# Explore Payment Methods: Pros and Cons of Cash, Cards, and Digital Payments

![Payment](https://www.investopedia.com/thmb/e7bjixZLvPBczBh-8MFoqzQG2Ck=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/payment.asp-Final-25aad0eedda34c9db463c665991c6323.jpg)

*— Investopedia / Jake Shi*

Payments involve the exchange of money, goods, or services as part of a predefined agreement, taking various forms such as cash, checks, wire transfers, credit and debit cards, or cryptocurrencies. In this guide, we explore the different types of payment methods available today, examining the benefits and drawbacks of each to equip you with the knowledge needed to make informed financial decisions.

### Key Takeaways

*   Payments can be made in various forms, including cash, debit cards, credit cards, checks, electronic funds transfers, and cryptocurrencies.  
    
*   Credit cards offer convenience and reward opportunities but can also lead to high debt due to interest and potential for overspending.  
    
*   Debit cards provide direct access to funds without the risk of debt but have limited fraud protection and do not build credit history.  
    
*   Mobile payments using contactless technology are fast and secure but are not yet universally accepted.  
    
*   Cryptocurrency offers a modern payment method without needing a bank, but it is still emerging with value instability and technical challenges.

## The Evolution of Payment Methods

Today's system allows payments with [currency](https://www.investopedia.com/terms/c/currency.asp). Currency simplifies [transactions](https://www.investopedia.com/terms/r/reference-number.asp), serving as a convenient and easy-to-store medium for payments.

Before the widespread use of currency and other payment methods, [barter payments](https://www.investopedia.com/terms/b/barter.asp) were used in which one product or service was exchanged for another. For example, if an egg farmer with a large surplus of eggs wanted milk, the farmer would need to find a dairy farmer who would be willing to take eggs as payment for milk.  

In this case, if a suitable dairy farmer weren't found in time, not only would the egg farmer not get the milk, but the eggs would spoil, becoming worthless. Currency, on the other hand, maintains its value over time. Companies still practice bartering today to exchange services.

Payments can involve transferring anything of value to the parties. An [invoice](https://www.investopedia.com/terms/i/invoice.asp) or bill typically precedes a payment. Payees often choose how they want to be paid. Some laws require payers to accept legal tender up to a set limit. Payment in another currency often involves additional [foreign exchange](https://www.investopedia.com/articles/personal-finance/022415/worst-place-exchange-currency.asp) transaction fees, usually around 2–3% of the total payment being made, but could be quite a bit higher depending on the bank or card issuer and country of purchase.

> **Important**
>
> In the U.S., the payer is the party making a payment, while the payee is the party receiving the payment.

## Exploring the Different Types of Payments

Payments are made using various methods. Throughout history, these types of payments have changed and evolved, and new payment methods are likely to appear in the future. Here are the most common types of payments used today.

### Credit Cards: Advantages and Risks

Today, [credit cards](https://www.investopedia.com/terms/c/creditcard.asp) are widely used for purchases and payments. Credit cards work by offering their users a line of credit where an individual can draw credit up to a certain limit. When you attempt to use your credit card, your account information is sent to the merchant bank. The merchant bank then receives authorization from the credit card network to process the transaction.

Lots of [businesses take credit cards](https://www.investopedia.com/how-businesses-accept-credit-card-payments-11722414), but accepting them often means paying a fee to the payment provider and bank. This fee may be a percentage of the transaction or a flat rate.

### Credit Cards

Pros

*   Help an individual build a credit history that can be used to make more major purchases in the future
    
*   Reduce risk, as it is easier to carry a single plastic card as opposed to cash
    
*   Produce revenue opportunities through rewards and airline miles
    
*   Delay when an individual actually needs to use personal capital to pay for something
    

Cons

*   Create the potential to overextend credit and incur unpayable debt
    
*   Charge processing fees by many merchants, making a purchase more expensive than other methods
    
*   Charge high interest (~15% to ~25% APY) on unpaid balances
    
*   Impact a credit report negatively when too many cards are opened
    

### Debit Cards: Convenient and Controlled Spending

[Debit cards](https://www.investopedia.com/terms/d/debitcard.asp) look like credit cards but work differently. When a debit card is used, funds are immediately withdrawn from an individual's account. Instead of having a line of credit that you can pull from in excess of what you have saved, debit card transactions can be declined if you do not have enough money in your account.

Debit cards are easy to carry and widely accepted, sharing many advantages with credit cards. However, debit cards have fewer promotions and may incur fees if you overdraft.

