Payment Method Definition

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021

Define Payment Method In Simple Terms

A payment method is the way an individual pays for goods and services.

Payment methods evolved from a barter system into either instant forms of payment, such as cash, debit cards, and wire transfers (for larger purchases), or commitments to pay in the future, such as a credit card or a payment plan.

What are Modern Payment Methods?

All modern payment methods fulfill the role of transferring some amount of currency from one entity to another.

Cash and coins have physical numbers on them representing a value, so that when an individual pays for goods, they are transferring that amount of wealth to the vendor they are purchasing from.

Similarly, electronic payment methods transfer a digital representation of wealth from the purchaser to the vendor.

This is usually accomplished via a point of sale system, or POS.

Credit Cards

Credit cards are a commonly-accepted payment method, although the individual does not pay until later.

Credit card companies, such as banking institutions, pay vendors immediately and later collect from the individual for a processing fee.

To hold individuals accountable, every person is assigned a FICO score which represents their reputation and trustworthiness of paying back a loan–not paying back credit card loans will result in a reduction of one’s FICO score, making it more difficult and more expensive for the individual to receive loans in the future.

Despite associated fees, most companies accept credit cards as a valid payment method because paying for something later via a credit card is easier psychologically and can result in more sales.

Modern Payment Statistics

According to the Federal Reserve’s American Payment Study, the modern world is shifting away from cash payments each year.

In 2018, cash payments made up 26% of all payments in the US, which was down from 31% in 2016.

Additionally, cryptocurrencies such as Bitcoin and Ethereum are becoming more widely adopted as a valid payment method.

Payment Method Definition FAQs

A payment method is the way an individual pays for goods and services.
Credit cards are a commonly-accepted payment method, although the individual does not pay until later.
According to the Federal Reserve’s American Payment Study, the modern world is shifting away from cash payments each year.
Cash and coins have physical numbers on them representing a value, so that when an individual pays for goods, they are transferring that amount of wealth to the vendor they are purchasing from.