Automated payment systems explained: how they work and best practices

According to the 2023 McKinsey Global Payments Report, global payments revenues have increased by 11% in 2022 to more than US$2.2 trillion. This growth was driven by a range of factors, including the rise of automated and digital payment solutions.

However, automated payment systems are no different to other business technologies in having 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 cover how to set up an automated payment system for your business, get started with 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; accordingly, 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 transfers, direct debits and electronic cheques. EFTs move funds from one account to another electronically, without requiring paper money.
• Direct deposit
  Employers often use this method to deposit wages into employee bank accounts automatically. It's also used for distributing benefits such as pensions or social insurance.
• 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, 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 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-off 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, 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 being transferred to the business's primary bank account.
• Security protocols
  Security measures 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 initiating the transaction. Methods include PINs, passwords, biometrics and/or multi-factor 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 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.
• Record-keeping
  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 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 has been approved, it moves through banking networks. This involves communication between the payer's bank and the payee' 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, tokenisation 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) that allow for integration 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. Analysing this data helps businesses understand customer behaviour, 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 US$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 labour needed for data entry and reconciliation. By integrating payment systems with accounting software, financial reporting happens in real time, enabling responsive, strategic 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 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 optimisation
  By precisely controlling the timing of payments, automated systems help businesses optimise 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 multi-factor authentication, encryption, tokenisation 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 submit payments manually. 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 record-keeping and compliance
  Automated systems create digital records for each transaction, simplifying compliance with financial regulations and tax laws. Comprehensive digital record-keeping 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 organisation'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 minimising 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. Organisations 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 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 minimise downtime and ensure that important payment functions remain functional during the transition.
• Costs
  Upfront 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 lead to challenges, especially if the vendor experiences outages or other issues. Organisations 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 that 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 multi-factor 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 how to handle daily operations, oversee security protocols and troubleshoot 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, authorising payments and understanding new billing cycles.
• Deployment: Once testing has been completed and all parties have been trained, roll out the new system. A phased approach – starting with a smaller group before extending it to all users – can minimise impact on 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 that 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: 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: Make sure 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 updated on the latest security practices.
• Have a response plan: If something goes wrong, you'll need to be able to react quickly. Have a plan in place for dealing with security breaches, including whom 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 that 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. 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 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 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, customised to maximise 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 that funds are settled correctly in the business's bank account. This automation is important for businesses that want to scale while minimising increases to their administrative burden.
• Subscription services and billing
  With Stripe Billing, businesses automate their recurring billing, subscriptions and invoicing. They can set up complex billing scenarios such as tiered pricing or usage-based billing, which Stripe then manages 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 generate financial reports automatically and gain insights 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.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.