Payment automation allows individuals and businesses to transfer money from one account to another without a physical currency exchange or manual processing. Payment automation systems work electronically and can process transactions almost instantly. They are used for several purposes such as customer purchases and payments on bills, salaries, and supplier invoices.

According to the 2023 McKinsey Global Payments Report, global payment revenue has increased by 7% annually from 2018–2023 to more than $2.4 trillion. A range of factors drove this growth, including the rise of automated and digital payment solutions.

But like other business technologies, automated payment systems have complexities that require careful planning and management to address. There are many benefits to adopting automated payment systems, but there are also risks and vulnerabilities that businesses must consider. Below, we'll discuss how to set up an automated payment system for your business, get started using it, and implement best practices to protect it.

What's in this article?

• What is payment automation?
  
• Types of automated payment systems
  
• Key components of automated payment systems
  
• How does payment automation work?
  
• Which technical components enable payment automation?
  
• Benefits of payment automation for businesses
  
• Challenges associated with automated payment systems
  
• How to set up an automated payment system
  
• Best practices for payment automation
  
• How Stripe can help
  

What is payment automation?

Payment automation is the use of technology to manage the payment process. Behind the scenes, computers and software execute payment instructions when certain conditions are met. For example, a company might set up automated payments for regularly recurring expenses. Its system will automatically send money to the designated recipient at set intervals.

Types of automated payment systems

Payment technology is varied and dynamic, and automated payment systems can work in multiple ways. Each type of automated system caters to a specific transaction type and the businesses and customers who use it. Here's an overview of some automated system types:

• Electronic funds transfer (EFT): EFTs include many types of digital money transfers, including bank wire transfers, direct debits, and electronic checks. They move funds from one account to another electronically, without requiring paper money.

• Direct deposit: Employers often use this method to automatically deposit wages into employees' bank accounts. It's also used to distribute benefits such as pensions and social security.

• Direct debit: Direct debit payments allow a third party to withdraw funds directly from an individual's bank account, usually for bill payments or subscriptions. The account holder grants permission for the third party to debit the necessary amount each month.

• Online payments services: These platforms let users send and receive money online. They can be used for personal transfers (e.g. sending money to friends or family) or for business transactions (e.g. paying for goods and services).

• Mobile payment systems: With the widespread use of smartphones, mobile payments have become increasingly popular. These systems include digital wallets that allow customers to make payments with a tap or scan of their phones, as well as other apps that store payment information.

• Automated Clearing House (ACH): The ACH network handles bulk transactions – such as payroll, vendor payments, and utility bills – in the United States. It's known for having low transaction fees, making it a preferred method for many businesses.

• Charge cards and credit cards: These cards allow customers to make purchases or withdraw cash up to a certain limit. They must pay back the borrowed money, often with interest.

• Point-of-sale (POS) systems: Used by retailers, POS systems process payments from customers when they're making purchases. Modern POS systems can handle different payment methods, including credit and debit cards and even mobile payments.

• Contactless payments: Contactless payments involve using radio frequency identification (RFID) or near-field communication (NFC) technology to make secure payments by tapping or waving a card or a smart device near a reader – without needing to insert a card or provide a signature.

• Cryptocurrency payments: These are digital or virtual currencies that use cryptography for security. Payments are peer-to-peer transfers without a central processing authority.

Each of these systems has its own set of protocols, security measures, and uses. They're constantly developing, adding new features to meet the changing demands of customers and businesses.

Key components of automated payment systems

Despite the variance across automated payment systems, many of the key components are similar:

• Transaction initiation: Transaction initiation is the beginning of the payment process, when an individual or business decides to move funds. This could be a one-time action (e.g. a customer buying an item online) or a recurring instruction (e.g. setting up a monthly bill payment).

• Payment gateways: Payment gateways act as an intermediary for online transactions. They capture payment data from the customer and send it to the payment processor.

• Payment processors: Payment processors verify and process transactions. They check whether the payer has enough funds, authorise the transaction, and communicate with the customer's and business's banks.

• Banking networks: These are the systems that banks use to communicate with each other. They transfer information and funds between banks.

• Merchant accounts: Businesses need these specialised bank accounts to receive money from credit and debit card transactions. Funds are deposited into a merchant account before they're transferred to the business's primary bank account.

• Security protocols: Incorporating security measures can protect transaction data and prevent unauthorised access. They include encryption, tokenisation, and compliance with industry security standards such as the Payment Card Industry Data Security Standard (PCI DSS).

