What is an E-Payment System and How It Works

What is an E-Payment System and How It Works

What is an e-payment system? Considering the drive for a cashless economy, it has become necessary for people to get involved in electronic payment systems. However, what most people don’t know about this system is that there are several types, with different ways they work. Knowing this is key to the growth of your business.

What are electronic payments?

Electronic payment simply means conducting financial transactions via the Internet or other media. If you have ever bought or sold items through an electronic medium without any exchange of cash or cheques, then you are already involved in electronic banking or online payment systems.

Electronic payment systems have experienced massive growth recently with the demand for internet banking and online shopping. As the world continues to advance in technology, more people continue to patronise electronic payment systems. Electronic payment is so far one of the safest ways to conduct transactions today. It is more secure than carrying checkbooks or cash around.

How does an electronic payment system work?

A lot of people are unaware of how this system really works. Electronic payment works when people stay connected to technologies to move payment data instantly through a series of logical progression steps. This payment system is instant and can be completed within seconds.

To explain better, let’s say you need your credit card to place an order on a website. You would be required to enter your credit card information which includes the three-digit card CVV code, card expiry date, and address. When you send out the data, you will be redirected to a payment gateway which will proceed to get your approval to continue the request or decline it. This gateway provides a link between the seller’s website and your card bank account.

This system validates the data input and also with its added security protocols, it ensures that your payment information is kept safe using encryptions. The payment gateway then sends your purchase request directly to your credit card company which in turn verifies if you have sufficient funds in your bank account. If you do, you will be debited and the transaction will be completed on the seller’s website.

What is an E-Payment System and How It Works

Electronic payment methods/types

There are different types of electronic payment systems today and they can be placed in three different categories:

  • One-time payment from a customer to a vendor;
  • Recurring payments from a customer to a vendor;
  • Automatic payments from a bank to a vendor.

One-time Payment

This is a single or one-time payment where a customer purchases an item or pays for a service. This is the most common form of electronic payment people use every day. You can make a one-time payment when shopping online for any item. You include the item in the cart, insert your payment details and then check out. The vendor confirms your order by sending an email and processes your payment. The vendor verifies if they can authorise payment from your credit card bank account, and once approved, your bank immediately executes the transfer. This is how a one-time payment from a customer to a vendor takes place.

Recurring Payment

Like the one-time payment, the recurring payment also works similarly. The only difference is that this time the payment does not happen just once but regularly. It may be a monthly schedule with you keeping paying for a particular good or service. For instance, if you are paying a mortgage loan, it will come in the form of a recurring payment.

For recurring payments, you will provide your checking account number to the vendor. The vendor gains access to your bank account once each month with the permission to withdraw the approved amount.

Automatic Payment

This payment method is done by the bank to your vendor. It only happens when the bank sets up a recurring payment schedule similar to how the recurring payment from the customer to the vendor works. The only difference is that it is an instruction coming directly from the bank.

Other electronic payment transactions take place between buyers and sellers. The popular ones include the following:

Automated Clearing House (ACH)

The ACH allows you to transfer money automatically between bank accounts. This way you can get your company to send your payment through their bank directly to a vendor’s bank for goods you have already ordered using the ACH payment system.

Virtual Credit Card

This is quite different from the conventional credit cards you get directly from your bank. Virtual credit cards allow you to log into your online banking portal to create a one-time use credit card. The virtual card gives you added security compared to regular credit cards. The card number can’t be typed online and this will protect your bank account.

What is an E-Payment System and How It Works

What are the benefits/advantages of electronic payment systems?

Electronic payments make online transactions seamless, simple, and very fast. Considering the benefits of electronic payment for businesses today, it is surprising that some businesses are yet to tap into its endless possibilities. Here are some of the benefits you get from electronic payment systems.

1. Instant Payment

If you are looking for a superfast and instant transaction method, electronic payments trump the list. It kicks to the curb other methods like cash or cheques. You can make online payments any time of the day and it doesn’t have any of the constraints associated with cash transactions. You can make payments around the globe from the comfort of your smartphone or tablet device.

2. Higher Security

One of the features that make electronic payment stand out is its high-security protocols. This system offers multiple security methods like tokens, encryption, SSL, and many others. Your money can’t be withdrawn unless you give direct authorisation by providing a “One-Time Password”.

3. Better Customer Experience

Customers not only enjoy a seamlessly easy experience using electronic payments, the service usually allows them multiple opportunities to purchase goods at their convenience. You can buy goods on credit or with pay later businesses. Instead of getting constant reminders for repayment, the money will be automatically debited over the agreed period.

4. Low Risk of Theft

Electronic payment systems are safe and don’t come with the risk of carrying cash. With cash, a person can easily be robbed of their money. Also, high safety measures will be required when depositing or withdrawing cash from the bank. However, with electronic payment, the risk is reduced and your transactions are safe.

Features of Electronic Payment System

There are several features of electronic payment systems. These include the use of credit cards, e-wallets, e-checks, and e-cash methods.

Credit cards

Banks and other financial institutions usually issue credit cards to individuals to handle financial transactions with ease through electronic mediums. Credit cards usually have a verification system that will identify that you authorised the transaction before a transfer or purchase are approved.


E-wallets are also another means people use to store financial information like your credit card. It usually comes in the form of a mobile payment app that you can access from your smartphone. The e-wallet system verifies if you have sufficient funds to pay for the items you are paying for before approving the transfer.

Direct Debit

Direct debit is when an individual or company withdraws money directly from the bank account. This is usually done with debit cards.


This is like a paper check but only that it is available in electronic format. It operates the same way as a paper check would. They are more efficient and cost-effective compared to paper checks.


This is a digital currency that is available through online payment platforms. You will find this mostly on platforms like Venmo and Apple Pay. E-cash is usually available in digital wallets and you can transfer it from one account to another.


Cash transactions are no longer in vogue as electronic payments are gradually replacing this method of payment. Small businesses need to leverage this technology and also protect their businesses. It is safe and makes it easy to transact business with your customers. Buyers want a seamless way of doing business and you can provide them that opportunity when you adopt electronic payment systems in your business.

Join the trend, and take part in a profitable system that enables business growth. With electronic payment systems, you can build your business and boost your profits. You can connect with us if you have any inquiries about electronic payment systems.

Olufifun A.

Content Writer

I write unique, well-researched, educative and entertaining articles and blog posts to meet specific needs. I deliver articles on time, and I am diligent, dedicated, and focused on generating amazing results.