Total transaction value in the digital payment market is projected to reach $20.37 trillion in 2025. For businesses, this means it’s more important than ever to offer customers a variety of digital payment methods so they can easily pay on their phones, laptops, or at physical terminals that accept contactless cards.

A digital payment system handles each part of that transaction, ensuring the money moves from buyer to seller. It’s a complex process that occurs in seconds, and it shapes a core aspect of commerce.

If you run a business, whether it’s online or a physical store, you should understand how digital payments are processed and how they shape your daily operations. Below, we’ll explain how digital payment systems work, how to set them up, and how Stripe helps businesses handle their digital payments.

What’s in this article?

• What is a digital payment system?
  
• How do digital payment systems work?
  
• What are the advantages of digital payment systems for businesses?
  
• How do you set up a digital payment system for your business?
  
• What are the fees associated with digital payment systems?
  
• How does Stripe help businesses manage digital payments?
  

What is a digital payment system?

Digital payment systems facilitate digital payments, from paying online with a debit card to using your phone to send money to a friend. These systems have made payments faster, easier, and more trackable for businesses and customers.

Many people used to be wary of using cards to make online purchases. But now, a huge subset of individuals and companies rely on digital payments to send or accept money: in 2024, 92% of customers in the United States made some form of digital payment over the previous year.

How do digital payment systems work?

The process begins when the payer initiates a transaction, either in person or online. They select a payment method (e.g., credit card, digital wallet) and input the necessary details such as card information and a password, depending on the method.

Once the customer clicks “pay,” the information is sent to a payment processor. This processor is a third party that routes the data and ensures it’s legitimate.

The payment processor relays the message to the customer’s bank or card network, which checks the account balance, credit limit, and any other relevant constraints. If everything is in order, the bank sends back an approval. If there’s a problem, the bank sends a decline.

The approval or decline travels back to the seller’s system. If approved, the transaction is queued for settlement. The customer sees a payment confirmation message, and the business is informed that the purchase went through.

After a certain period – minutes, hours, or sometimes a couple of days – the money is transferred from the customer’s bank account (or credit line) to the business’s designated bank account. Different payment methods have different settlement timelines.

What are the advantages of digital payment systems for businesses?

A digital payment system has many benefits for sellers, whether they’re giant online marketplaces or local vendors starting out in e-commerce. Consistent, predictable payment operations can reduce guesswork, facilitate revenue tracking, and lay the groundwork for growth.

Here’s how digital payment systems can benefit companies:

• Faster transactions: No one needs to wait for a check to arrive in the post or clear at the bank. Digital payments transfer money on a shorter timeline, which is better for cash flow planning.

• Easier recordkeeping: Storing data in a digital format creates clean transaction histories. Everything is organised in one dashboard, which makes it simpler to match payments to orders, handle refunds, or track trends.

• Broader customer reach: Shoppers can pay with their preferred digital payment methods, from major credit cards to digital wallets. Accepting digital payments can open your business to a broader audience.

• Better customer experience: A good payment system makes checkout easier and faster for online shoppers. This can reduce cart abandonment and lead to repeat purchases.

• Security: Tools such as encryption and tokenisation help stop unauthorised access to sensitive payment information.

• Automation potential: Businesses can link payment tools to invoicing or accounting software. This means less time spent on manual data entry and fewer mistakes caused by human error.

• Expansion opportunities: Online transactions allow you to serve customers in many different locations – even internationally – without needing to open additional physical shops.

How do you set up a digital payment system for your business?

Different businesses have different needs. Some businesses choose an all-in-one solution, where hosting, shopping cart functionality, and payment acceptance are offered by the same provider. Other businesses use different services together, with one vendor for site hosting and another for payments. The best system depends on how you operate (e.g., online, in-person, subscription-based) and your specific budget, desired features, and level of tech expertise.