• User authentication: This involves verifying the identity of the person who initiated the transaction. Methods include personal identification numbers (PINs), passwords, biometrics, and multifactor authentication.

• Settlement and clearing: This process involves reconciling the transaction details between the payer's and payee's banks, transferring the funds, and paying out the intended recipient.

• Dispute resolution systems: These systems handle any disagreements or issues that arise, such as unauthorised transactions and errors in the amount transferred.

• User interface: This is the part of the system that customers interact with. It needs to be simple, allow customers to easily input payment details, and show the transaction status.

• Recordkeeping: Automated payment systems keep records of all transactions. These are necessary for accounting, maintain legal compliance, and provide a transaction history for both businesses and customers.

Every component must work together smoothly so that payments are processed promptly, accurately and safely.

How does payment automation work?

Payment automation simplifies the process of moving money from one party to another. It involves a complex orchestration of technical and operational elements that work together to create smooth, secure, and prompt transactions. Here's how the payment process works:

1. Initiation: This is where the transaction starts. For example, a customer decides to make an online purchase. They enter their payment details on the business's website or app, which then sends this information to the payment gateway.

2. Payment gateways: These act as a bridge between the business and the payment processor. They encrypt the payment details and forward them to the payment processor in a safe, secure manner.

3. Payment processors: Payment processors validate the payment details. They check whether the payer's account has enough funds or credit, then they approve or decline the transaction based on this information. They play an important role in fraud prevention.

4. Banking networks and intermediaries: Once the transaction is approved, it moves through banking networks. This involves communication between the payer's and payee's banks. Intermediaries here include networks like Visa and Mastercard for card transactions, and ACH networks for direct bank transfers.

5. Settlement and reconciliation: Funds are transferred from the payer’s bank to the payee’s bank. This process also involves reconciling the transaction details between the two parties and ensuring accurate recordkeeping.

6. Customer account management: Throughout this process, automated systems manage customer accounts, keep track of transactions and balances, process invoices, and provide digital receipts.

Which technical components enable payment automation?

These are the components that facilitate and secure automated payments:

• Security protocols: Security measures are key to protecting sensitive data. Encryption, tokenisation, and adherence to security standards such as PCI DSS can prevent data breaches and fraud.

• Application programming interface (API) integration: Automated payment systems often use APIs to integrate with various financial institutions and service providers. This allows different systems to communicate with each other effectively and securely.

• Data management and analytics: Automated payment systems store vast amounts of transaction data. Visibility into this data allows businesses to analyse and understand customer behaviour, manage risks, and improve services.

• Scalability and reliability: These systems can handle high transaction volumes reliably. This requires extensive server infrastructure, efficient processing algorithms, and contingency plans for system downtimes.

These components shape the customer experience:

• User interface: The customer-facing aspect of these systems needs to be intuitive and easy to navigate. That means including clear instructions, speeding up response times, and making the checkout process smoother.

• Customer support: Responsive customer service from these systems is important for handling queries, resolving issues, and maintaining trust.

• Transparency and communication: Keeping customers informed about the status of their transactions and any issues that arise is key for efficient automated payment systems. This includes real-time notifications and easy access to transaction histories.

Benefits of payment automation for businesses

With the transaction value of the global digital payment market expected to reach nearly $38.07 trillion by 2030, payments infrastructure is more important than ever. Automating your payment systems has many benefits, as long as you approach it intentionally and thoughtfully. Here are some of them:

• Operational efficiency: Automating the payment process simplifies operations, reducing the manual labour needed for data entry and reconciliation. By integrating payment systems with accounting software, financial reporting happens in real time to enable responsive, informed decision-making.

• Financial precision: Automation minimises human error in financial transactions. Sophisticated algorithms ensure that payments are processed for the correct amount and sent to the correct recipients. This precision is particularly valuable in environments with high transaction values.

• Cost savings: Beyond saving on the direct costs of materials and transaction fees, automated systems can decrease indirect costs associated with error correction, financial delays, and time spent on manual processes. Over time, these savings can be substantial, releasing capital for investment in other areas of the business.

• Liquidity improvement: By precisely controlling the timing of payments, automated systems help businesses refine their liquidity and cash flow. This improves cash management, since businesses can make informed decisions on short-term investments and borrowing.

• Enhanced security measures: Payment automation systems typically come with advanced security features that protect against fraud and theft. These can include multifactor authentication, encryption, tokenisation, and anomaly detection systems that halt suspicious transaction activity.

