Online payments: An introduction

Online payment is the electronic transfer of funds via the internet, usually between a merchant and a consumer. These payments can be made in various ways, such as via credit and debit cards, banking apps or web pages. Exactly which method of online payment you choose to offer and accept will depend on the specifics of your business and the preferences of your target market.

Accepting online payments

Online payments, especially recurring online payments, form a fundamental part of many businesses' revenue streams. However, each online payment method has distinct advantages and disadvantages. What might be well-suited to one kind of product, service, or market may be unsuitable for another.

This is critical!

Many businesses that take recurring payments undervalue the strategic significance of which online payment methods they offer their customers:

How you accept payment from your customers impacts not only your revenue but the growth of your business.

Minimising friction in your payment process saves you time and money and makes positive cash flow more likely. Therefore, it’s important to choose payment collection methods that encourage prompt payment and can be automated as much as possible.

This guide will help you achieve more clarity on your options for taking online payments.

You will learn:

• Which online payment methods are available

• How they work

• Frequently asked questions about online payments

• How your choice of payment method affects your business

• How to choose which online payment method is best for you

No single online payment method is perfect in all cases, but this guide will help you identify those that are best suited to your business.

What are online payments?

Online payments are payments that are initiated over the internet for goods or services purchased either online or offline. Common methods to facilitate this include:

• Bank Debits via online mandate (often referred to as Direct Debit - which is the terminology we’ll use in this guide)

• Bank transfers (also referred to as wire transfers)

• Online credit or debit card transactions

• Digital wallet payments (such as PayPal)

Payments can be one-off (e.g. e-commerce transactions like purchasing clothing) or recurring (e.g. subscriptions to services like Netflix or Spotify).

How do I take online payments for my business?

For your business to take online payments, you can either take them directly yourself or pay an intermediary to take them. Each approach has its merits, as this guide will explain.

What the exact process for taking online payments looks like depends on the payment method in question. The following entities are typically involved:

• The customer

• The customer’s bank (or other entity that holds the funds they’re paying with - e.g. a digital wallet)

• The business (often referred to as the ‘merchant’ - we’ll use these terms interchangeably in this guide)

• The business’ bank

• Organisations that help authorise and process the transaction, resulting in the funds being transferred from customer to merchant

In the following pages of this guide, we explore the payment process for four common online payment methods - Direct Debit, bank transfers, credit and debit cards, and digital wallets.

Online payment via GoCardless

GoCardless offers a done-for-you payment collection service for recurring, one-off, and instant bank payments. Payment collection can be automated, as can much of the associated financial admin, which means you always get paid on time, and your finance team doesn’t need to deal with tiresome manual admin.

Set up payments in just a few clicks using the merchant dashboard. Once your customer has provided authorisation, you’ll be able to automatically collect payments for the amounts agreed upon and on the due dates set by you.

Case study: combine instant and recurring payments

For many UK SMEs, offering customers automated bank payments has many advantages as a payment collection method:

• affordable transaction fees, 

• a high level of automation which eliminates late payments and manual admin

• strong consumer protections providing customers peace of mind

However, one sticking point has often been the three-day payment cycle which has been problematic for businesses that need to see funds clear that day or the next day.

Gravity, a trampoline park business, used to offer customers both card payments and bank payments via Direct Debit. However, card payments meant expensive transaction fees, and new Direct Debit agreements meant the first payment took five days to clear, so customers could use the service on the day and then cancel their mandate before a payment went out!

GoCardless was able to offer a combination of Instant Bank Pay and Direct Debit, this allowed Gravity to take an initial payment instantly and then reliably collect future payments through Direct Debit.

As a result of using GoCardless, Gravity was able to:

• prevent subscription cancellations and subsequent revenue loss

• save 50% on transactions fees

• reduce customer sign-up time by 55%

• get 90% of new customers to use the Direct Debit and Instant Bank Pay combination

• make sign-up easier and quicker for customers

Watch the short video on how Gravity used Direct Debit & Instant Bank Pay: