Online payment methods for ecommerce sites: a beginner’s guide

Andy Tweddle, Payments writer
11 Jan 2022
UI showing an instant bank payment

You’ve done the hard work of persuading a new customer that your product or service is right for them. Don’t let the final step in the journey — collecting the payment — stop you from winning that new customer.

Offering customers their preferred payment methods is key to completing any sale. So, what are some of the most common online payment methods?

1. Credit and debit card payments

Card payments remain the most popular online payment method in the UK (with 15.8 million debit card payments in 2020 alone). Familiarity is a key benefit for merchants, as most consumers are comfortable shopping with credit and debit cards.

However, their popularity is dwindling slowly. In Europe, cards in 2021 are estimated to represent around 41% of ecommerce payments. By 2026 this share is expected to fall to 33% (Edgar Dunn & Company, 2022).

You’ll need to set up a merchant bank account and use a payment gateway to accept online credit card payments. Merchant accounts hold funds until they’re cleared to your business bank account. Payment gateways connect your website to a payment processing network and enable you to accept card payments at your checkout.

All-in-one processors (such as Stripe) can take care of both requirements on your behalf. There’s no need to set up a merchant account. Instead, these payment service providers effectively work as the connection between your ecommerce store and the banks.

Pros of card payments:

  • high levels of trust and recognition among consumers

  • useful if your business has both online and offline stores

Cons of card payments:

2. Instant bank transfers

Instant bank transfers initiate payments using open banking technology. A consumer can pay straight from their bank account at checkout through open banking APIs, without needing a card. Once a consumer selects the instant bank transfer option and gives consent, a third party provider initiates the payment to the merchant on the consumer's behalf. As the name suggests, the transfer of funds is instant.

The payment provider, such as TrueLayer, is responsible for populating the business payee details in the payment order to the bank, rather than the customer, which prevents misdirected payments from occurring.

Open banking-powered instant bank transfers are growing in popularity. In just November 2021, there were over 3 million successful transactions in the UK.

Pros of instant bank payments:

  • instant transfer and settlement

  • low fraud because payments are strongly authenticated

  • low fees compared to credit cards (~1-1.5%)

  • high payment success rates

  • seamless customer experience

Cons of instant bank payments:

  • lower awareness with consumers, due to being newer to the market

  • Inconsistent experience across the EU (but this is improving rapidly)

3. Manual bank transfers

Manual bank transfers involve the direct transfer of funds from one bank account to another (in this case, the customer’s bank account to the business’ bank account). To make a manual bank transfer, the customer simply needs to instruct their bank to transfer funds to a business’ bank account. To do that, the business needs to supply them with a six-digit sort code, eight-digit bank account number and a payment reference.

Unless the customer purposefully schedules a payment for a later date, manual bank transfers are typically instantaneous. However, banks will occasionally hold on to funds for hours or days if the bank decides the transaction looks unusual or suspicious.

Pros of manual bank transfer:

  • no transaction or processing fees

  • payments are typically transferred instantly

Cons of manual bank transfer:

  • customers need to navigate away from your site to pay

  • easy for customers to incorrectly input bank details

  • lots of admin to ensure payments have been paid

  • lots of admin to reconcile payments

4. Direct Debit payments

Direct Debit payments offer a traditional bank to bank transfer service, withdrawing payments directly from a customer’s account. First, the customer must fill out a Direct Debit mandate to authorise the payment. They will then receive notifications regarding any upcoming payments.

You can set up Direct Debit as one of your online payment options either directly through your bank or with a third-party Direct Debit provider. Direct Debit management software can streamline the process by integrating and managing Direct Debit payments automatically.

Direct Debit payments are most often used for recurring payments like subscriptions or instalments, as the Direct Debit mandate gives your business power to ‘pull’ money directly from a customer’s account.

Pros of Direct Debit:

  • enables recurring payments

  • merchants can ‘pull’ payments from customers (with their consent)

  • convenient for customers (who don’t need to remember to make monthly/annual recurring payments)

Cons of Direct Debit:

  • payments can fail due to insufficient funds

  • payments can be reversed at the request of the customer

  • slow settlement speed (typically 3–5 days)

5. Digital wallets

Digital wallets store bank account details, credit cards, gift cards, and loyalty cards all in one place. Leading names in this category include Google Pay, Apple Pay, and Amazon Pay. Users can access stored details through an app for checkout. There’s also no need for the customer to enter lengthy card details for each individual transaction.

Digital wallets have become popular in the UK, with 17 million people registered for mobile payments, with the likes of Google Pay and Apple Pay.

Pros of digital wallets:

  • convenient, speedy checkout process

  • mobile-first UX

  • rich data available to merchants with the customer’s consent

Cons of digital wallets:

  • significant integration investment to accept specific digital wallets

  • not all consumers are comfortable with this technology

  • merchants must still pay costly card processing fees

6. Buy now, pay later

Buy now, pay later (BNPL) platforms include companies like Klarna and Afterpay. They work by letting customers make a purchase with interest-free credit. A customer makes their purchase, paying the BNPL provider at a later date, either in a lump sum or as a series of instalments. Terms and conditions will vary, with most charging hefty fees for late payments.

BNPL has become a popular payment method in the UK, with over 17 million customers having made at least one online purchase using it. BNPL is estimated to represent 8% of European digital payments (Edgar Dunn & Company, 2022).

Pros of BNPL:

  • customers enjoy interest-free financing, which can lead to higher checkout conversion rates

  • consumers aren’t barred by insufficient funds (at the moment of purchase)

  • growing popularity among consumers

Cons of BNPL:

  • providers charge a per-transaction fee to the retailer

  • merchants face risk of some buyer’s defaulting on loans

  • harsh penalties for late payments will discourage some consumers

  • not all customers will qualify for credit

  • increased reconciliation efforts

7. Gift cards

If you want to encourage spending at your ecommerce store, you may want to try gift cards. These work in the same way as any other prepaid card as the card contains a specific value to spend. Closed-loop cards are specific to a single retailer or affiliated group. This makes them different to more general prepaid cards, which can be spent anywhere that the issuing company is accepted.

Pros of gift cards:

  • encourages spending on your site

  • quick, easy transactions

Cons of gift cards:

  • higher risk of fraud

  • transaction fees can vary

  • still require other payment methods for customers to buy gift cards

8. Cash on delivery (COD)

It may not be one of the most common ecommerce payment methods, but cash on delivery (COD) is another option. With this method, the customer places their order on your ecommerce site and then pays the courier when the order is delivered. COD is most popular in countries where cash is widely preferred, such as Thailand and India. However, it’s important to remember that this term might also be used to describe any cashless transaction involving payment on delivery.

Pros of COD:

  • reduces return rates

  • less risk of fraud

Cons of COD:

  • risk that delivery will be refused

  • lag time between order and payment

  • popularity varies greatly from country to country

  • unsuitable for companies without a physical product

Should I offer multiple payment methods?

In short, yes. Over two-thirds of shopping carts are abandoned at the checkout stage, according to a global Statista survey. Lack of preferred payment options is a primary reason for shopping cart abandonment.

By giving your customers plenty of choices, you can improve satisfaction and increase ecommerce conversion rates. For example, YouGov research shows that online shoppers are more likely to buy from a retailer if the right payment options are available. And according to Forbes, providing more payment choices also speeds up the purchase process, especially on mobile devices.

The best course of action is to combine traditional payment methods like credit cards with newer options like digital wallets and open banking payments. Open banking payments are increasing in popularity, offer low fees for merchants and minimise the risk of fraud.

Find out more on how to get started with open banking and instant bank transfers.

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