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What Is a Payment Instrument?

In a post-pandemic commercial climate, a growing number of consumers are loath to carry cash. Anything that changes hands between strangers represents a degree of risk that many customers and businesses alike feel uncomfortable with taking. During the pandemic, cash use plummeted by as much as 35%.

But many argue that COVID-19 has merely hastened a change that has already been a long time coming. Gone are the days when cash payments and the occasional cheque made up the bulk of our daily transactions. Today, we have a broad range of financial instruments to help facilitate transactions.

Payment instruments explained

‘Financial instrument’ is an umbrella term used to describe any physical or digital instrument that is used to make cashless transactions, facilitating the movement from the customer’s bank account to the merchant’s.

Commonly used examples include:

Are financial instruments riskier than cash?

For generations, conventional wisdom among SMEs was that ‘cash is king’. And while it is still the preferred method of payment for many sectors (especially those that rely on local foot traffic like convenience retail and takeaways), the use of financial instruments has overtaken cash use since 2019.

Some SMEs believe that cash is inherently more secure than the use of financial instruments. But there is no systemic risk inherent in the use or acceptance of financial instruments.

Financial instruments are included in the Eurosystem central bank oversight of payment systems. This ensures security and efficiency across the entire Single Euro Payments Area (SEPA), of which the UK is still a part after Brexit. Furthermore, the Payment Systems regulator works in conjunction with other regulators like the Financial Conduct Authority and Bank of England to ensure that payment instruments and systems are convenient and secure.

Payment instruments vs payment systems: What’s the difference?

The terms ‘payment instruments’ and ‘payment systems’ are sometimes used interchangeably. However, their meanings are slightly different.

A payment instrument is part of a payment system. It’s the part that facilitates the transfer of funds. But there are a whole host of processes going on behind the scenes that move the money from the buyer’s account to the seller’s. The payment system is the umbrella term for this process, encompassing a number of parties including banks, PSPs and credit card companies.

Even taking cash out of an ATM requires the use of payment systems.

What payment instruments are best for your business?

It goes without saying that in an increasingly cashless commercial landscape, businesses need to accept a broad range of payment instruments. But with so many to choose from, each with its own benefits and caveats, how do you know which are best suited to your customers’ needs?

When it comes to accepting payment instruments, you’ll need to balance several considerations including customer convenience, fees and charges incurred, and the security of both parties. You’ll need to ask yourself:

  • Will the customer feel confident paying in this manner?

  • Is it quick, safe and convenient?

  • Can I accept payment online, on-site and over the phone?

  • Will it make future transactions quicker and easier?

  • Is it easily available for my target demographic?

  • What impact will fees and charges have on my profit margins, and will these be offset by the propensity for increased spending?

Many smaller businesses offset fees and charges by imposing a minimum spend limit for customers using financial instruments such as credit and debit cards, contactless, Apple Pay etc. This can not only remove barriers to sales but drive up the average spend per customer.

We can help

If you’re interested in finding out more about payment instruments, payment systems, and facilitating frictionless transactions, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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