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Payment Methods: Types, Importance, With Pros and Cons for Each
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Payment methods are important, as they enhance a buyer’s affordability and increase a seller’s sales.
Credit Cards are the most successful mode of payment, as they distribute the due cost into EMIs.
Electronic fund transfer is the safest payment type as it uses a secure gateway to transfer funds from your account to the recipient’s.
Credit and Debit Cards are the best digital payment methods, as they eliminate the need for cash and complete the transaction instantly.
Credit Cards are the fastest payment method. You already have an approved credit limit, which you may use to complete the payment.
Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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With digital advancements, various payment methods have been introduced. The technical boost has made transactions much more accessible than ever before. However, it is important to understand that every technology has its own positives and potential drawbacks. Let us try to understand the meaning of payment types and their impact on cash flow.
What is a Payment?
Payment refers to the transfer of money in exchange for goods or services. A buyer can pay through various methods, including Cash, Cheque, Debit Card, Credit Card, wire transfer, cryptocurrency, etc. Let’s dig deeper into this:
Credit Cards Payment
A financial institution issues a Credit Card to eligible candidates. It grants them a credit limit, which they can spend using the credit card. It is a revolving line of credit that you must repay with monthly Credit Card bills. It is highly convenient and widely accepted.
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Debit Cards Payment
A Debit Card is directly tied to your Bank account, providing immediate access to available money. Rather than using credit, a debit card allows you to use money that has already been deposited into your bank account.
The primary purpose is to eliminate the involvement of physical cash.
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Cash Payment
Cash payment involves using physical currency, such as coins or notes with tangible value. It is appropriate for small transactions or situations where digital methods are not feasible.
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Mobile Phones Payment
Mobile phone payments work through mobile Banking apps provided by the user's financial institution. These apps let users manage their accounts, transfer money, and pay using smartphones.
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Cheque Payment
Although cheques have declined significantly, they remain a relevant mode of payment for specific transactions. A cheque is a written order instructing your Bank to pay the amount mentioned to the bearer. Commonly used for formal and legal transactions, it provides a tangible paper record to ensure formality and transparency.
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Electronic Funds Transfers
Electronic funds transfer is a standard method of payment in Banking. It is appropriate for large payments or recurring transactions. Businesses that need transparency and trackability in their financial transactions find this mode of payment extremely advantageous.
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Cryptocurrency
Cryptocurrency uses cryptographic principles to provide digital currencies. It operates on a decentralised blockchain technology to facilitate transparent, borderless payments. However, its regulatory and volatility pose risks.
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Special Considerations
Sometimes, the recipients may offer a discount on payments instead of a full settlement. The buyer must check any interest, late payment charges, or surcharges when using certain payment methods. Once they accept the payment, request an acknowledgement from them to account it as ‘paid in full’.
Payment Credit Terms and Discounts
Sellers set payment terms dictating the due dates, applicable discounts, etc. If you borrow a loan, pay the EMIs on time to save money on interest. Check out the discount offers available for payments before a due date.
Instalment Payments
Instalment payments involve a transactional contract. You receive the product or service at the time of contract or after full payment. In some instances, the delivery takes place over time.
Advance Payments (Prepayments)
In contractual situations with advance payments, the seller requires payment upfront before the product or service is delivered. More commonly, for service agreements, the recipient must perform the action after receiving the payment.
What is a Bank Payment?
Bank payment is an online mode of payment from one Bank account to another. It is a convenient, secure, and quick mode of payment to collect or send money. You may use it for one-time or recurring payments.
Buy Now, Pay Later (BNPL)
BNPL services allow customers to distribute due payments in instalments. However, fees and interest rates apply when BNPL is incorporated into the payment mode.
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Digital Wallets
Digital wallets work through mobile apps that store payment details for convenient transactions. Examples include Google Pay and PayTM. These payment methods facilitate contactless payments with optimum speed and security.
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