Money is the life and blood of modern economies, businesses, and professionals. The ultimate objective of any business is to earn money, and money can inflow and outflow smoothly only if you have a robust payment flow in place.
Payment flow can simply be defined as the inflow and outflow of money from the sender to the recipient. However, a payment flow has more layers to it. It can broadly be classified into two categories — income or inflow of funds and expenses or outflow of funds.
To understand the different nuances of payment flow, let’s take an example. Suppose you’re in the profession of accounting with 10 employees working for you and a decent enough base of 15 clients. The inflow of funds, in this case, would include your professional fees from clients. Outflow would include staff salaries and other office expenses. You’d need to have a seamless payment flow to ensure not only uninterrupted inflow but also outflow of funds.
How to set up an online payment flow
Most businesses today want to have an online presence, and rightly so. Consumers also love the convenience of being able to purchase items from the comfort of their homes. If you want to receive payments through your own website (our guide to the best website builders will help you create one) or a payment gateway, here are some things you need to keep in mind:
1. Merchant accounts and payment gateways
Here are the steps involved if you want to accept online payments:
Step 1: To start collecting payments online, you’ll need a merchant account. These are special accounts offered by financial institutions to facilitate the acceptance of payment through credit cards.
Step 2: Once you’re approved for a merchant account, you’ll need to sign up with a payment gateway. A payment gateway acts as an intermediary between the customer and your business. The payment gateway securely verifies if the card details are valid.
Step 3: You’ll also need a payment processor, which will act as a communicator between the business, the customer’s bank, and your bank.
Some terms you should know before understanding how payment gateways work:
Acquirer bank: This is the bank that issues the merchant account. The sales proceeds will be deposited in this bank account.
Card scheme: This is essentially the card issuer, say Visa or Mastercard.
Issuer bank: The customer’s bank is known as the issuer bank. The sales proceeds will be deducted from this bank account.
Here’s how the online payment flow works:
1. Once the customer clicks on “Pay Now”, they enter their card details, including CVV, on the payment page.
2. The payment gateway encrypts these details, carries out a fraud check to validate the card details, and transfers them to the acquirer bank.
3. The acquirer bank transfers this detail to the card scheme, which, again, carries out a fraud screening.
4. The card scheme relays this data to the issuer bank.
5. The issuer bank then verifies if the customer has sufficient funds for the transaction to go through after carrying out fraud checks on its end.
6. The “accept or decline” message (known as authorization) is transferred back to the payment gateway, which then informs both the customer and the merchant.
7. The merchant bank then “captures” the purchase amount from the buyer’s account to the merchant’s account. It is after this “capture” that the card limit is reduced, and the funds are blocked.
2. Use an online payment service provider
This is one of the easiest ways of receiving payments online. For this, you’ll need an account with one of the online payment service providers — Paypal, Stripe, Skrill, and so on. Next, you’ll need to head on to your website builder, say WordPress, and integrate it with your online payment provider. Most website builders provide dedicated plugins that make integrating payment solutions easier.
Once the customer hits the “Pay Now” button, the payment service provider will jump into action and ensure the smooth completion of the transaction. You’ll not have to worry about getting a merchant account — almost all online payment service providers come with one.
3. Use forms
The best online form builders allow seamless payment integrations to receive payments and donations. This can be useful in businesses where payment flows are less in number, say 4-5 a month, like the construction industry. You can create a separate form for each payment and keep track from a central forms dashboard.
Types of payment gateways
We can classify payment gateways into two broad categories: hosted payment pages and server-to-server integrations.
1. Hosted payment page
If you sign up with a hosted payment page provider, your customers will be redirected to the provider’s server, where all the card details will be stored. You would not need to worry about PCI and other compliances - this will be taken care of by the hosted payment page provider. Once the transaction is approved, the customer will be redirected to your website to complete the transaction.
2. Server-to-server integration
If you do not want your customers to visit a third-party server to complete their transactions, you can opt for a server-to-server integration. Here, your server and that of the payment gateway provider are linked through an API. The customer can complete the payment on your page itself. This gives you more options to customize the page design and customer experience. However, this comes with additional PCI compliances.
