Advances in Online Payments Bring Opportunities and Challenges for Businesses

Chris Latham
Senior Writer

As consumers get more comfortable with online payments, businesses of all types and sizes are implementing them. The proliferation of these new systems presents significant opportunities and challenges for fintech providers, the businesses that increasingly rely on their tools, and traditional payments services that almost all digital transactions still depend upon.

In 2020, Venmo Credit Cards and Venmo Debit Cards launched, with its branded credit cards issued by Synchrony Bank and its branded debit cards issued by The Bancorp Bank with Mastercard licensing. That same year, the Chicago Transit Authority rolled out a tap-to-pay system for riders by using their smartphones and smartwatches. At the start of this year, the Metropolitan Transit Authority in New York followed along with its own tap-to-pay system. The CTA and MTA both allow Apple Pay, Google Pay, Samsung Pay, and Fitbit Pay. In September, Amazon launched contactless payments without physical checkouts at non-Amazon businesses, and Square launched Cash App Pay for consumers to purchase goods and services through QR codes by using their mobile devices.

Sole proprietors, from landlords to accountants, have started using peer-to-peer apps like Venmo and Zelle. Many businesses that involve relatively small exchanges of money, such as food trucks and barbershops, use smartphone-enabled apps by vendors such as Square or Paypal (which owns Venmo). The ride-sharing services Uber and Lyft accept Apple Pay, PayPal, and Venmo. The national retail chains Target and Costco accept Apple Pay, Google Pay, and Samsung Pay. These companies all also accept credit card payments.

Last year, approximately 92.3 million people in the U.S. completed payments through their mobile devices, with an average annual spend per person of $1,973, according to a report by the subscription-based market research firm eMarketer. This year the forecast is for approximately 101.2 million people in the U.S. to conduct mobile payments averaging $2,430. Approximately 125 million U.S. mobile shoppers are forecast to spend an average of $4,064 in 2025. According to data from Venmo and Square, their average transaction sizes are $70 and $15, respectively.

IMPROVING REVENUE AND OPERATIONS

Businesses have discovered that both technological advances in online payments and higher rates of adoption can indirectly improve their revenue and can directly improve their operations, according to Mike Cunningham, Director of Product Strategy at Infuse, a San Francisco-based developer that supports the software needs of companies, including their payments processing technology.

“Online payment portals are not just an experiment to see how consumers prefer to pay,” he says. “It’s been made clear, even before the pandemic, that self-serve online payment portals are a primary preferred payment method, and the easier it is to pay a bill, the more likely a customer will pay the bill. From a topline perspective, catering to this consumer preference has been and should continue to be a top priority.”

From an operations perspective, with the payment portal in the hands of the consumer, companies can refocus their resources, Cunningham argues. For instance, with subscription or healthcare services, customer success teams can shift away from chasing customers to pay their bills and focus on providing support. With many of the top payment platforms, reminders are built into the platform, acting in some ways as a de facto collections agent – or a hedge against having to resort to one.

Compliance and legacy systems are among the main challenges that online payments developers face in creating effective software for companies, he says. At large businesses, securing customer data is paramount, and compliance-mandated due diligence can take several months to a year to complete. During that time, competitors might launch their own payments innovations. Although legacy systems do not require the same intensity of due diligence, the older they get the harder it becomes to find experts who can maintain them.

For consumers and companies alike, innovations in mobile-device payment options have meant enhanced functionality and convenience. Faster checkout times and same-day processing are prime examples. The main disadvantage of them is that, during the early stages, both organizations and people have to get comfortable enough with these technologies to actually use them to maximum advantage. “Because the payments industry is a two-sided marketplace where parties agree to transact in a certain way, getting over the hump of uncertainty to implement a new payment process is a daunting task,” Cunningham says.

He sees the pandemic as triggering wide adoption of tap-to-pay options as consumers prefer contactless experiences. QR codes were invented in 1994, but prior to 2020 few restaurants utilized them. Now tableside QR codes are common and poised to grow. Cunningham also points to the emergence of three other trends: buy now / pay later platforms, which sell name-brand items through installment plans; closed-loop payments, which enable a company to issue its own card that consumers use for payments and rewards; and in-person payments innovations, which enable personalized promotions at point of sale based on an individual’s buying habits.

