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Payment automation refers to any system that transfers money between accounts without manual processing. It enables customer payments and allows businesses to set up recurring payments such as salaries, vendor payments, and invoices.
Accounting can be overwhelming for small business owners. Not only is it tedious to ensure accurate bookkeeping and compliance with tax regulations, but tracking and transferring information across disparate systems can also be time-consuming. Errors can proliferate, leading to costly financial discrepancies.
Payment automation helps small businesses solve trust and efficiency problems by supporting that payments are processed accurately and on time.
Using electronic payment systems, businesses can automate payment processes to:
Accounting software integrations with value-added services can schedule and automate complex payments, freeing up time for other priorities. However, like automated systems, they introduce risks that businesses must be aware of.
Read on to learn how automated payments work, their benefits, and the associated risks.
Table of contents
Payment automation uses systems that connect financial institutions to initiate, validate, approve, and process payments.
There are many ways to integrate automation into payments, and the details depend on the specific systems involved.
Below is a general overview of payment automation:
Some key functions of payment automation:
For example the following flowchart describes an automation that businesses can use to approve or reject invoices. This expedites the invoicing process by eliminating the need to manually collect, track, and process invoices.
Automated payments can function with multiple electronic payment systems.
The types of automation available may vary depending on the type of payment, the accounts involved, and the processing systems.
An electronic funds transfer moves money directly between bank accounts within a bank or to external accounts. ETFs are controlled by the party sending the money.
Examples of automated electronic funds transfers:
A direct debit moves money between bank accounts like a direct deposit, but the party receiving the money controls the details.
Examples of automated direct debit:
Online payment services are any systems that facilitate payments between two parties over the Internet. The service acts as a third party that communicates between the accounts.
Online payment services are common in e-commerce transactions, allowing customers to pay businesses directly via debit or credit card.
Example of automated online payment services:
Mobile payment services allow users to pay for things using their phone instead of a card. The user authorizes an app to access their accounts and can make purchases by presenting their phone to a compatible reader.
Example of automated mobile payments:
An electronic network between financial institutions that facilitates payments such as direct debit, electronic funds transfer, and credit transactions.
Examples of ACH automation:
Payment cards that authorize transfers of money out of a debit or credit account. This is possible with the physical card or electronically using the information on the card.
Example of card payment automation:
A point-of-sale system is a combination of hardware and software that processes transactions. Businesses use POS systems to accept customer payments, track sales, and keep records.
Example of POS automation:
Contactless payments are features in point-of-sale systems that allow customers to make payments by tapping their card or phone instead of inserting or swiping a card.
Many small business owners seek help managing finances from software and professionals:
Payment automation software can address many of the compliance and tax headaches that small business owners face. Reducing errors can save time and make tax season less expensive.
These are some of the top benefits of payment automation systems:
Automated payment and accounting practices comply with changing tax laws and financial regulations. Automated systems also often come with security features to help protect sensitive financial data against unauthorized access and cyber threats.
Automation software is designed to handle repetitive tasks, such as entering transaction details into accounting software. This frees up time for small business owners to focus on critical work and growth.
Reporting payments manually introduces human error. Mistakes can require time from accounting professionals to fix. Automating transactions and their records helps avoid these expenses, as well as unexpected taxes and fines.
Automated reporting tools can generate financial reports nearly in real time, providing businesses with up-to-date insights into their financial health. In one survey, 89% of accountants currently using automation in their operations said it made their organization more profitable and efficient.3
This improved data visibility supports more informed decision-making, helping owners strategically steer their businesses based on current financial landscapes.
As businesses grow, integrations and automation can easily scale to handle increased volumes of data and more complex processes. Payment process automation can support growth without proportionate increases in manual work or staffing.
During growth periods, it’s easy to lose track of new vendors and bills. B2B payment automation allows businesses to maintain good relationships and track new spending.
Automating inventory management also helps keep margins stable during growth by preventing over- or under-stocking.
Automated billing can help reduce late and unpaid bills by removing the element of human forgetfulness. As long as the account has enough money, the payment will continue processing without repeated human approval.
If customers don’t want to enable automated payments, automated reminders can help businesses collect payments for their services on time. This could take the form of a text or email reminder that a bill is coming due.
Payment process automation can speed up operations like billing, invoicing, and customer queries about their accounts and payments. Quick responses can improve customer satisfaction and can help increase customer retention rates.