### Debit Cards

Pros

*   Help individuals transact easier through ATM withdrawals or purchases as many major companies
    
*   Typically don't have annual fees or transaction costs as long as you have money in your account
    
*   Discourage excess spending by only allowing spending up to account balance
    
*   Doesn't charge interest since all payments are facilitated using the spender's money
    

Cons

*   Often has limited fraud protection up to certain dollar amounts or time periods
    
*   Limit your spending capabilities to your account balance, not allowing for higher amounts of spending for emergency or high need situations
    
*   Charge overdraft fees through some banks when you attempt to withdraw more funds than available in your account
    
*   Don't build your credit score as no credit is used
    

### Cash: The Traditional Payment Method

[Cash](https://www.investopedia.com/terms/c/cash.asp) is still used for many businesses, such as the retail industry. Coffee shops and convenience stores, for example, still accept cash payments. Considering the fees associated with debit and credit cards, many retail small businesses prefer cash payments from their customers. Cash has its own disadvantages, as it can be lost, stolen, or destroyed. Businesses dealing in large transactions must often incur additional expenses to pay for related security measures such as secured transit or fraud detection.

### Cash

Pros

*   Eliminate all hidden fees as there are no transaction costs for transacting with cash
    
*   Manages spending as you can only spend up to whatever physical bills you have in possession.
    
*   Assists with budgeting as you can easily visualize how much money you have to spend
    
*   Eliminates the need for access to the Internet or technology
    

Cons

*   Does not build your credit score as no credit is used
    
*   Incurs ATM fees when withdrawing cash from an ATM
    
*   Has higher risk of theft as cash is often owned by the bearer (whoever is in possession of the paper)
    
*   Doesn't keep a record of spending like other digital means do
    

### Mobile Payments: The Rise of Contactless Transactions

New [contactless payment](https://www.investopedia.com/terms/c/contactless-payment.asp) technology has made payments easier. The credit or debit card machine—called a [point of sale terminal](https://www.investopedia.com/terms/p/point-of-sale-terminal.asp) (POS)—can read the customer's banking information through the software application that's installed on the mobile device. Once the phone reads the information from the POS terminal, a signal is generated to inform the customer that the payment has been made.

Mobile payments require a device with near-field communication (NFC) capability. The user then needs to set up their mobile wallet to contain their existing card information. The bank that issued your credit card often has to approve the new payment platform, and the payee must have capabilities to accept mobile payments.

### Mobile Phones

Pros

*   Allow for very fast transactions (a simple tap with your smartphone and authentication is all that is needed)
    
*   Promotes financial security through tokenized mobile payment apps
    
*   Further promotes security through biometric authentication requirements on mobile devices
    
*   Doesn't require user to carry around additional goods (as long as they normally have their phone on them)
    

Cons

*   Still an emerging type of payment, so it is not always accepted.
    
*   Only supported by certain types of mobile phones.
    
*   Ties together multiple assets; if you lose access to your phone via theft or dead battery, you cannot make payments.
    
*   May require payer to use specific app at specific places (i.e., Apple stores may only accept Apple Pay)
    

### Checks: Security and Fraud Considerations

[Checks](https://www.investopedia.com/terms/c/check.asp) are less popular today due to electronic payment advances. Checks can be useful when a seller needs guaranteed payment. A bank [cashier's check](https://www.investopedia.com/terms/c/cashierscheck.asp) or a [certified check](https://www.investopedia.com/terms/c/certifiedcheck.asp) are two types of checks that banks offer to help sellers receive the money owed from the buyer.

Checks are linked to a payer's bank account. Each check contains your bank's routing number (a nine-digit code to identify a financial institution) as well as your account number. When a check is written, the payee deposits the check, sending the transaction to a clearing unit. The clearing unit makes the appropriate changes to each party's account.

### Checks

Pros

*   Charge low to no fees (outside of the cost of the paper check and a stamp to potentially mail payment)
    
*   Provide protection as checks must be signed by the recipient who must often also show ID prior to cashing
    
*   Generate proof of payment via paper trail
    

Cons

*   May be costly depending on how checkbooks are ordered and securely distributed to the payer
    
*   Results in longer processing time as funds aren't transferred until the recipient cashes the check  
    
*   Are still susceptible to fraud; if depositing bank does not require ID, fraudulent checks only require a single forged signature.
    

### Electronic Funds Transfers: Fast and Secure Options

Wire transfers and ACH payments ([Automatic Clearing House)](https://www.investopedia.com/terms/a/ach.asp) are typically used for larger or more frequent payments in which a check or credit card wouldn't be appropriate. A payment from a manufacturer to a supplier, for example, would typically be done via wire transfer, particularly if it was an international payment. An ACH payment is often used for direct deposits of payroll for a company's employees.

Though both are transfers of electronic funds, ACHs and wire transfers are different. ACHs only work domestically, and often take one or more business days to fully process. Wires are most often processed the same day, but have location limitations. In addition, ACHs can often be reversed, while wire payments are permanent once the transaction is initiated.

