Automated payment systems explained: How they work and best practices

Payments
Payments

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  1. Introdução
  2. Types of automated payment systems
  3. Key components of automated payment systems
  4. How do automated payment systems work?
    1. Payment process
    2. Technical aspects
    3. Customer experience
  5. Benefits of using automated payment systems
  6. Challenges associated with automated payment systems
  7. How to set up an automated payment system
  8. Automated payment system best practices
  9. How Stripe can help

Automated payment systems allow individuals and businesses to transfer money from one account to another without a physical currency exchange or manual processing. These systems work electronically and can process transactions almost instantly. They are used for a variety of purposes such as paying bills, salaries, and supplier invoices, as well as for customer purchases.

The technology behind these systems involves computers and software that execute payment instructions when certain conditions are met. For example, a company might set up automated payments for regularly recurring expenses. The system used will automatically send money to the designated recipient at set intervals.

According to the 2023 McKinsey Global Payments Report, global payments revenues have increased by 11% in 2022 to more than $2.2 trillion. This growth was driven by a range of factors, 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 payments systems, but there are also risks and vulnerabilities that businesses must consider. Below, we’ll cover how to set up an automated payments system for your business, get started using it, and implement best practices to protect it.

What’s in this article?

  • Types of automated payment systems
  • Key components of automated payment systems
  • How do automated payment systems work?
  • Benefits of using automated payment systems
  • Challenges associated with automated payment systems
  • How to set up an automated payment system
  • Automated payment system best practices
  • How Stripe can help

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 type of transaction and the businesses and customers using them. There’s an automated payment system for nearly every kind of transaction. Here’s an overview of some of the automated system types:

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

  • Direct deposit
    Employers often use this method to automatically deposit wages into employee bank accounts. It’s also used for distributing benefits such as pensions or 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 payment services
    These platforms let users send and receive money online. They can be used for personal transfers—such as sending money to friends or family—or for business transactions, such as 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 phone, and 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 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 are making a purchase. 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 made peer-to-peer without a central processing authority.

Each of these systems has its own set of protocols, security measures, and uses. They are constantly evolving, 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 a business decides to move funds. This could be a one-time action—such as a customer buying an item online—or a recurring instruction, such as 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 if the payer has enough funds, authorize 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 specialized bank accounts to receive money from credit and debit card transactions. Funds are deposited into a merchant account before being transferred to the business’s primary bank account.

  • Security protocols
    Security measures protect transaction data and prevent unauthorized access. They include encryption, tokenization, 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 initiating the transaction. Methods include PINs, passwords, biometrics, and/or multifactor authentication.

  • Settlement and clearing
    This process involves reconciling the transaction details between the payer 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 unauthorized transactions or 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, maintaining legal compliance, and providing a transaction history for both businesses and customers.

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

How do automated payment systems work?

Automated payment systems simplify the process of moving money from one party to another. These systems involve a complex orchestration of technical and operational elements that work together to create smooth, secure, and prompt transactions. Here’s how they work:

Payment process

  • Initiation of payment: 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.

  • 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 and secure manner.

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

  • Banking networks and intermediaries: Once the transaction is approved, it moves through banking networks. This involves communication between the payer’s bank and the payee’s bank. Intermediaries here include networks such as Visa or Mastercard for card transactions, or ACH networks for direct bank transfers.

  • 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.

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

Technical aspects

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

  • API integration
    Automated payment systems often use application programming interfaces (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. Analyzing this data helps businesses understand customer behavior, manage risks, and improve services.

  • Scalability and reliability
    The systems can handle high volumes of transactions reliably. This involves extensive server infrastructure, efficient processing algorithms, and contingency plans for system downtimes.

Customer experience

  • User interface
    The customer-facing aspect of these systems needs to be intuitive and easy to navigate. This includes clear instructions, quick response times, and a smooth checkout process.

  • 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 using automated payment systems

With global digital payment transaction value expected to reach nearly $14.8 trillion by 2027, 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 those benefits:

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

  • Financial precision
    Automation minimizes 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 high-volume transaction environments.

  • Cost management
    Beyond saving on the direct costs of materials and transaction fees, automated systems reduce 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 optimization
    By precisely controlling the timing of payments, automated systems help businesses optimize their liquidity. 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, tokenization, and anomaly detection systems that identify and halt suspicious transaction activity.

