Selecting the appropriate payment method is a critical decision with direct implications for an organization's cash flow, financial reporting and stakeholder relationships.

When choosing a payment method, treasury professionals must prioritize three essential factors: the transaction amount, the recipient's destination and the timing of the payment. The objective is to ensure the precise and secure delivery of funds while maintaining alignment with the organization's financial goals and operational needs.

What Is a Payment?

A payment is the transfer of monetary value from one party to another, whether in cash or noncash form. A cash payment is effected by the transfer of notes and/or coins from the payor to the payee. For a noncash payment, the value is typically transferred between depository accounts held at different banks.

Cash Payment

In general, cash payments (i.e., payments involving currency notes and coins) are used by consumers to settle small transactions. Many types of companies, such as retailers, grocers and restaurants, receive a portion of their payments in the form of cash.

Cash payments are typically self-settling, meaning that the physical transfer of cash provides the clearing network leading to final settlement. As a result, no additional settlement infrastructure or bank network is needed for cash transactions.

A common misconception is that cash payments are less expensive than other types of payments. In fact, cash is a high-cost payment method for many companies because it represents a security risk. Cash receipts must be safeguarded at the collection point until they can be transported to a bank and deposited into the company’s bank account. This requires items such as locked cash drawers, dual-control procedures, specialized safes and armored cars. Additionally, banks typically charge their corporate customers a fee to receive, count and verify cash deposits.

Noncash Payment Types

When considering the various noncash payment types, it’s important to compare the distinctive operational traits, risks, regulations, and methods for settling transactions that each has to offer.

Payment Method	Electronic or other	Irrevocable	Security level	Time to clear	Cost
Checks: Written directives from the payer to their bank, authorizing the transfer of funds to the designated payee. Still widely used, especially in the United States.	Paper	No	Considered one of the least secure methods of payment	Within 2-3 business days of deposit by payee	High
Wire Transfers: The transfer of funds through a global network managed by banks and transfer service providers.	Electronic	Yes	High	Immediate	Most expensive payment method
Real-time payments (RTPs): Because they are generally irrevocable, RTPs reduce the settlement risk associated with batch payments.	Electronic	Generally, yes	High	Immediate	Lower-cost alternative to wire transfers
Batch payments: Known as ACH in the United States or Bacs in the United Kingdom, they are value-dated and processed in batches, e.g., payroll, bills, transfers funds directly from one bank account to another	Electronic	May be recalled under certain conditions	High	24-48 hours, though same-day ACH is available in the U.S. for domestic payments of $1M or less	Nominal to free
Cards: Includes credit cards, debit cards, prepaid cards, purchasing cards, virtual cards and payroll cards.	Electronic	May be recalled under certain conditions	Medium	1-3 business days	Nominal to free for the payer
Digital: Digital (or mobile) wallets, mobile (phone) payments, person-to-person payments and virtual currencies.	Electronic		Medium

Given the complex nature of digital payments, we will take a closer look at this method. As stated in the table above, digital payments include digital/mobile wallets, mobile payments (made most commonly with a mobile phone), person-to-person payments and virtual currencies.

• Digital/mobile wallets (e.g., Alipay, Google Pay, Apple Pay) use smartphones and tablets equipped with near-field communication (NFC) chips or a bar code. The digital/mobile wallet allows you to choose a payment method, then tap the phone to a contactless payment device or scan a bar code.
• Mobile payments allow you to set up an account with a cell provider and transfer money via text message. A PIN is used for security. Mobile payments do not require a smartphone or a bank account, making the system popular in developing and underbanked countries (e.g., M-Pesa is popular in Kenya and Tanzania).
• Person-to-person payments may be initiated by the payer through a bank (e.g., QuickPay, Popmoney), a nonbank intermediary (e.g., PayPal), or a credit card network (e.g., Visa money transfer).
• Virtual currencies are digital forms of money that don't come from a central authority such as a government or bank. They exist only online and use decentralized networks to handle transactions and confirm them. One popular category of virtual currency is cryptocurrency, with Bitcoin, Ethereum and Litecoin being some of the most famous examples. Cryptocurrencies use special math techniques and decentralized technology called blockchain to secure transactions, verify ownership, and control the creation of new units. They are typically traded on online exchanges and can be used for a wide range of purposes, including investment, remittances and online purchases.

The AFP Real-time Payments Survey, underwritten by The Clearing House, finds that adoption and implementation of real-time payments varies across organizations based upon revenue and size.

Payment Types by Parties Involved

Payment methods can vary depending on whether the recipient is an individual, a business or a government entity.

• Business-to-business (B2B) payments involve the transfer of funds from one business to another, usually for the purpose of paying vendors or suppliers. Although B2B payments account for the smallest number of transactions, they generally represent the largest portion of total payment value. B2B payments are more frequently being made electronically or through card-based transactions, reflecting a shift away from checks.
• Business-to-consumer (B2C) payments move funds from businesses to consumers or individuals; for example, payroll is a B2C payment.
• Business-to-government (B2G) payments include taxes, fines and other government fees.
• Consumer-to-business (C2B) payments involve the transfer of funds from individual consumers to businesses, usually for the purpose of buying products or services and paying bills. While small-dollar transactions at the point of sale might still involve cash, the majority of other C2B payments made today are either through card payments directly at the point of sale or electronically through a bank.
• Consumer-to-consumer (C2C), or person-to-person/peer-to-peer (P2P), payments move funds from one person to another.
• Consumer-to-government (C2G) payments include taxes and other government fees.
• Government-to-business (G2B) payments are usually for vendor payments.
• Government-to-consumer (G2C) payments include various government-issued payments such as retirement, social security, tax refunds and welfare payments. The majority of G2C payments are electronic or card-based.

The AFP Digital Payments Survey, underwritten by J.P. Morgan, provides insights into how organizations are rapidly adopting digital payments solutions in response to recent significant global challenges.

Key Characteristics of Payments

Payments can be further categorized based on several key characteristics, including the timing of the transaction, the payment amount, and whether it is a push payment or a pull payment. These factors must be considered when determining which payment method to use.

• Is there any urgency to the receipt of payment? The payment processing time and the ability to determine when the payee will receive the funds varies according to the clearing and settlement process for the selected payment method. Settlement times vary from instant to a day or longer.
• What is the amount of the payment? The payment amount can affect which payment methods are available to you. For example, some countries have maximum value thresholds for certain payment systems and require that any payments over that amount be processed through their EFT system.
• Is it a push or pull payment? Push payments include checks, ACH credits and most wires, all of which are initiated by the payer. Pull payments, which include direct debits and some card payments, are initiated by the payee, e.g., automatic withdrawal for utility payments, and may be based on a one-time or recurring agreement.

Importance of Choosing the Right Payment Method

The choice of payment method directly impacts financial efficiency, liquidity management and risk mitigation. By carefully assessing factors such as transaction speed, cost, security and the needs of both the payer and payee, you can select the most appropriate payment solutions for your organization and its unique requirements.

Whether opting for traditional methods such as checks and wire transfers or embracing more modern methods such as electronic transfers and virtual currencies, treasury professionals must prioritize solutions that streamline operations, enhance transparency, and support the overall financial objectives of the company. With a strategic approach to payment selection, you can effectively navigate the evolving landscape of financial technology and drive sustainable growth and success for your organization.

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