### Electronic Funds Transfers

Pros

*   May help payees receive funds faster than other methods
    
*   Can be set up as an automatic payment for recurring transactions
    
*   Allow for investigation and dispute for fraudulent transactions
    

Cons

*   Require the payer to immediately have the funds ready to be disbursed
    
*   May not be recoverable for certain types of EFTs
    
*   May result in higher transaction fees or costs
    

### Cryptocurrency: The Future of Payments?

Digital currency or tokens are a more modern approach to facilitating transactions. The premise is simple: one person in possession of digital currency can send coins or tokens to any address on a blockchain. Blockchains with smart contract capabilities can interject logic to automatically withdraw or transfer specific amounts based on underlying conditions.

Cryptocurrency is still new compared to other payment systems. However, cryptocurrency has the advantage in only needing an Internet connection to facilitate a payment; as long as both parties have a digital wallet on the same network, payments can be made.

### Cryptocurrency

Pros

*   Do not require use of a bank account; facilitation only requires an Internet connection
    
*   Can easily accommodate a payee's preferred digital currency by swapping coins/tokens in a centralized or decentralized exchange
    
*   May result in very fast payment processing
    

Cons

*   Does not have stable value and may result in loss of capital
    
*   Requires moderate technical understanding of how to send funds; failure to send correctly may result in loss of funds.
    
*   Not as widely as accepted as a means of payment compared to other methods
    

## Important Considerations for Payment Methods

The payee may choose to compromise on debt and accept partial payment in lieu of full settlement of the obligation, or it may offer a discount at their discretion. The payee may also impose a surcharge, for example, as in a late payment fee, or for the use of a certain credit card.

Acceptance of payment by the payee extinguishes a debt or other obligation. A creditor cannot unreasonably refuse to accept a payment, but payment can be refused in some circumstances, such as on a Sunday or outside banking hours. A payee is usually obligated to acknowledge payment by producing a receipt to the payer, which may be regarded as an endorsement on an account as "paid in full."

### Payment Credit Terms and Discounts

Every company that receives payments must set their payment terms. This payment term dictates when payment is due and whether the company offers a discount for early payment. Loans might use an [equated monthly installment (EMI)](https://www.investopedia.com/terms/e/equated_monthly_installment.asp) payment system. EMI uses fixed payment amounts meant to be submitted on a specific date each month.

The most common form of payment term is called "net 30" where a payment is due 30 days from the receipt of the invoice. A company may set the number of days to whatever they want; however, these terms must often be agreed to in the contract with the payee. In addition, a payer may offer a discount (i.e., 1%) if payment is made within a short period of time (i.e., 10 days). This is written as 1/10, net 30, and the company may offer that discount if it is urgent they receive cash.

### A Guide to Installment Payments

In a very basic, transactional contract, a good or service is provided at the same time, immediately preceding, or immediately following payment. When buying an apple at a grocery store, you pay before leaving with it. Consider a haircut; you must pay immediately after the barber styles your hair.

Complex deals might need ongoing delivery of goods or services. Consider a real estate developer that charges a 4% fee on a building they are constructing. The agreement for the developer fee may call for quarterly payments to the developer based on the percentage of completion of the building. Another example may be keeping a lawyer on retainer; payment must be made on a recurring basis in advance of any services being provided.

### What You Should Know About Advance Payments

In some contractual situations, one party to the contract may require payment upfront before service has been performed or the good has been delivered. More often for service agreements, the payee that receives payment has an obligation to perform on the contract after payment has been received. In addition, that payee must follow strict accounting guidance that limits their ability to record revenue until the payment is actually earned.

## What Does Payment Mean?

Payment is the exchange of something of value as part of an agreement. One party makes payment and receives something else of value, while the other party receives payment in exchange for providing a good or service. The most traditional type of payment was through physical currency, but a majority of payment types now leverage technology.

## What Are the Main Types of Payments?

Traditionally, cash, debit cards, credit cards, and checks were the main types of payments. Now, more advanced forms of digital payments are becoming more popular. This includes online payment services, digital currencies, and electronic transfers.

## What Is a Bank Payment?

A bank payment is a transfer from one bank account to another. It is a form of digital payment that leverages technology to transfer currency. Instead of relying on transferring physical currency or writing a paper check, a bank payment can be issued for many recurring expenses (i.e., utility bills) or sporadic expenses (i.e., grocery bills).

## What Is the Best Form of Payment?

There is no single best form of payment, as each typically has its own advantages and disadvantages. More traditional forms of payment, like cash, don't need technology and are often universally accepted. More modern forms of payment have less risk of theft and may be accompanied by payment rewards.

## The Bottom Line

Throughout history, payment methods have evolved from barter to cash and now to various digital transactions. Today, individuals and businesses can choose from several options such as credit and debit cards, mobile payments, and cryptocurrencies, each with its own pros and cons.

Understanding these payment methods helps you conduct transactions effectively, whether you're considering ease of use, cost, security, or the ability to build credit. Stay informed about new technologies and consider their potential for simplifying your financial interactions.