  • User convenience
    With automated payments, customers no longer need to remember due dates and manually submit payments. This can improve customer retention and reduce the number of 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 makes audits easier and can be invaluable during financial reviews.

  • Customer trust and satisfaction
    Automated payment options can enhance the customer experience, creating trust through reliable and 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 organization’s sustainability goals.

  • Global scalability
    For businesses operating in multiple markets, automated payment systems provide a scalable solution for handling transactions in different currencies and across various regulatory environments. This global scalability is key for businesses that want to expand their market reach while minimizing increases in operational complexity.

Challenges associated with automated payment systems

Automated payment systems have unique challenges. Your payment system should work for your current needs, but also 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 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 is still a risk of cyberattacks or data breaches. As payment systems become more sophisticated, so do the methods used by cybercriminals. Organizations need to stay updated on best practices to protect sensitive financial data.

  • User training and acceptance
    Employees and customers may 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 these disputes can be time-consuming and may impact customer relationships.

  • Operational disruptions
    Transitioning to an automated system can temporarily disrupt normal business operations. Careful planning is required to minimize downtime and ensure that important payment functions remain functional during the transition.

  • Costs
    Up-front costs for implementing automated payment systems can be high. Organizations 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 lead to challenges, especially if the vendor experiences outages or other issues. Organizations need to have contingency plans in place to handle such situations.

  • Global transaction issues
    For businesses operating 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 Europe’s General Data Protection Regulation (GDPR), businesses need to be particularly careful about how they handle customer data. Automated payment systems must comply with these laws, which can be a complex and ongoing task.

How to set up an automated payment system

When setting 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:

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

  • Market research: Conduct 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 with peers or industry groups for recommendations.

  • Vendor selection: Choose a vendor based on your research. Consider not only the product, but also the vendor’s customer service, support, and track record for making updates and resolving issues.

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

  • Integration planning: Plan the integration of the new system with your existing financial and IT infrastructure. This could involve software, cloud-based services, or point-of-sale hardware.

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

  • Testing: Before going 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.

  • Training: Train your staff on how to use the new system. Training should cover handling daily operations, overseeing security protocols, and troubleshooting common issues.

  • Customer and vendor onboarding: If your automated payment system affects customers or vendors, develop a plan to onboard them. This may include writing instructions on setting up accounts, authorizing payments, and understanding new billing cycles.

  • Deployment: Once testing is complete and all parties are trained, roll out the new system. A phased approach—starting with a smaller group before extending it to all users—can minimize impact to business operations.

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

  • Evaluation and adjustment: Evaluate the system’s performance regularly. Gather feedback from users and make adjustments as necessary to improve efficiency and customer experience.

  • Maintaining compliance: Keep the system updated with the latest security patches and regulatory changes. Regular audits can ensure the system remains compliant and secure.

Automated payment system best practices

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

  • 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: Carefully track transactions to catch any unusual activity early. Automated systems can flag anomalies, but human oversight can determine whether they’re false alarms or genuine issues.

  • Educate your team: Make sure your team understands how to use the payment system and is aware of common scams or security threats. Regular training sessions can keep everyone updated on the latest security practices.

  • Have a response plan: If something goes wrong, you need to be able to react quickly. Have a plan in place for dealing with 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 known for their reliability and customer service. If you run into problems, you want a partner that will be responsive and helpful.

  • Be mindful of compliance: Stay informed about the regulatory requirements affecting your payment system and ensure you comply with them. This can include financial regulations, data protection laws, and industry standards.

  • Review and audit: Periodically review and audit your payment processes to confirm 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. Have a plan for how you will 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 dodge 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 their 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 that includes your entire payment system or just a part of it. Stripe supports payment automation for businesses through an extensive set of features and products, customized to maximize efficiency and decrease manual intervention. Here’s what that looks like with Stripe:

  • Comprehensive payment processing
    Stripe automates the entire payment journey, from accepting various payment forms—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 minimizing increases to 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 or 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, attempting to recover failed payments through smart retries. It also makes it easy 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 such as Stripe Sigma, businesses can automatically generate financial reports and gain insights from their data, which can drive more informed decision-making.

  • Global reach with localized 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.

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