the overall cost of risk to the financial institutions facilitating online payments.

Overall, the difference in fees is negligible. And they will still probably be lower than someone paying for something in person with an Amex Business Card. However, for those still concerned about the slight fee difference, there are some ways around this. One way is that you can build the fees into your pricing.

Collecting Payments Online With ACH Transactions

But another is to take a different method of payment: ACH transfers. This involves collecting checking accounts and routing numbers. Payments are transferred from the customer’s bank to your business bank with the help of the Automated Clearing House Network.

ACH payments are often significantly less expensive than debit and credit card payments. The average ACH payment costs about three dimes to run versus 2-3% for plastic. This is why online ACH payments are excellent for large transactions like rent payments, utilities, insurance premiums, and other large, one-off payments. Although, you can also collect recurring online ACH transactions, which is great for any type of monthly transaction. 

Collecting Payments Online: Wrap-Up

There is really no reason not to accept online payments. Moreover, the same company that processes your in-person card transactions can set up an online payment gateway. That way, all of your systems and accounting can be streamlined and synced up. To learn more about collecting online payments, give us a call or fill out the form below. We’d love to hear about your business and how you currently collect payments.

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