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A Small Business’s Guide to Digital Payments

Whether you're launching a new business or upgrading your current payment processing services, here's why digital payments should be part of your plan.

Woman making a purchase with her smart phone in a small coffee shop

There’s plenty to think about when it comes to launching a small business, but one of the most important is figuring out how you’re going to get paid. As payment processes continue to evolve, your business must also adapt and evolve to meet customer expectations around paying for goods and services.
Whether you’re launching a new business or thinking about upgrading your Point of Sale (POS) system, now may be the time to consider digital payment processing.

Contactless and digital payments have grown significantly in the past few years, largely thanks to the pandemic but also as a result of growing technology and heightened concerns around financial data security. By 2021, over 80% of US consumers had used contactless payments, with global predictions indicating that the contactless payment market will quadruple in value by 2026.

As of 2021, over two-thirds of US retailers offered a contactless payment option, with nearly 60% of small businesses already using or planning to shift to digital-only payments in the next two years. Will your business be among them?

What are digital payments?

Digital payments are those made via online or digital modes, with no hard cash involved in the transaction. Many businesses are already familiar with the most basic form of digital payment—credit or debit card swiping. 

However, with newer digital payment technologies, no card swiping is required. Instead, a customer is more likely to use a contactless card or a mobile wallet like Apple Pay or Google Pay via their smartphone.

Contactless payments

Around half of all American adults now use at least one form of contactless payment, but what are these and how do they work?

Contactless payments refer to either mobile wallets or tap-and-go cards. They’ve been an option since the late 1990s, but have seen substantial growth in usage over the last few years. 

Instead of swiping a card or inserting one into a payment terminal, a contactless payment option uses specialized technology that allows the payment details to be transferred from your phone or contactless card to the payment terminal wirelessly. 

The customer holds their device or card over the payment reader, where the information is encrypted for security before passing the details of the transaction to the terminal to complete the payment.

Mobile wallet

Like contactless cards, mobile wallets can be used to make payments with merchants who accept this option. Essentially, a mobile wallet is similar to a physical wallet, but card information is encrypted and stored digitally on a smartphone instead. 

You can store cards, boarding passes, IDs and more in a mobile wallet, and use them to make purchases directly from a device instead of with a physical card in-hand.

Over 100 million Americans used mobile wallets in 2021, accounting for nearly half of all smartphone owners and increasing nearly 10% on the previous year. They’re a convenient way to make payments, especially as most people carry their phone on them at all times, and provide an added layer of security thanks to the encryption process that happens between the phone and payment terminal.

QR codes

Making payments with a small business using a QR code isn’t as common, but you do sometimes see this as an option for customers. 

You’re most likely to see something like this at restaurants or bars, where a QR code may be generated on the bottom of the check for patrons to pay directly from the smartphone, without needing to hand over cash or a card to a server.

Peer-to-Peer (P2P)

Services like PayPal and Venmo offer peer-to-peer, or P2P, payment options, where individuals can send money directly to friends and family via their devices. 

Some retailers are beginning to accept P2P as a form of payment, but there can be complications with this come tax time. Using dedicated merchant processing services like a POS system can simplify your payment processes and make doing your small business taxes much easier.

Why do customers prefer digital payments?

One of the biggest reasons for customers switching to digital payments is security. As technology becomes more sophisticated, so too do hackers and scammers. Protecting their hard-earned cash is at the forefront of every customer’s mind, so the encryption process of contactless cards and mobile wallets is incredibly enticing.

It’s also significantly more convenient to use digital payment methods. No more worrying about leaving your wallet at home when you have your cards stored on your phone, and it takes much less time to check out at the store when you can quickly scan your device or contactless card.

People are also carrying less cash these days than in the past. More banking now happens online, with people taking fewer trips to the ATM. Contactless payments are also more sanitary than using cash, which was a top priority for many during the peak of the pandemic. There’s no need to touch payment machines or handle cash being passed between an unknown number of people. 

Not only has cash become a headache for many people, but there are also plenty of rewards that come with a debit or credit card that can’t be found with cash-only payments. Many banks now offer rewards to customers who pay using a card, whether that be cashback at the end of the month or a percentage off at their favorite retailer. There’s more incentive for people to use cards, and digital payments, when they’re getting something
back in return.

Why should your business accept contactless payment options?

So how do digital payments benefit entrepreneurs and small business owners? With more customers carrying little to no cash and preferring digital payment options, it’s one of the best moves you can make in your business. After all, you don’t want to be losing business and customers because someone can’t pay for what they want to buy!

It’s also important to recognize that your competitors are likely implementing digital payments within their own businesses, too. 8 in 10 merchants say that contactless payments have made their checkout area safer and cleaner, with another 70% stating that customers have been asking for digital payment options since the start of the pandemic if none were in place. 

Whether it’s from your customers directly or because you know a competitor now offers digital payments, you don’t want to be missing out and risking sales by not having contactless and mobile payment options in place.

The cost benefit analysis of accepting digital payments

As with any other credit card merchant services, there are standard fees that apply to card transactions. While this is an expense for your business, you need to weigh this against the amount of money and customers you could lose without offering digital payments. This is especially the case if your customers have come to expect this from other similar businesses and are now carrying less cash. Many shoppers prefer to use their credit cards for the rewards points that the card company offers. However, this leads to more fees for merchants. 

To offset some of these digital wallet payment processing costs, some merchants have implemented a minimum purchase amount for credit card transactions (often $5 for small businesses). This may be a good compromise if you’re unsure about offering digital payments to your customers. However, it is worth noting that merchant processing service fees may be claimed as a business expense on your taxes and will help to lower your overall taxable income at the end of the year. Consult your tax advisor to see if this would apply to your business. 

Some small businesses choose to pass the surcharge along to the consumer. This allows the businesses to assist a customer with a credit card transaction without incurring the fees. If you decide to go this route, be up front with the customer about the surcharge before they make the purchase. They may actually decide to pay with cash once you let them know about the fee. 

It’s also important to note that P2P services like Venmo also charge fees for their business partners. Any businesses found trying to avoid this fee by using the family and friends, or personal, option, can be permanently banned from the platform.

How can your business accept digital payments?

Whether you’re a small business with a traditional POS system, or you’re an entrepreneur with a tablet, you can accept contactless payments quickly and easily. Any compatible flexible POS system that can accept near field communication (NFC) technology is set up for taking digital payments. 

Companies like Talech can offer tools that connect directly to POS systems, or even your smartphone or tablet to convert these into an on-the-go POS system for accepting these payments. With First National Bank and Trust, you can even offer loyalty programs to your customers directly through your POS system.

Set your small business up for success

Don’t let taking customer payments become a headache for your small business. Start the process of integrating digital and contactless payments into your operations today, with help from the team at First National Bank and Trust. 

We’re here to support small businesses throughout Southern Wisconsin and Northern Illinois and have decades of experience working with local and independent businesses like yours. Contact us to discuss any questions you have about cash management services or merchant services we offer.