Creating Infrastructure for Digital Payments – A Short Guide For SMEs
Digital is the future & SMEs need to adapt
The payments sector has been among the most impacted by the recent proliferation of various types of technology. The payments revolution was spurred on by the rise of internet banking and credit cards. Following this, innovations in AI & cloud computing enabled contactless non-card payments. Recently, digital payments have emerged as the industry benchmark for commerce.
According to reports, nearly 92% of big business transactions are conducted electronically, with large enterprises being the biggest adopters of digital payments. The pervasiveness of digital payments is due to several factors, including – widespread digitization, regulatory & technological openness, and changing customer expectations. These have resulted in the rise of one-stop solutions, fintech offerings, and niche platforms with unique value propositions.
The benefits of leveraging digital payments are numerous and far-reaching.
Entrepreneurial advantages of digital payments
The business advantage derived from adopting a digital payments system include –
Reduced payment processing time
Digital transactions are 1.4x faster than traditional payments, with 75% of businesses in a Deloitte survey reporting faster payment processing time as the biggest advantage of adopting digital payments.
Reduced processing costs
Digital purchase orders cost USD 20 to process, compared to USD 73 for traditional payment methods. Shifting to a digital payment process also helps businesses make supplier payments quickly, manage trade contracts, and enable better record-keeping practices due to the electronic audit trail created by digital payments.
Improved customer experience
Digital payments systems result in 60% improvements in customer relationships and a 51% improvement in the payment reconciliation period. The massive role of digital payments in streamlining customer payments and creating a seamless payment workflow cannot be understated.
Improved supplier and employee relationships
Due to a reported 61% decrease in effort for payment chasing, digital payments are among the best options to manage supplier and employee payments. Digital payments also improve audit transparency and supply-chain accountability. Additionally, by providing digital payments to employees, businesses can ensure income stability for workers and contribute to women’s empowerment by offering women greater control over their income and assets.
Improved credit access
Nearly half of all businesses worldwide need loans, but only 30% of entrepreneurs have a bank account or a line of credit. Due to the technological advancements powered by data analytics and AI-based risk assessments that are now integrated with digital payment systems, financial institutions can create real-time credit risk reports, enabling streamlined credit access.
Despite these advantages, however, there are still numerous barriers to digital payments adoption by SMEs.
Challenges In Digital Payments Expansion
- Lack of physical infrastructure – Digital payments require an excellent physical network and banking system for support. In low-income countries with rudimentary payments systems, constructing and maintaining a digital payments infrastructure is a major challenge.
- Customer verification protocols – More than two billion people worldwide have no formal identification and several more possess outdated or incompatible ID documents, preventing them from being able to open a bank account, access credit, or make payments online.
- Financial & digital literacy – Unfamiliarity with finance, especially digital finance, is another significant roadblock to adopting digital payments. This makes it harder for entrepreneurs and workers to make sound financial decisions.
While these challenges certainly are daunting, they shouldn’t stop enterprises from leveraging a digital payments system to experience all the advantages that come along with it.
Here’s how any business can start creating a system to accept & process digital payments.
Digital Payments – The Basics
As many entrepreneurs will already know, payment systems consist of three critical elements.
- Initiation: This refers to how payments are triggered. Ex – Digital wallets, mobile payment apps, card readers, chips, pins, etc.
- Infrastructure: This is how payments are processed, settled, and cleared. Ex – APIs, blockchain, Cloud Payment Systems, NPPs (New Payment Platforms), etc.
- Information: This refers to the recording of the payment and related information. Ex – APIs, real-time reporting, QR codes, and various value-added information services such as invoicing, CRM, inventory management, procurement & more.
With the vital building blocks of a payments system now in place, the next step is to examine the payments flow at a high level.
Step 1 – Digital payments are initiated by the business or the customer, usually via the customer’s digital wallet. Following this, the business will need a way to process the payment information sent in by the digital wallet.
Step 2 – Here’s where a payment gateway comes into play. This is a secure pipeline to transmit the customer’s payment information to the acquiring bank, the bank where the business holds an account.
Step 3 – Finally, the payment information now with the acquiring bank needs to be validated. This is usually done via card networks (Visa, Mastercard, etc.) which communicate with the issuing bank, where the customer holds an account.
Step 4 – Once the payment has been validated, a confirmation is sent via this pathway to the business and the customer, completing the digital payment.
By summing up this payment workflow, a list of critical elements for digital payments can be formed.
Building a Payments System – Key Infrastructure Elements
Here are the key elements any business needs to get its digital payments system up and running.
Online funnel for payments
Both the customer journey and payments pipeline must be seamlessly integrated into the business’ payments infrastructure. Businesses must ensure minimal churn and drop-offs during checkout and payment by optimizing checkout forms, ensuring that standard payment methods are integrated, and bringing the customer back to a familiar touch-point once payment is completed.
Recurring payment solution
Setting up a payments pipeline involving the issuing bank, acquiring bank, payment gateway, and card network are crucial for a payments system. Businesses can integrate with a recurring payments automation solution to make sure this pipeline is secure and seamless.
Solutions such as eNACH eMandate, a form of periodic payment automation, are popular among businesses for this task. eMandate solutions enable customers to set up instructions for automatic debits. This payment information is transmitted from the acquiring bank to the issuing bank via secure digital pathways.
Once the payment details are validated, the payment is confirmed and repeated at intervals.
Risk management & redressal
Businesses will need a rules-based framework to assess risk due to fraudulent payments or customers and then take the appropriate action. Machine learning (ML) algorithms can also be leveraged to learn from every transaction recorded and identify high-risk actors and transactions.
Network acceptance
Due to the massive diversity in payment types, businesses must ensure that their digital payments infrastructure can receive and process payments from various methods.
Value-added services
As the digital payments sector has matured, new ways of using these payments to add value to the business have emerged. New fintech offerings enable SMEs to leverage value-added financial services extensively for several purposes. Here are some examples.
- Driving loyalty: Reward points, coupons, offers, discounts & more
- Marketing: Promoting SMEs within target groups and communities
- Accounting: Reconciliation and record-keeping tools for payment activity
- Invoicing: Integration with invoice systems
With these key elements in place, SMEs can rest assured that payments can be initiated, processed, and managed with ease.
Finally, to round it all off, here’s a checklist for SMEs in an advanced stage of leveraging a digital payments system.
Conclusion – Digital Payments Checklist for SMEs
Digital payments are now more popular than ever, and businesses are continuing to get in on the action. Here’s what businesses need to do to make their digital payments work for them.
- Verify users if possible – Authenticating clients before accepting payments is a convenient and sure-fire way to prevent fraud and increase trust. Additionally, the information collected goes a long way in expediting reconciliation.
- Support different ways to pay – Supporting diverse payment methods such as cards, internet banking, social payments, Buy Now Pay Later (BNPL) financing, invisible payments & more can reduce involuntary customer churn.
- Use what you’ve already got – In most cases, onboarding a new vendor for payments is unnecessary. Most businesses already have a rudimentary payment method set up, which can be upgraded by integrating with recurring payments solutions.
- Make your payments flexible – Businesses need to support various ways to move money, such as account debits, subscriptions, holding funds, etc.
- Account for taxes – Complying with various tax regimes depending on business geography is crucial for any payments system to stay valid and trustworthy. Clarifying taxes should be a priority for businesses offering digital payments.
Digital is the present and future of payments and stands to provide numerous advantages to SMEs that leverage it flexibly and optimally.
