What are smart payments? Benefits and how they work

What are smart payments?

Smart payments refer to digital payment methods that use innovative technologies to facilitate financial transactions. This includes the use of emerging technologies like: 

• Near field communication (NFC): Enables short-range wireless communication (like from a phone or card to a reader)
• Radio frequency identification (RFID): Supports contactless payments using radio waves to transmit payment information
• Biometric authentication: A security method using biometric data (e.g., face or fingerprint scans) to authorize payments and prevent unauthorized use
• QR codes: Visual codes that can be scanned with a wireless device to initiate online payments

Smart payments vs. traditional payment methods

Smart payments are a clear evolution of traditional payment methods, such as cash or physical cards. 

In this way, there are a few key differences between smart and traditional payment methods. Namely: 

• Efficiency: Smart payments facilitate instant money transfers compared to cash or check payments, which must be deposited in a bank.
• Security: Smart payments utilize advanced security measures to prevent fraudulent transactions, unlike cash payments. 
• Convenience: Merchants that support smart payments can accept transactions even when the buyer doesn’t have cash or a physical card on them.

Benefits of smart payments

As mentioned above, there are plenty of advantages for businesses that employ smart payment technologies, which we’ll cover in further detail below: 

Increased efficiency and convenience

A clear benefit of smart payments is the improved speed and efficiency in payment processing. This benefits merchants and customers, improving the transaction experience for both parties. 

For customers, they no longer need to have a physical card or cash to complete a transaction. Instead, they can initiate payments using contactless methods, which is an added convenience. 

For merchants, these transactions can be processed in real time, leading to fewer delays in receiving funds after a sale. 

Enhanced security features

Additionally, smart payments utilize advanced security features to minimize fraudulent payments. 

This includes measures like encryption and tokenization of payment data to prevent this information from being intercepted by a bad actor. Plus, biometric authentication on the customer’s device can bar an unauthorized person from initiating a transaction without their knowledge. 

Again, this is a benefit to parties on both ends of a transaction. For the customer, there is less of a risk that their bank account or credit card information will be used for a fraudulent transaction. 

In turn, merchants face less financial risk from chargebacks and related fees from payment processors. Plus, they can avoid the reputational damage from being associated with fraud. 

Cost savings for businesses

Accepting smart payments can also provide direct cost savings for merchants. 

This can come in the form of lower payment processing fees. More specifically, an ACH transfer or payment from a digital wallet often incurs lower costs than traditional credit card processing fees. 

Also, contactless payment methods don’t require costly point of sale terminals, which can be a bonus for new merchants or those who need to upgrade their current system. 

Finally, automated or contactless payment methods can reduce the manual efforts needed to enter and process payments, which can produce further cost savings. 

How smart payments work

Though there are several modalities for smart payments, transactions processed using this method tend to follow a few key steps, such as: 

1. Customer initiates a payment. At checkout, the customer chooses their payment method. If they select a smart payment method (e.g., a digital wallet, mobile app, or tap-to-pay), the following steps apply.
2. Payment data is encrypted and transmitted. After choosing a smart payment option, the payment details are encrypted and sent securely to the payment processor.
3. Authorization is requested. The payment processor contacts the customer’s financial institution (bank, credit card issuer, etc.) to verify the purchase request and run any fraud checks. This usually occurs within seconds at checkout. 
4. Transaction is completed. Upon approval from the relevant financial institution, the funds can be transferred to the merchant’s account. If the purchase is declined, the merchant will be informed.
5. Funds are settled. The payment processor typically batches payments and settles funds with the merchant every few days. 

What are common smart payment types?

Smart payment methods can take many shapes and forms. Take a look below to see some of the most common types used today. 

Digital wallets

Mobile pay or digital wallets stored on smartphones are a common type of smart payment option. 

Consumers can set this up by loading their credit card details into their digital wallets for secure storage. 

At the point of purchase, they can simply “tap to pay” with their phones at a supported merchant, without needing to present their physical card. 

Digital wallets can be password- or biometric-protected, preventing an unauthorized user from using the stored payment details even if they possess the device. 

Lease-to-own (Phones/Electronics)

Lease-to-own, sometimes called Buy Now, Pay Later (BNPL) solutions, is another smart payment method. 

BNPL payment options have grown substantially over recent years. In fact, Morgan Stanley reports that more than 25% of consumers in the United States have now used BNPL solutions. 

It’s often used to fund larger purchases, like furniture or electronics, essentially giving consumers a short-term loan that they pay back in installments. 

These set payments are typically automated, with payment details stored securely after being stored at checkout. 

Automated bill pay

Any automated subscriptions or recurring payments are also a form of smart payments. 

In this case, the merchant does not need to possess the customer’s physical card or cash in order to initiate each transaction. 

Instead, the merchant processes the payment amount on the agreed-upon schedule (e.g., monthly, quarterly, annually). 

This is possible through tokenization, which allows the merchant to securely store card or bank account information between payments. 

Embedded payments

Payments you initiate in ride-sharing or food delivery apps, or one-click payments on e-commerce sites, are also considered smart payments. 

It’s easy to make purchases in these apps without needing to re-enter your payment details each time you want to make a transaction. 

In this way, smart payments add convenience for the customer, but card or bank account details are stored securely between uses. 

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Enjoy faster payments with same-day and next-day payment options, and make payments on the go using our secure cloud-based portal. 

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Frequently asked questions

What are smart payment solutions?

Smart payment solutions are digital payment methods that don’t require buyers to present a physical credit card or cash to complete a transaction. These methods leverage emerging technologies to streamline payment processing, improve security, add convenience for consumers, and reduce costs for merchants. 

What is an example of a smart payment?

There are a few common types of smart payments used today, including: 

• Digital wallets
• Mobile pay
• Contactless card payments
• Buy Now, Pay Later (BNPL)
• QR code payments
• Embedded payments (e.g., in-app purchases)