• User convenience: With automated payments, customers no longer need to remember due dates and manually make payments. This can raise customer retention rates and minimise late payments. For businesses, automated payments are convenient for payroll, vendor payments, and tax remittances – all of which can be scheduled in advance and executed consistently.

• Digital recordkeeping and compliance: Automated systems create digital records for each transaction, simplifying compliance with financial regulations and tax laws. Comprehensive digital recordkeeping can make audits easier and prove invaluable during financial reviews.

• Customer trust and satisfaction: Automated payment options can enhance the customer experience, creating trust through reliable, consistent payment processing. This is particularly important in subscription-based models where the ease and reliability of payment processing are directly linked to customer retention.

• Sustainable practices: By eliminating paper-based processes and reducing the need for physical transportation, automated payment systems contribute to an organisation's sustainability goals.

• Global scalability: For businesses that operate in multiple markets, automated payment systems provide a flexible solution for handling transactions in different currencies and across various regulatory environments. This global scalability is important for businesses that want to expand their market reach while minimising operational complexity.

Challenges associated with automated payment systems

Automated payment systems present unique challenges. Your payment system should work for your current needs and be flexible enough to handle any future changes to your business. This starts with knowing what challenges to expect:

• System integration: Integrating new payment solutions with legacy financial systems can be complex. This process requires careful planning, skilled information technology (IT) support, and potential changes to existing workflows.

• Compliance and regulatory issues: Financial transactions are heavily regulated, and automated systems must comply with a multitude of rules that vary by jurisdiction. Adhering to these regulations requires constant vigilance and can entail substantial administrative work.

• Security risks: Even with advanced security measures in place, there's still a risk of cyberattacks or data breaches. As payment systems become more sophisticated, so do the methods used by cybercriminals. Organisations need to stay up-to-date on best practices to protect sensitive financial data.

• User training and acceptance: Employees and customers might be resistant to adopting new systems, especially if they are not user friendly. Extensive training and change management practices are necessary to guarantee user acceptance and proper management.

• Transaction errors and disputes: Even with automated systems, errors can occur. Incorrect payments can lead to disputes and resolving them can be time-consuming and might impact customer relationships.

• Operational disruptions: Transitioning to an automated system can temporarily disrupt normal business operations. Careful planning is required to minimise downtime and assure that important payment functions still work during the transition.

• Costs: Up-front costs for implementing automated payment systems can be high. Organisations must consider the initial investment in software and hardware in addition to ongoing costs for maintenance, updates and security.

• Vendor dependence: Relying on third-party vendors for payment processing can cause difficulties, especially if the vendor experiences outages or other issues. Organisations need to have contingency plans in place to handle those situations.

• Global transaction issues: For businesses that operate internationally, it can be complicated to handle multiple currencies, varying transaction fees, and cross-border regulations. Automated systems must be equipped to handle these complexities.

• Customer privacy concerns: With the rise of data protection laws such as the General Data Protection Regulation (GDPR) in Europe, businesses need to be careful about how they handle customer data. Automated payment systems must comply with these laws, which can be a complex, ongoing task.

How to set up an automated payment system

When you set up an automated payment system for your business, ensure the system aligns with your operational needs, your security requirements, and any relevant financial regulations. Here's an overview of the process:

1. Assess your needs: Begin with a thorough assessment of your business's payment needs. Consider the transaction volume, payment types (e.g. vendor payments, payroll, customer transactions), and any specific industry requirements. This will help determine the scale and type of system required.

2. Conduct market research: Do market research on available payment systems that fit your business requirements. Look at features, costs, ease of use, compatibility with existing systems, and vendor reputation. It's also wise to consult peers or industry groups for recommendations.

3. Choose a vendor based on your research: Consider both the product and the vendor's customer service, support, and track record for making updates and resolving issues.

4. Ensure regulatory compliance: Check that the system you choose complies with all relevant financial regulations, including those for data protection and fraud prevention. This might involve consulting legal experts.

5. Plan the integration: Outline how your new system will integrate with your existing financial and IT infrastructure. This could involve enterprise resource planning (ERP) software, cloud-based services, or POS hardware.

6. Implement security measures: Work with your IT department or an external security consultant to implement the necessary security measures. These might include encryption, access controls, and multifactor authentication.

7. Test the integration: Before you go live, thoroughly test the system with a series of transactions to confirm it operates correctly and securely. Address any issues that arise and retest as needed.

8. Train your staff: Educate staff on how to use the new system. Training should cover how to handle daily operations, oversee security protocols, and troubleshoot common issues.