CARDS REMAIN MOST POPULAR

However, for all the surface-level advances in online payments systems that businesses are adopting, old-school methods remain the most popular for consumers, according to Chris Motola, Financial Analyst at Merchant Maverick. The website provides research and reviews on financial and e-commerce tools available to entrepreneurs and small to midsize businesses.

“We tend to think of online payments as being cutting edge and the site of exciting new innovations, but the truth is the overwhelming majority of online payments are simply Visa or Mastercard credit card transactions,” Motola says. Indeed, Square, PayPal, and Google Pay all accept traditional credit cards as underlying payment methods. “But with credit card transaction fees rising, there is definitely room for competition.”

The method of online payment that businesses prefer to use with customers varies by company, but the least expensive option for the seller often wins out. While credit card transactions are expensive, they also are reasonably secure, Motola argues. He has seen some interest in using bank-to-bank automatic clearing house (ACH) transfers, comparatively old technology that online payments providers such as PayPal have leveraged for their own platforms. Conversely, other online payments providers have looked into removing banks from the process — something that few consumers have been eager to embrace, so far.

The costs of using online payment, for customers and businesses, are the transaction fees, he says. When credit cards are involved, online transactions tend to be classified as “card not present” (CNP) transactions. Their processing cost exceeds card-present transactions, since CNP is theoretically riskier due to the inability to physically verify the card’s existence and in turn making fraudulent charges easier to conduct.

In addition, more businesses appear to be passing along transaction costs to customers through online transaction surcharges. How a business chooses from among the two most prominent online payments systems, Square and PayPal, may depend on a combination of transaction fees and the degree to which the business conducts sales in-person.

Both providers can handle in-person and e-commerce transactions, with Square’s infrastructure more specialized in the former and PayPal’s in the latter, according to Motola. “That’s traditionally how I would have directed businesses to one service or another,” he says. “However, PayPal has recently raised its transaction fees, making it more expensive than most of its competitors.”

PRIVACY AND SECURITY

Since the success of a business adopting any advance in online payments ultimately rests on the willingness of consumers to use those new platforms, businesses must continually upgrade their privacy and cybersecurity capabilities in order to protect against the data breaches, hacks, phishing scams, ransomware and digital thefts that have become rampant.

Dr. Brian Krupp, Associate Professor of Computer Science at Baldwin Wallace University in Berea, Ohio, points to financial industry guidelines that are organized through the Payment Card Industry Security Standards Council. The group launched in 2006 with founding members American Express, Discover, JCB International, MasterCard, and Visa Inc. Its mission is to enhance global payment account data security, so companies and consumers can safely transact through what has increasingly become an online-first ecosystem.

As for why so many consumers are willing to use certain online payment systems despite the risk of compromising their data, Dr. Krupp suggests that it’s less about consumers trusting specific platforms over others and more a matter of convenience.

“Think about how much information consumers share on mobile platforms in general, such as social networks and other apps on their smartphones,” says Dr. Krupp, who also runs the Mobile, Privacy, and Security (MOPS) Research Group for BWU students and alumni. “It’s common behavior for people to share their location and photos of themselves, even items they purchase, despite no guarantee their information will remain secure once it hits a third-party server.”

Yet mobile devices with online payment apps often offer greater protection than physical debit or credit cards, according to Dr. Krupp. Many smartphones and apps require additional user authentication through passcodes, fingerprints, or facial recognition scans. Conversely, when consumers lose their cards they have to first realize the card is missing and then call the card company in order to lock it — two actions that can give thieves time to commit fraud.

That’s why he remains extra cautious with his own card usage, and advocates using credit cards instead of debit cards for online purchases. “If someone copies credit cards and uses them for fraudulent transactions, consumers can dispute that without losing money,” he says. “But if someone commits fraud against debit cards, those consumers risk losing money they cannot immediately get back to their accounts.”