There is a growing trend of small to medium-sized businesses embracing electronic payments to remain competitive. While e-payments offer undeniable convenience for both businesses and customers, with features like faster checkouts and improved cash flow, not all solutions are made equal. It is essential to weigh the advantages against potential drawbacks like transaction fees.

This article explores the pros and cons of e-payments for small and medium-sized businesses. We'll delve into how taking electronic payments can boost efficiency, enhance customer experience, and simplify record-keeping, while also acknowledging challenges like managing costs, maintaining security, and dealing with potential limitations.

By understanding the nuances of e-payments, you'll be empowered to make an informed decision about integrating them into your business.

Pros

Speed

With electronic payments, transactions are lightning-fast. Imagine a scenario where a customer makes a purchase on your website using their credit card. Within seconds, the payment is authorized, ensuring a seamless checkout experience. This speed not only delights your customers but also improves your cash flow by accelerating the availability of funds.

Electronic payments also facilitate timely payments, which are crucial for maintaining strong relationships with suppliers and vendors. By paying your bills promptly, you ensure a smooth supply chain.

• ACH/eChecks offer a cost-effective alternative to paper checks, with funds typically clearing within 1-3 business days, ensuring timely payments and maintaining positive supplier relationships.
• Credit cards provide instant confirmation of payment, eliminating uncertainty and streamlining the communication process with your customers and vendors.

Not taking electronic payments? You may experience:

Delays in Processing: Without electronic payments, transactions may encounter delays in processing. For instance, if you rely on mailing checks for payments, it could take several days for the recipient to receive and deposit the check.

Physical Handling Time: Non-electronic payment methods often involve physical handling of cash or checks, which adds to the processing time. If you receive a check payment from a customer, you may need to physically deposit the check at a bank branch or ATM.

Improve Cash Flow

Electronic payments play a vital role in optimizing your working capital. By shortening the payment cycle and reducing the time it takes to receive payments from customers, you can free up cash that would otherwise be tied up in accounts receivable.

By shortening your payment cycle by even 2 days, you can increase your working capital by 20% over the course of a month. This liquidity empowers you to invest in growth initiatives, cover operational expenses, and navigate financial decisions with greater flexibility.

71% of CFOs surveyed by Ernst & Young anticipate tighter working capital in 2024 due to rising costs and continued high interest rates.

Manual AP processes contribute to this challenge by extending processing times, increasing days payable outstanding (DPO), and affecting cash conversion cycle times.

Transparency

Electronic payment platforms provide detailed records of transactions and allow businesses to monitor transactions in real-time. You can access comprehensive transaction histories that include details such as the date, time, amount, and recipient of each transaction, facilitating accurate record-keeping and financial analysis. You can also track the status of transactions and reconcile accounts immediately.

Altogether this facilitates auditing and compliance efforts by providing transparent transaction data that can be easily audited and verified.

A 2021 survey by Avalara noted that 72% of businesses surveyed with annual revenue between $100,000 and $5 million had been audited in the previous five years. Certain industries are more prone to audits than others, with businesses in sectors like retail, construction, and personal services facing higher risks.

The South Dakota v. Wayfair Supreme Court decision (2018) established that states have broader authority to collect sales tax from online retailers, even if they lack a physical presence in the state. This has increased the complexity of sales tax compliance for many businesses, and states are implementing stricter enforcement measures.

Not taking electronic payments? You may experience:

Lack of Transaction Visibility: Without electronic payment systems, it is challenging to track and reconcile payments accurately. Often the alternative is a manual-intensive process that is both time-consuming and error-prone.

Limited Reporting Capabilities: You may have limited reporting capabilities compared to electronic payment systems. For instance, if you process payments manually, you may struggle to generate comprehensive reports and analysis due to the lack of transaction data.

Increased Risk of Errors: Manual payment processing methods are prone to human errors, such as incorrect amounts or misplaced checks. These errors can lead to reconciliation issues, delayed payments, and potential financial losses for your business. Electronic payment systems offer automation and built-in validation checks, reducing the risk of errors and ensuring accuracy in financial transactions.

The Institute of Finance and Management (IFM) reported that nearly 40% of invoices contain errors, often due to manual processing mistakes. These errors can lead to delays, unnecessary costs, and damage relationships with vendors.

Security

Electronic payment methods often come with robust security features, such as encryption and authentication protocols, to safeguard sensitive financial information. For example, when you process transactions online using secure payment gateways, your customers' credit card details are encrypted, protecting them from unauthorized access or interception by cybercriminals.

According to a 2021 report by Verizon, 83% of data breaches involve stolen or weak credentials. Robust encryption helps prevent unauthorized access to sensitive financial data.

Electronic payment systems implement sophisticated fraud prevention measures to detect and mitigate fraudulent activities. They may analyze transaction patterns and use machine learning algorithms to identify suspicious behavior and flag potentially fraudulent transactions in real-time, reducing the risk of financial losses to your business.

The Association of Certified Fraud Examiners (ACFE) estimates that organizations lose 5% of their annual revenue to fraud. Implementing real-time fraud detection can significantly reduce these losses.

Electronic payment platforms provide a secure transaction environment for both businesses and customers. They comply with industry standards such as PCI DSS (Payment Card Industry Data Security Standard) to ensure the secure handling and processing of payment data, minimizing the likelihood of data breaches or security incidents.

A study by Verizon found that organizations that comply with PCI DSS standards experience 64% fewer breaches compared to those that don't.

Integration of Workflows

Some electronic payment solutions may seamlessly integrate into existing workflows, streamlining administrative processes for businesses. For example, when you integrate electronic payment systems with your accounting software or ERP (Enterprise Resource Planning) system, you can automate tasks such as invoicing, payment processing, and reconciliation, reducing manual intervention and improving efficiency.

Cons

Technological Issues: Electronic payment systems are susceptible to technological glitches or system failures, which can disrupt transactions and cause inconvenience to users. Issues such as server outages or software bugs may temporarily impede the smooth operation of electronic payment platforms.

Phishing/Scams: Cybercriminals often target electronic payment users through phishing scams or fraudulent schemes aimed at stealing personal or financial information. Unsuspecting individuals may fall victim to these tactics, leading to financial losses or identity theft. It is important to work with an electronic payment platform with safeguards in place to minimize such scams.

Fees: Some electronic payment services impose fees on transactions, particularly for certain types of transfers or international payments. Fees charged by electronic payments providers can vary widely but generally credit card processing fees are much higher than ACH processing fees.

Account Security (Passwords): Weak passwords or inadequate account security measures can make electronic payment accounts vulnerable to unauthorized access or hacking attempts. Individuals and platforms that fail to implement strong password practices or utilize additional security measures may face the risk of account compromise.

Processing Limitations: Some payments processors limit the amount of money you can process per transaction, or even have limits on total amounts processed over a given period of time. Frustratingly, many of these limits are not transparently conveyed, and are often based on various factors including whether your business is considered high-risk. It’s important to know whether the processor you choose can meet your business needs in a cost-effective manner. Get started with Nickel and grow your business without restraint.