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E-commerce Payment Methods

Consumers have multiple payment method options when making online purchases. For businesses implementing e-commerce its important to understand the forms of payment that consumers use, and prefer, for online purchasing.

Updated:

May 4, 2020

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Photo: Bigstockphoto.com/Le Quang Nhut

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E-commerce typically requires an associated online payment transaction through the shopping cart (keep in mind that it is possible to process orders online and take payment offline). When choosing an e-commerce platform, you will need to decide upon the forms of payment you will accept. Knowing the forms of payment that your customers use, or prefer, for online purchasing is valuable in setting up your online storefront. If you are currently using a point-of-sale system (POS), you may be able to access reports indicating the payment methods being used in store or in person. Are your customers paying with cash, credit, digital wallet, or something else?

According to Statista, in 2018, 62% of consumers reported using credit cards as their primary online payment method – 45% where the card was stored online in a customer account and 17% where the customer had to manually key in their card number. PayPal was the next most common payment method, with 22% of consumers preferring this form, while other digital wallet methods (Apple Pay, Google Pay, Amazon Pay) combined for 9% preference by consumers (Statista). Finally, 3% reported using methods that were categorized as 'other,' for example, eChecks and virtual currencies, such as Bitcoin.

E-commerce platforms utilize payment gateways, such as Stripe, Square, Authorize.net, Braintree, or PayPal for processing online transactions. Some platforms, such as Square have their own payment gateway already integrated, while others such as BigCommerce, Weebly, and others allow you to choose your payment gateway. However, if your e-commerce website builder includes an integrated gateway and you want to accept payment methods not accepted by that gateway, you'll need to subscribe with an add-on gateway, incurring additional costs.

Debit and credit cards fall behind cash and checks as the third and fourth most adopted forms of payment in the U.S. In 2018, 83% of consumers had a debit card and 76% of consumers had at least one credit card (Federal Reserve Bank of Atlanta). Debit cards, when used as an online payment method, are processed the same as credit cards by the payment gateway if they have a Mastercard or Visa logo.

An additional layer to investigate when assessing e-commerce platforms and payment gateways is the specific types of credit cards they accept. The four major credit card types, by market share, are Visa, Mastercard, American Express, and Discover (Holmes). If possible, use your POS transaction data to determine the types of credit cards being used by customers.

Digital wallets are a growing online payment method and include Paypal, Venmo, Apple Pay, Google Pay, and Amazon Pay, among others. Digital wallets allow customers to pay by simply logging into their digital wallet service during checkout to authorize the payment to your business. Some people prefer this payment method because they only need to remember their login.

In 2018, approximately 48% of U.S. consumers had adopted a non-bank payment account such as PayPal, while 60% had adopted mobile apps or online accounts such as Apple Pay (Federal Reserve Bank of Atlanta). Adoption and use of digital wallets is highest among younger individuals. A 2018 survey found 63% of Gen Y consumers had used a digital wallet compared to only 38% Gen X and 17% of Baby Boomers (Chow).

While check payment has an adoption rate higher than debit and credit cards among U.S. consumers, using eChecks as an online payment method is not common, falling into the 3% of 'other' payment methods as reported by Statista. Should you decide that your customer base requires the ability to pay via eCheck however, be aware that you may require an additional payment gateway add-on and that processing of payments takes longer resulting in a delay to access those funds.

If you issue and accept gift cards in-person, you may want to ensure that these can also be redeemed through the e-commerce platforms you're considering. Gift cards are not typically handled by many payment gateway services, with Square being an exception. Therefore, you will likely require an additional service to allow customers to redeem gift cards on your e-commerce site accruing an additional fee to provide the gift card feature.

A final online payment option is virtual currency. There are numerous virtual currencies; the most well-known being Bitcoin. While virtual currencies are growing in popularity - the Federal Reserve Bank of Atlanta reported 2% consumer adoption in 2018 - they tend not to be processed by mainstream payment gateway services, thus requiring a niche gateway. With only 2% consumer adoption, you aren't likely to need or want to facilitate this method of payment. However, it may be something to watch and keep in mind for the future as consumer adoption grows and companies either create their own virtual currency or support one or more of the leading choices.

Security is a vital aspect of e-commerce. Consumers need to feel confident that their payment information is safe in their hands. From the standpoint of online payment method, most consumers view credit cards as the safest method of online payment followed by PayPal and debit cards (TSYS). If there is a security breach and payment information is stolen, however, 43% of consumers indicated that they felt the store or merchant was responsible (TSYS). Ensure that you are confident with the security and compliance features provided by the payment gateway you choose or that comes integrated with your e-commerce website builder.

Consumers have a variety of payment forms available to choose from – cash, check, e-check, debit, credit, digital wallet, and virtual currency, among others when making purchases. Make sure to understand your customer demographics and needs, the forms of payment they currently use, and their willingness or ability to adopt alternative forms. By providing a wide variety of payment options on your online store, you increase your accessibility to all consumers, but this should be balanced against your needs and all associated costs.