Exploring the Pros and Cons of 7 Payment Modes

Payment is an essential aspect of any business, carried out on a daily basis. In order to utilize services and goods, one party is obligated to make payment to another party. There exist various modes of payment, each with its own set of advantages and disadvantages, which will be discussed further in this article. It is crucial for both parties to come to a mutual agreement on the mode of payment prior to the actual transaction.

In this article, you will learn about the different modes of payment that can be used to make payment in exchange for goods and services.

Modes of Payment

#1. Payment using Cash

It is a widely recognized and straightforward method of payment that has been utilized for centuries. While it may be preferred by older individuals or those less familiar with technology, it remains a common form of payment worldwide. The buyer simply provides the seller with the agreed-upon payment in the form of cash or coins in exchange for the goods or services, with the seller providing a receipt for the transaction. This method of payment is frequently utilized in everyday transactions.

Pros of Payment using cash:

Paying in cash has its advantages and disadvantages. On one hand, it allows for quick and easy transactions, such as when a child buys an ice cream with a dollar bill or when you purchase produce from a roadside vegetable stand. However, it also carries the risk of loss or theft, and can make it more difficult to track expenses and budget effectively.

Hassle-free payment.

Payment using cash can be made anywhere such as you can make payment using cash at a big mall as well as in a local market.

 No other equipment is required.

Ease mode of payment for old age and less tech-savvy people.

Cons of Payment using cash:

Tax stealing.

One needs to carry the currency of the country where he wants to make a transaction.

It is difficult to make a large number of payments using cash.

More chances of accounting errors.

#2. Cheque

Cheques are frequently utilized as a means of payment. A cheque is essentially a written request to a bank, authorizing the withdrawal of a specified sum of money from the account of the person who wrote the cheque, and directing the bank to pay that amount to the individual named on the cheque.

Rewritten: Utilizing a cheque as a payment method is often deemed secure since it eliminates the need to carry a substantial amount of cash. When opening a bank account, an individual is usually provided with a checkbook. Cheques can come in several forms, including Bearer Cheque, Crossed Cheque, Stale Cheque, Order Cheque, Open Cheque, Self Cheque, Post-dated Cheque, Banker's Cheque, among others. However, there are both advantages and disadvantages associated with this payment mode.

Pros of cheques as a mode of payment.

Convenient mode of payment.

Safe mode of payment.

A cheque is crossed, which reduces the chances of payment to the wrong person.

The payer can cancel the payment until payee has presented the cheque to the bank.

Cons of Cheque as a mode of payment.

It can be inconvenient for both merchants and individuals who frequently make day-to-day transactions. Furthermore, the use of cheques as a mode of payment is not universally accepted by all merchants, which can pose a challenge particularly when you are in an unfamiliar location.

More chances of fraudulent cases as cheques might get rejected by the bank due to insufficient balance in the payer’s bank account.

#3. Telegraphic Transfer or Mail Transfer

This payment method is widely used by traders and merchants who conduct thousands of transactions daily. It is significantly faster than the previous payment method.

The payer can opt to deposit cash in a branch of the payee's bank located in their town for this payment mode. Upon deposit, the payee's bank is notified via telegraph and instructed to transfer the funds into the payee's account. Alternatively, the same transaction can be completed via mail transfer, which takes longer than the telegraphic option.

Pros of using telegraphic transfer or mail transfer.

Useful mode of payment in an emergency.

Money can be transferred overseas in less time.

Safe and convenient mode of payment.

Cons of Using telegraphic transfer or mail transfer.

Can take 3 or more days to make the transfer.

 The different time zone can cause a delay in the transfer.

#4. Bill of exchange

A bill of exchange is a crucial legal instrument utilized to transfer money to a particular individual on a predetermined future date. It is commonly employed in international business transactions that involve two unfamiliar parties engaging in a business agreement.

Pros of using a bill of exchange:

A bill of exchange has numerous advantages, although it also has a few drawbacks. Understanding these benefits and drawbacks is essential. If you're interested in learning more about the different types of bill of exchange, click here.

A useful mode of payment in international transactions.

Reduces the chances of fraud.

By including crucial details such as the names of the parties involved, the payment amount, the payment date, and the payment conditions, a bill of exchange fosters a sense of trust between the seller and the buyer.

Services can be used on credit and can be paid later using the bill of exchange. Payment can be made early using a bill of exchange in case of urgency.

Cons of using a Bill of exchange:

Additional legal work.

The payer is bound to pay fine in case he fails to make a payment on time.

It becomes a burden on the payer if the bill is not drawn by the payee.

#5. Promissory Note

Similar to a Bill of exchange, a promissory note is a written promise to make payment to another party at a specified time. However, it differs from a banknote and serves as a legal document.

Which binds the payer to pay a certain amount to the payee under specified conditions on the promissory note.

Pros of using a Promissory Note:

Legal document.

Allows you time for the payment.

The flexibility of paying money in single lump or installments.

Cons of using Promissory Note:

Additional fees are required to be paid to the third party where the promissory note is kept.

Cannot be used in complex situations.

Unfavorable conditions can be involved in the long-termed promissory note which a novice borrower might not be able to understand.

Time-consuming legal process.

#6. Bank Draft as a Modes Of Payment

When a bank draft is issued, it acts as a guarantee that the funds are available for payment and cannot be cancelled or revoked. This makes it a safe and secure payment method, particularly for large transactions or when dealing with unfamiliar parties.

Pros of a Bank Draft:

Banks Draft is useful for making large payments.

More secure than a bank cheque as it is drawn on a bank, not on an individual.

#7. Digital mode of payment

Digital modes of payment have gained immense popularity due to technological advancements and the widespread use of the internet. Among the different options available, customers can choose to make payments using banking cards, including debit and credit cards, conduct online transactions through internet banking or mobile banking, and even use payment applications such as PayPal.

Digital Modes of payment are frequently used by people to make small and big transactions. These methods of payment have various advantages as payment can be made within a few seconds.