By reducing the need for paper-based processes, automation contributes to an organization's green initiatives.
Examples of green automation initiatives could include:
| Benefits | Risks |
|---|---|
| Reduced data entry and tracking labor with higher accuracy and improved oversight. | May be difficult to integrate into existing systems and present new security challenges. |
| Efficient customer service and automated billing to help reduce late/unpaid bills. | Business is responsible for ensuring regulatory compliance across borders. |
| Improved security and automatic compliance with tax laws and other regulations. | Customers, vendors, and internal teams may resist adoption, and automation may increase the volume of transaction disputes. |
Implementing automation can present risks and costs. Transactions and authorization should be automated with care to avoid mistakes, vulnerabilities, and unforeseen expenses.
Not all systems are directly compatible. New automations may require new tools and software, as well as changes to existing workflows.
Implementing new systems comes with operational interruptions. Certain systems, or the whole business, may need to pause operations to accommodate new system adoption.
Automations can open revenue opportunities in new regions. However, regional regulations and tax implications can create a lot of new work to stay compliant.
Compliance can become an issue when businesses change the way they handle information and when they gain customers from new regions.
Different jurisdictions have different privacy and data protection regulations.
Legislation can govern what a business can track and how it stores information.
Global transactions can include increased expenses and risks:
Currency conversions, additional fees, and international shipping.
While opening up a business to new markets can be exciting, the additional fees associated with international sales can make profit margins small. Businesses may need to adjust pricing or limit availability.
Increased payment fraud risk.
Bad actors can manipulate their IP addresses to appear to be from different regions. This enables them to dodge attempts to block them from making purchases. Accepting payments from many different regions may give fraudsters avenues of attack.
Automation introduces risks that errors could be repeated without being noticed. Incorrect applications could result in erroneous charges, or an error might result in bills going unpaid.
Adding third parties also adds potential vulnerabilities, because each new system is a new potential direction of attack for bad actors. No system, no matter how advanced, is immune to attack.
Businesses may need to ensure not only that their security software is current, but that employees practice good information security processes.
Consumers, employees, service providers, or clients may resist payment automation. They might object due to convenience or security concerns.
Businesses needs to be prepared to educate stakeholders and users and address concerns.
While automation goes a long way to eliminate errors and fraud, it also introduces new risks. A higher volume of transactions could mean there may also be a higher volume of chargebacks, disputes, and fraud to handle.
Deciphering the difference between legitimate errors and fraudulent chargebacks is time-consuming. Merchants may need additional chargeback dispute automation tools to handle an increased volume of transactions.
New automations come with initial costs and may have recurring overheads. The costs of payment automation can include:
Service interruptions can prevent businesses from operating, so choosing vendors with consistent uptimes and excellent support is important. A point-of-sale system experiencing downtime could prevent a business from completing transactions.
Payment automation can take many different forms, but the basic electronic payment process has standard elements and procedures.
These are some of pertinent components of automated electronic payments:
There are many different payment solution vendors. A business’s needs, the jurisdictions in which it operates, and its capabilities will determine specific choices.
These are key considerations:
Businesses can apply automation at many different stages of payment, including authorization, transfers, and disputes.
First, assess where automation will have the most impact:
With a list of necessary features, including whether the system needs integrated hardware, it’s time to begin research.
Keep these in mind when researching automation providers:
Get an accountant to help with the initial setup so that any automation begins with correct deductions, fees, and reporting.
Businesses without internal legal counsel may need external consultation to ensure payment solutions meet their privacy, security, and fraud prevention needs.
To help ensure success when implementing any new software or hardware, businesses can make an onboarding plan. Depending on a business’s size, this might mean involving an IT team. Ensure that relevant stakeholders have an opportunity to voice concerns before making any final decisions about which services to purchase.
Payment automation solves many of difficult and time-consuming accounting tasks by reducing the manual input required to make and record payments.
PayPal’s integrations and automation features are designed to help transform how you manage your accounting and payment automation. By facilitating electronic payments that smoothly integrate with your accounting software, PayPal helps your financial data flow efficiently without manual input, helping you reduce errors and save time.
That’s going to make tax season a breeze compared to manual data entry.
PayPal’s integrations and automation features are designed to help transform how you manage your accounting and business operations.