Cashless payment: How it works – and why it’s becoming increasingly important

17 December 2020

Symbolbild: Kreditkarte wird in modernes kabelloses POS-Terminal geschoben. Bargeldloser Zahlungsverkehr wird auch am POS immer wichtiger.

The volume of sales in e-commerce is growing continuously. But even with regard to only stationary trade: More and more payments are made cashless. For customers, cashless payments are more convenient. But even for companies, electronic payments offer a number of advantages.

How exactly do cashless payment transactions work? Which types of cashless payment are there? What are the advantages and disadvantages for companies? And finally: What are the future trends? We will explain to you fast and simple, how cashless payment or Electronic Funds Transfer (EFT) works.

Content of the article

    What are cashless payment transactions?

    Cashless payment transactions or Electronic Fund Transfer (EFT) are all kinds of electronic transactions including:

    • Debit and credit card payments
    • Bank transfers and direct debits
    • Mobile payments
    • Online payment services such as PayPal

    Cashless payment transactions: Impressive figures

    The share of debit card payments has increased significantly.
    The share of debit card payments has increased significantly.

    Cashless forms of payment:
    How do electronic payment transactions work?

    It’s always the same basic principle: By transferring essential payment data, a sum of money is moved from the payer’s bank account to the recipient’s account. These data include:

    • Sum of money to be transferred
    • Target account
    • Source account
    • Time of transfer

    There is also a difference between the various electronic payment methods in how they transfer payment data. Here we’ll explain how the usual cashless payment methods work in (stationary) retail.

    Cashless payments with debit or credit card

    In stationary retail, a terminal reads the chip or magnetic strip stored on the cards to process the account information. The buyer authorises the transfer of the payment amount with a signature or PIN. Then the payment amount is first reserved on the buyer’s bank account, then the acquirer (or authorization) transfers the money to the seller’s account.

    Contactless payment

    Here, an NFC chip (Near Field Communication) is used: In this case, there’s no need to read a chip or magnetic strip. Instead, the same information is transmitted to the payment terminal by radio using NFC.

    Mobile Payments

    Mobile payment applications (such as Apple Pay, Google Pay, etc.) are a form of contactless payment. With this technology, mobile end devices (often smartphones) are used to initiate, authorise and realise payments.

    Apple Pay or Google Pay store the credit card data in an app, which is then accessed during the payment process. Here, too, communication with the payment terminal works via NFC.

    PayPal and other online payment services

    Here, cashless payment transactions are first processed completely online via a virtual account. In the second step, this amount is debited from the linked current account or credit by direct debit.

    Find out more about PayPal payments and how they can affect the posting processes of a company.

    Cashless payment: Key market players

    In order for cashless payment transactions to work securely and reliably, certain technical and organisational requirements must be met. This is ensured by various market players – from terminal manufacturers to payment service providers and acquirers to banks.

    We will explain the key players for you.

    Cashless payment: Key market players. POS Software Companies, Payment Terminal Provider, Payment Service Provider, Acquirer and Banks.
    Cashless payment: The most important market players.

    Manufacturers of cash register systems

    For electronic payments to work at the checkout, these systems must facilitate the processing of the various forms of payment.
    Among other things, secure, reliable and fast communication between the POS systems and the payment terminals is very important. Find out here why communication may not always run smoothly – and how to master this challenge.

    Suppliers of payment terminals

    Payment terminals process card payments at cash registers: On the one hand, they must be able to process different types of cards and contactless payment options. On the other hand, they need to communicate with the POS systems via an interface (such as ZVT).
    Especially when switching to a different terminal provider, the communication between the terminal and the cash register can quickly become problematic.But there is a solution for this, too.

    Payment Service Provider (PSP)

    Payment service providers facilitate the integration of different cashless payment methods into the company’s payment system. That way, certain credit or debit cards, online payment services or e-wallets can be accepted.

    Normally, a payment service provider can use more than one acquirer or payment network, i.e. a retailer can offer many different payment methods with just one PSP. When a payment request is made, the PSP contacts the acquirer to have it confirmed or authorised.

    The acquirers

    Once a payment service provider receives a payment request, it sends the relevant information to the acquirer, who then confirms or rejects the payment based on the validity and credit limit of the card. If confirmed, the information is sent to the bank and back to the payment service provider.

    The acquirer acts as a buffer between the payment service provider and the bank. Its tasks? To record, authorise and process card transactions.

    The banks

    The acquirer tells the bank that a payment amount has been authorised. In the next step, the bank debits the payment amount to the buyer’s account and initiates a credit note to the seller’s account.

    The banks also provide bank accounts to both buyers and sellers, which are the basic requirements for the Electronic Funds Transfer (EFT).

    Cashless payment in Europe – a comparison

    • The Zukunftsinstitut (Future Institute) has compared the frequency of electronic payments across different EU countries. The result: Scandinavia is a pioneer in Electronic Fund Transfers (EFT).
    • Did you know? In Sweden,people already pay 80% of their purchases by card or smartphone.
    Cashless payment in Europe – a comparison
    Amount of cashless payments per inhabitant and year in European countries.

    Advantages and disadvantages of cashless payment transactions for companies

    Advantages of cashless payment transactions

    • Increased revenue: Cashless payments are usually much more convenient for consumers than to pay cash. Often this also leads to more consumption.
    • Speeding up the payment process: Card payments also shorten the checkout times: Queues become shorter and the company needs less staff at the cash registers.
    • Less risk: The less cash is in the shop, the lower the risk of robberies or internal theft/fraud. Even the higher transparency and documentation of all transactions provides more security.
    • The possibilities of e-commerce: Cashless payments are an essential requirement for online retailers, whose revenue is continuously increasing. Unrestricted opening hours and the international reach create potential for retailers.

    Disadvantages of cashless payment transactions

    • Installation costs:To be able to offer different forms of electronic payments in your own company, they first need to be integrated safely and reliably. Smooth communication between all systems must be ensured. Otherwise, it usually means a great effort for IT.
    • Fees: Payment service providers such as PayPal, mobile payment apps and processors of debit and credit card payments charge for every transaction. For companies with thousands of transactions per day, this can cause costs that should not be underestimated.

    The future of cashless payment: What are the trends?

    Summary: Cashless payment

    • Cashless payment transactions comprise all electronic transactions, including card payments, transfers, mobile payments and online payment services.
    • In cashless payment, payment data is transferred from the payer’s account to the recipient’s account.
    • The share of cashless payments is growing continuously. There’s a clear indication that this trend will continue in the future.
    • Electronic payment transactions not only require the technical basis (internet, encryption, terminals, etc.) but also the communication between payment service providers, acquirers and banks.
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