Here’s what you should consider when you establish a digital payment system:

• Primary sales channels: Do you sell mostly through a website, a mobile app, or a brick-and-mortar shop? An online boutique might need a checkout page that handles multiple card brands and digital wallets, while a corner store might use a point-of-sale terminal that accepts contactless taps.

• Technical needs: Some businesses have web developers on staff who can build a custom solution. Others prefer a plug-and-play approach where they embed ready-made payment buttons on their sites. If you’re not tech-savvy, you might want a platform with user-friendly dashboards, minimal coding, and thorough documentation.

• Desired payment options: Look for specific payment features that make sense for your business model. Do you want one-click checkout or subscription billing? Do you need support for multiple locations or foreign currencies?

• Security measures: The provider you choose should incorporate strict security measures to protect customers’ financial data. Tokenisation and two-factor authentication are two common options that can help prevent fraud.

Once you’ve chosen a provider, run a handful of test transactions to ensure everything is working properly. Watch for user experience feedback: do customers find the checkout easy to complete or do they abandon their carts? For a physical store, ensure your employees are fully trained on how to accept payments and handle refunds in person. For an online shop, you and your team should know how to use the backend dashboard to issue refunds, manage orders, and handle chargebacks.

What are the fees associated with digital payment systems?

Digital payments aren’t free. Different providers will charge different kinds of fees, such as the following:

• Transaction or processing fees: These are typically a small percentage of the transaction plus a flat fee.

• Monthly fees: These are charges for monthly access to payments services. These are especially common if the provider bundles services with advanced features such as analytics and invoicing tools.

• Chargeback fees: Some providers charge you every time a customer disputes a transaction, even if you successfully fight the dispute.

• Currency conversion fees: These are extra fees for currency conversion services included with payment processors.

Compare providers on more than cost to find the best fit. Some providers might charge slightly more but include better fraud protection, a more flexible interface, or better reporting. Ensure you’re clear on your volumes, your average transaction size, and the countries you’ll be selling to, then consider which fee structure makes the most sense for your business model.

How does Stripe help businesses manage digital payments?

Whether you’re running a small online store or a global enterprise, Stripe makes it easier to handle digital payments. The cost structure is generally transparent, and the platform is designed for a wide range of business types. That means you can start with a single online store and later add more payment methods, build subscription models, or accept in-person payments without having to rework your entire system.

Here’s what Stripe can do for you:

• Process a wide range of payments: Stripe lets you accept payments through cards, digital wallets (e.g., Apple Pay, Google Pay), and bank transfers. Stripe customers don’t pay any additional fees to process Apple Pay and Google Pay, and the pricing per transaction is the same for all cards and digital wallets. If you need to work in multiple currencies, Stripe can handle conversions. If your business runs on subscriptions or memberships, Stripe Billing can manage recurring payments.

• Provide different options for integration: For businesses with development teams, Stripe’s application programming interfaces (APIs) make it simpler to build custom payment systems. For businesses without development teams, Stripe also has ready-made tools such as Stripe Checkout, a plug-and-play option that gets online payments running quickly.

• Automate the billing process: Stripe can send invoices, calculate and collect taxes for you, and help with point-of-sale transactions if you also sell in person.

• Help with security and compliance: Stripe takes security seriously and handles compliance with the Payment Card Industry Data Security Standard (PCI DSS). It also uses machine learning to detect and prevent fraud in real time.

• Show you helpful insights: With the Stripe Dashboard, you can track revenue and payment trends and see why some transactions might be failing. This data helps you fine-tune your payment processes and make smarter business decisions.

• Support global businesses: Stripe makes it easier to accept local payment methods such as SEPA Direct Debit and iDEAL, which customers in some regions prefer over cards. It also helps you address foreign tax regulations and compliance if you operate in multiple countries.

• Simplify payouts: Stripe transfers your funds to your bank account automatically, and you can even implement instant payouts in some markets for a small fee. If you’re running a marketplace, Stripe Connect can handle payouts to your sellers or service providers.