What Are Electronic Payments Systems and How Do They Work?

Although physical currency is still accepted, cash is no longer the king it used to be. The new heir to the throne? Electronic payments aka e-payments. The changes in shopping habits during the pandemic and digitalization, meeting this digital-first consumer preference is key for merchants who wish to remain competitive in today’s commercial landscape. The bottom line? If you’re not accepting electronic payments, your customers will take their business to someone who is.

Electronic payment systems allow your customers to pay for goods and services electronically, without the physical use of checks or cash. Safe, secure, and convenient, electronic payments may be carried out using a credit or debit card, or via a digital payment wallet, for example.

Types of electronic payments

Today’s economic climate may be one of uncertainty, but accept electronic payments and you’ll not only increase your reach but also keep loyal customers coming back for more. Optimizing your payment systems to ensure you can capture every sale is vital, so here are some of the most popular types of electronic payments in use today.

Card payments: Credit, debit and store cards remain three of the most popular types of e-payments globally. Credit and store cards are often used to earn the holder rewards and discounts, although there are signs that their use may be on the wane, particularly among Millennials.1

Tap-to-pay payments: Contactless cards come with a chip that can be tapped or waved over a payment terminal, using near-field communication (NFC) to transfer the data wirelessly. Their use surged considerably during the COVID-19 pandemic due to fears of touching contaminated surfaces. Now surveys show that tap-to-pay is one of the electronic payment methods that shoppers are comfortable with.2

Digital wallet payments: Financial apps that store the customer’s account information electronically are called digital wallets. They enable customers to pay for goods and track their payment history, using convenient devices such as phones and tablets. Examples of digital wallets include Apple Pay, Google Pay, Samsung Pay. Additionally, the PayPal App is considered a digital wallet app. Electronic payments made through digital wallets accounted for 49% of all online transactions worldwide in 2021, which could further increase to 53% by 2024.3

Internet banking payments: A bank transfer is when funds are moved electronically from one account to another. It can be done via any computer or device with internet access, which is why it's also known as an internet banking payment.

QR code payments: Fast, frictionless, and relatively low-cost to implement, retailers continue to pivot to QR codes as a contactless payment method. QR code payments enable consumers to pay with ease, no matter the point of sale or country they’re in. A QR code is a type of barcode that stores information as a series of pixels. When scanned via the camera on the customer’s smartphone, the code directs the user to access the relevant payment page to make a hassle-free payment via their chosen method. Learn more about how QR codes work as a payment method.

How electronic payment systems work

To illustrate how electronic payment systems work, let’s take the example of a contactless transaction. Your customer pays for something by tapping or waving their contactless credit card, debit card or smartphone over a reader, which then wirelessly transmits the payment information using near-field communication technology, similar to radio frequencies.

When payment devices and reader devices are held in close proximity and activated, their NFC chips exchange encrypted data, which then sends a message to the customer’s bank to process the payment using a payment gateway. A payment gateway is a software application that encrypts financial data and authorizes transactions, communicating with payment processors to enable the transfer of funds from buyer to seller.

While digitizing your payment system may come with challenges, there are huge benefits of electronic payment for business. So what are the advantages and disadvantages of electronic payment, and how might they apply to your own organization?

Benefits of electronic payment systems

Electronic payment systems can save you time: Checks take days to clear, while cash involves frequent visits to the bank. But today’s electronic payment solutions can also automate many of your most repetitive manual accounting processes, so you and your team can get on with the work that really matters to your business. Of course, these days also electronic check cashing is possible, which also falls under electronic payments.

Electronic payment systems can save you money: Saving time on routine accounting admin is one cost benefit, while helping protect you against fraud is another major financial advantage. Historically, cash and check fraud have been notoriously difficult to trace. A best-in-class electronic payment system is highly secure and often backed by machine learning, while digitized systems provide business owners with real-time metrics for accurate audit trails.

Electronic payment systems can help you find new customers and retain the ones you have: New customer acquisition and existing customer retention are critical to the success of your business. So, it’s important to remember that 57% of consumers now say that the availability of digital payment options would impact their choices of where to shop.4 Friction-free electronic payment systems that offer multiple payment options and minimize card declines play a critical role in creating an engaging customer experience.

Drawbacks of electronic payment systems

Technical issues: Of course, electronic payments rely on technology, which can be prone to downtime, glitches and server outages. Electronic payments require unlimited, reliable access to the internet. If there is a problem with the payment system, transactions can be delayed or fail.

Security risks: While payment gateway providers invest heavily in security systems, there is always the risk of fraud and theft. Cybercriminals can use a variety of methods to steal payment information, including phishing scams and malware. That’s why it’s important to invest in reliable risk management systems.

Payment transaction fees: Some electronic payment methods charge fees for transactions, which vary depending on the payment method and the payment amount.


Consumers have migrated from physical payment methods to electronic ones, and many have no intention of going back. Merchants looking to succeed in this digital-first environment will need to provide payment features that their current and potential customers demand – and this means accepting electronic payment options such as contactless cards, QR codes, and digital wallets.

Electronic payments offer a range of benefits to the retailer beyond customer retention, including convenience, security, and reduced costs. However, there are a few disadvantages to consider such as technical issues, security risks, and payment transaction fees.

Transitioning to electronic payments is not without its challenges, but there are several benefits when you accept payments electronically – with safety, security, and convenience being key.

While the decision to accept payments electronically will depend on the needs of your business, PayPal’s enhanced fraud features and low transaction costs let you enjoy the benefits of electronic payments, while minimizing the potential downsides.

Was this content helpful?

Sign Up for the PayPal Bootcamp

In partnership with three expert business owners, the PayPal Bootcamp includes practical checklists and a short video loaded with tips to help take your business to the next level.


We’ll use cookies to improve and customize your experience if you continue to browse. Is it OK if we also use cookies to show you personalized ads? Learn more and manage your cookies