By Kate Hayward, UK Managing Director, Xero
Catering to the variety of ways customers want to pay is increasingly important for small businesses. While UK Finance data shows that card payments led the way in 2023, accounting for 61% of all transactions, and cash use fell to just 12%, more UK consumers now expect a broader range of payment options to be available. Younger generations in particular are shifting towards mobile-first payment habits, as highlighted in Xero’s I want to pay that way report, meanwhile digital wallets and tools like Tap to Pay are also seeing increased uptake worldwide.
Despite the ongoing shift, cash remains an important means of payment for some consumers, particularly those who are older, digitally excluded or living in rural areas. The UK government has introduced legislation under the Financial Services and Markets Act 2023 to protect access to cash, ensuring that people and businesses can continue to withdraw and deposit cash locally. However, unlike countries such as Spain and Norway, and several US states, there is currently no UK law requiring businesses to accept cash as a method of payment.
Ultimately, the future of payments lies in meeting customers’ needs and preferences, offering a variety of convenient and secure options for them to pay. For small businesses, now is the time to think strategically about how to embrace new payment methods, while catering to all customers’ needs – tradition or digital.
Understanding your customers’ payment preferences
When making decisions about payment options, it’s important to understand your customer base, and consider your industry and the product or service you are offering. Xero’sreport shows that consumers continue to change the way they make payments and their preferences vary across purpose of the purchase, demographic of consumer and on the payment location.
Every business is different, so how consumers prefer to pay those businesses is different. For smaller everyday purchases like groceries or coffee, debit or credit cards are the preferred payment option as they offer speed and ease of use at point of sale. For larger transactions like rent, mortgages or larger household bills, consumers prefer direct debit or bank transfers, reducing the risk of late fees and ensuring timely payments. Pay by Bank is a newer payment method that’s quick and easy for customers making larger transactions as they can authorise bank payments using their mobile banking app or online portal. For businesses who use invoicing but want fast, easy in-person payments, they can offer things like Tap to Pay, which lets them accept contactless payments on their phone.
For small businesses using online accounting software, it’s easy to connect multiple different payment methods. For example Xero customers using Stripe can offer payment via credit cards, debit cards, Apple Pay, Google Pay, Tap to Pay and Pay by Bank.
A flexible approach is vital. For example, while three in four UK consumers (75%) still use cash to some extent, almost half of Gen Z (47%) report only taking their mobile phone to pay when physically going to the shops.
Not knowing your customer and how they like to pay for your products or services can lead to a disconnect between the payment methods small businesses offer and those consumers prefer. This is reflected in our report, where over one in three (37%) UK consumers say that not having their preferred payment option available is a top frustration when it comes to making or managing payments. It can also ultimately lead to delays in getting paid, which hinders cash flow.
Why choice at checkout matters
Customers value having different payment options – and when they don’t, it can have negative repercussions for small businesses. In fact, our report revealed that one in four consumers would abandon a purchase and look for another business that offers more payment options if one of their preferred ways to pay wasn’t available.
A major reason for consumers not going through with a purchase is in fact having limited payment options. If a customer’s preferred method isn’t available, they are more likely to shop elsewhere. Offering a variety of payment options ensures that you are creating a more enjoyable shopping experience, increasing the likelihood of customers completing their purchases..
Some payment methods, such as online transfers or direct debit can help to ensure timely payments and quicker access to funds. By providing these options alongside other tools like automatic payment reminders and one-touch payments from an online invoice, you can reduce the risk of late payments and improve cash flow. This impact is reflected in ourreport findings where ‘reduced time to be paid’ was reported as the top benefit by small businesses in the UK who have adopted new payment methods in the last 6-12 months.
Getting ready for digital payments
While digital payment methods bring a variety of benefits, concerns around security may be holding some small businesses back from adopting them. Our report reveals that almost one in three small businesses globally cite security as a top barrier to preventing them from offering new payment methods to their customers.
Governments are collaborating with industry to improve reliability and security. In the UK, the government is actively working with industry to improve payment security. Initiatives like open banking, supported by the Financial Conduct Authority and the Competition and Markets Authority, are strengthening protections for businesses and consumers, while fostering financial innovation.
Staying ahead of the curve in digital payments requires a proactive approach to security. To alleviate concerns, it’s essential to prioritise strong security measures before adopting digital payments. Implement best practices like two-factor authentication for added protection, verify customer identities during transactions to minimise fraud and use tokenisation services to reduce your exposure in case of a data breach.
Meeting evolving payment expectations
To stay competitive, small businesses need to adapt quickly to how customer expectations are evolving, especially younger generations. Offering secure, convenient payment options tailored to customer preferences can be the deciding factor between securing or losing a sale.
Cash still matters for some customers, but expanding the range of accepted payment methods – particularly digital ones – will help businesses serve a broader customer base and build long-term resilience.