Digital payments have become a necessity for small businesses, and their adoption and use are only growing. In its 2022 digital payments study, Visa found that 41 percent of customers abandoned their in-store shopping in stores where digital payment options were not offered.
McKinsey & Company’s 2023 Digital Payments Consumer Survey also found that 9 out of 10 customers have used digital payments in the last year.
Why are digital payments catching on so quickly? It's mainly because of mobile phones. As mobile phones integrate increasingly into our daily lives, they reduce the number of physical items we must carry around. Credit and debit cards, insurance cards, banking info, gift cards, and many other items are all stuffed into our mobile phones.
What are digital payments? They can include:
- Online shopping
- In-app payments
- Digital or mobile wallets and digital currency
- Contactless payments
Contactless payments allow tapping a card, phone, or wearable device, such as an Apple Watch. The customer doesn't have to hand over their physical card or swipe it. The payment medium is always in the customer's possession, which is why it's called contactless payment.
Pros and Cons of Digital Payments
There are many advantages to using digital payments as a merchant and customer. But with those advantages come some disadvantages.
Pros:
- Increases cash flow efficiency: Because digital payments are processed immediately, merchants don't have to wait days for funds to be deposited into their accounts.
- Improves customer satisfaction: Digital payments provide another payment option for customers. On the flip side, merchants have a competitive advantage over those who don't offer digital payments.
Cons:
- Fees: Merchants will incur processing fees with each transaction. These fees vary from processor to processor.
- Complex security: Merchants must stay current with the latest fraud tactics and processor security notifications. Otherwise, fraudsters may expose vulnerabilities.
- Technical issues: Unlike writing a check or paying with cash, digital payments have many failure points, from power outages to processor problems.
According to the Federal Reserve's financial services unit, digital payments were the fastest-growing form of payment last year, rising from 47% in 2022 to 62% in 2023. Clearly, digital payments are favored by both merchants and customers, and this trend doesn't seem like it is slowing any time soon.
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