9. Onboard customers and vendors: If your automated payment system affects customers or vendors, develop a plan to onboard them. This might involve writing instructions on setting up accounts, authorising payments, and understanding new billing cycles.

10. Deploy: Once testing is complete and all parties are trained, roll out the new system. A phased approach – starting with a smaller group before extending the system to all users – can minimise any disruption to business operations.

11. Monitor and offer support: After deployment, continuously monitor transactions for any issues and provide ongoing support to customers. Be prepared to address and resolve issues promptly.

12. Evaluate and adjust: Evaluate the system's performance regularly. Gather feedback from users and make adjustments as necessary to improve efficiency and customer experience.

13. Maintain compliance: Keep the system up-to-date with the latest security patches and regulatory changes. Regular audits can ensure the system remains compliant and secure.

Best practices for payment automation

Employing best practices for automated payment systems is necessary to preserve a good customer experience and keep your internal operations running smoothly, with as few unnecessary costs and vulnerabilities as possible. These best practices include the following:

• Update software regularly: Keep your payment system software up to date. New versions often include patches for security vulnerabilities that have been discovered since the last update.

• Use strong authentication methods: Protect your system with strong authentication practices. Go beyond basic passwords and implement two-factor authentication, which requires a second form of verification.

• Monitor transactions rigorously: Track transactions carefully to catch any unusual activity early. Automated systems can flag anomalies, but human oversight is needed to determine whether they're false alarms or genuine issues.

• Educate your team: Assure that your team understands how to use the payment system and is aware of common scams or security threats. Regular training sessions can keep everyone up-to-date on the latest security practices.

• Have a response plan: If something goes wrong, you need to be able to react quickly. Create a plan for handling security breaches, including who to notify and what steps to take to contain the issue.

• Back up data: Regularly back up your payment system data. If you experience a system failure or cyberattack, you'll need backups to restore lost information.

• Choose reliable partners: Work with banks and financial institutions that are known for their reliability and customer service. If you run into problems, you want a partner that will be responsive and helpful.

• Stay compliant: Research regulatory requirements that affect your payment system and ensure you comply with them. These can include financial regulations, data protection laws, and industry standards.

• Review and audit: Review and audit your payment processes periodically to confirm that they're still serving your business effectively and haven't become outdated.

• Provide excellent customer service: Automated systems can sometimes be frustrating for customers to navigate. Provide clear instructions for use and be ready to help when needed.

• Encourage feedback: Listen to feedback from both customers and employees. They might identify issues or potential improvements that you haven't considered.

• Plan for downtime: Sometimes systems go down. Plan for how you'll handle payments if your automated system is temporarily unavailable.

How tightly or loosely you adhere to these best practices will affect how much your business benefits from payment automation – and how well you can circumnavigate possible challenges. Thoughtful attention to detail in payment automation will create a stronger, more reliable business.

How Stripe can help

For most businesses, successfully implementing and managing an automated payment system depends on having the right payment providers. For example, Stripe's entire suite of payment solutions is compatible with automated payment strategies, whether your strategy includes your entire payment system or just part of it. Stripe supports payment automation for businesses through an extensive set of features and products, customised to maximise efficiency and decrease manual intervention. Here's what Stripe offers:

• Comprehensive payment processing: Stripe automates the entire payment journey, from accepting various payment methods – including cards and digital wallets – to ensuring funds are correctly settled in the business's bank account. This automation is important for businesses that want to scale while minimising their administrative burden.

• Subscription services and billing: With Stripe Billing, companies automate their recurring billing, subscriptions, and invoicing. They can set up complex billing scenarios such as tiered pricing and usage-based billing, and Stripe manages them automatically – adjusting billing cycles and amounts as necessary.

• Tax handling: Stripe Tax automates the calculation of sales tax and value-added tax (VAT) for each transaction. This avoids manual tax calculation and keeps businesses up-to-date with tax compliance.

• Revenue recovery: Stripe helps automate the dunning process and attempts to recover failed payments through Smart Retries. It also makes it easier for customers to update their payment information.

• Financial reporting and compliance: Stripe automates financial reporting and compliance tasks such as revenue recognition and reporting. With tools like Stripe Sigma, businesses can automatically generate financial reports and gain insight from their data, which can drive more informed decision-making.

• Global reach with localised payments: Stripe supports global payment processing by automatically handling transactions in multiple currencies and conforming to local payment methods, reducing the complexity of international sales.

Learn more about Stripe's automated payment capabilities.