Payment flow in retail businesses
If you own a physical store offering goods, you’ll need to collect payments regularly. These are often one-time payments with no client commitments. Here’s where a POS system chips in. POS, or Point of Sale system, are complete retail solutions that let you manage your store. From keeping track of inventory to collecting payments — everything can be done through effective POS software.
Card reader — A card reader is a handy budget solution. You’ll need to pair your software app with the card reader, enter the amount of sale, and then ask the customer to make the payment either through a card or a contactless mode.
Terminal — A terminal is an entire POS solution packed in a portable gadget. For starters, you’ll not need to connect it to any external device. Plus, you can view inventory levels, print receipts, and accept payments from a single device. However, as you might have guessed, it’ll cost you more than a card reader.
However, make sure your card reader or terminal is NFC enabled to facilitate contactless payments. NFC, or Near Field Communication, is a technology that allows the transfer of data without physical contact. Customers would only need to bring their devices close to an NFC-enabled card reader to make a payment.
Payment flows for non-e-commerce businesses
If you do not fall in the e-commerce spectrum, setting up a payment flow is a piece of cake. For this, you must not be receiving payments through a website or own a physical store. For example, a large wholesale manufacturer of T-shirts would not go around advertising his products on a website. Consequently, all payments are made directly through bank transfers, credit, or debit cards.
All you need is a separate accounting and finance team that’ll coordinate with your bankers to ensure smooth transactions.
1. Identify the transaction
Identifying the activity that triggers the movement of money is the first step that initiates a payment flow cycle. For example, your activity of providing accounting services triggers an inflow for your business. The idea is to identify the “quid pro quo” in every transaction. “Quid pro quo” is essentially a favor granted in return for something. Here, the “something” is money, and “favor” is the activity for which you’re receiving or paying the money.
2. Identify the recipient or sender
Once you’ve identified the transaction, you’ll need to identify the sender or the receiver of funds. For example, if you’re receiving money, the sender would be your client. If you’re paying salaries, the receiver would be your employees. These are important information. Banks often reject transactions if the beneficiary account details are incorrect.
In a worst-case scenario, you might end up sending money to someone you didn’t intend to. Thus, ensure proper internal controls are in place to verify all the details before a transaction goes through.
3. Determine the mode of transaction
Once the transaction, sender, and receiver are identified, it’s time to execute the transaction. Since we’re talking about non-e-commerce and non-physical store transactions, bank ACH transfers are your best bet. You’ll need to provide all required details to your bankers to initiate the transaction. You can even do it yourself through net banking or mobile banking facilities offered by your bankers.
4. Follow up
After successfully executing a transaction, it’s time to check whether the receiver has received the funds. No payment system is without its occasional glitches, and you’ve to make sure your transaction has gone through smoothly.
Payment flow for salaries
Now, payments don’t necessarily have to flow into your organization. Every business has to make certain payments to ensure smooth continuing operations.
Paying salaries on time is a crucial business obligation. You could have a separate HR department to take care of employee attendance and payments. However, investing in an entire HR department wouldn't be worth it if you’re a small business with limited resources and only a few employees.
In this case, consider getting HR software that’ll help you track employee data. Once you‘ve decided the amount you’re paying (after deducting any leaves), there are two broad ways you can execute the transaction.
Cheques: Writing out physical cheques is the simplest method to pay anyone, let alone employees. However, ensure you have adequate funds before handing out cheques to avoid NSF or overdraft fees.
Direct transfers: Most businesses prefer the direct transfer mode of paying salaries. You can link your business bank account with the HR software and transfer the funds directly to your employees’ bank accounts.
Payment flow for other outward payments
Apart from salaries, you’ll be making regular payments to suppliers. The payment flow would depend on how you interact with your suppliers. If you make bulk offline purchases, the outward payment flow will be similar to that of non-e-commerce businesses, viz a viz, identify the transaction, the parties involved, choose a mode of transfer, and follow up.
However, if you make online purchases, there’s not a lot to be done from your end. The establishment of payment gateways and merchant bank accounts is the responsibility of the supplier. Just ensure you enter your business and card details correctly while making payments.
Cost of payment flow
I have outlined the various payment flows you’ll need to set up for smooth business operations. All of these payment flows - whether online or offline, require a robust banking partner. One should also pay heed to the costs involved in setting up these flows.
Although you can reduce these costs to an extent, they aren’t avoidable altogether. In fact, these are essential costs of doing business.
