Why offering more ways to pay can help small businesses stay competitive

By Kate Hayward, UK Managing Director, Xero

Small businesses today need to think carefully about how their customers want to pay. It’s not just about cards or cash anymore. People expect to have a range of options, and that can make a real difference to sales and customer satisfaction.

According to UK Finance, card payments made up 61% of all UK transactions in 2023, while cash use was just 12%. But that’s only part of the story. More and more consumers are using digital payment methods like Tap to Pay and mobile wallets, especially younger shoppers. Xero’s ‘I want to pay that way’ report shows that habits are changing fast, and businesses that can keep up with what customers want are more likely to succeed.

Even as digital payments grow in popularity, cash still plays a vital role for some consumers, especially those who are older, less digitally connected or based in rural areas. To support this, the UK government has introduced legislation through the Financial Services and Markets Act 2023 to safeguard access to cash, making sure people and businesses can continue to withdraw and deposit it locally. Despite this, unlike in countries such as Spain, Norway and several US states, there’s currently no legal requirement in the UK for businesses to accept cash as a form of payment.

Ultimately, the future of payments lies in meeting customers’ 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 the needs of every customer.

Know who you’re selling to – and how they want to pay

When making decisions about payment options, it’s important to understand your target audience, industry and the product or service you are offering. Our report shows that consumers continue to change the way they make payments and their preferences vary across purpose, demographic 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. For businesses that use invoicing but want fast, easy in-person payments, they can offer solutions 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 and now Tap to Pay.

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.

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 cart abandonment is 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 purchase completion.

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 our report findings where ‘reduced time to be paid’ was reported as the top benefit by small business leaders in the UK who have adopted new payment methods in the last 6-12 months.

Go digital with confidence

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 actively working 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, prioritise strong security measures before adopting digital payments. Implement robust 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.

More ways to pay, more ways to grow

Looking ahead, it’s important for small businesses to stay agile and in tune with what payment options their customers want. Offering secure, convenient ways to pay can be the deciding factor between making or losing a sale.

Cash still matters to many, but broadening your payment options, particularly to include digital methods, can help your business stay competitive and meet the needs of a wider range of customers over time.