What Is a Payout in Ecommerce? A Guide for Retailers (2024)

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Making a sale is a critical near-term goal for any business. But the financial journey isn’t complete until you actually receive the money from the purchase. This is also known as a payout. 

If you win a bet but the gambling company doesn’t release your money, does it really matter that you won? Or if you get a $10,000 order but the funds get held up by a credit card processor, for example, that doesn’t do you much good when you have your own bills to pay. That’s why business owners need to understand what a payout is and how a payout works.

In this guide, we’ll cover the ins and outs of payouts, including the different types of payouts and different ways to manage them to run a more effective business.

What is a payout? 

A payout is the distribution of money to an end recipient. Many different types of payouts exist, such as how an insurance company can provide payouts to customers when settling claims, and companies can provide payouts to investors by distributing dividends. In ecommerce, payment processors provide payouts to retailers by transferring collected payments into a merchant account, which can then get paid out into a traditional bank account.

Note, however, that not every step in the payment processing journey involves payouts—at least in terms of what retailers are practically looking for: money in the bank. 

If a customer makes a purchase with a debit or credit card, for example, a payment processor would instruct the card’s issuing bank to transfer funds to the retailer’s merchant account, which is a type of bank account set up to accept card payments (some payment processors offer integrated merchant accounts). Once the money lands in the merchant account, another payout can take place to the retailer’s primary bank account.

With Shopify Payments, you can easily accept online payments from all major credit cards and other popular payment options, and you can easily manage your cash flow with transparent payouts.

Types of payouts for ecommerce merchants

Ecommerce merchants can receive different types of payouts, depending on how they set up their stores to receive payments from customers. Some of the more popular payout types include the following:

• Bank transfer
• Payment apps
• Cash
• Check

Bank transfer

One of the easiest and most common payout methods is a bank transfer. For example, when using Shopify Payments, you can set up automatic payouts, where net sale proceeds will be paid out via bank transfers to your linked bank account.

Payments extensions

Some Shopify store owners use third-party payment integrations like PayPal for payment processing and/or as a payment method. For example, when a customer pays for an order using PayPal (through their linked credit card), funds can then get paid out to your business’ PayPal account. 

Another option is to receive a payout through a mobile payment app like Venmo. From there, you might use the funds within that payment app or do a bank transfer to a separate bank account.

Cash

A literal cash payout is more common in physical settings, such as how a coffee shop manager might provide pooled tips as a cash payout to baristas. 

In an ecommerce setting, a cash payout sometimes refers to liquid funds, including bank transfers, that can be used almost instantaneously like cash. If you choose cash on delivery as a payment option, for example, then customers could pay a courier in cash when they receive their order, and the courier could then provide you with a cash payout.However, receiving alternative payouts in the form of a store credit, for example, would not be a cash payout. 

Check

It might seem like checks are antiquated in today’s online-oriented world, but they have managed to remain relevant. By some estimates, 40% of US B2B payments still rely on checks. 

Not only do many companies pay for goods and services by check, but this remains a common payout method too. An insurance payout, for example, can involve cutting a check as a settlement for a policyholder. And in ecommerce, some payment platforms offer merchants an option to cut a paper check as a payout option, though doing so can carry a fee.

How to initiate a payout to your business bank account

While all the behind-the-scenes action of payment processing can be interesting to some, you probably just want to know how to get the money into your business bank account. Here’s how the process works: 

1. Choose a payment processor
2. Link your business bank account or use an integrated merchant account
3. Select your local payout currency
4. Set a payout schedule or use automatic payouts

1. Choose a payment processor

The first step to initiating a payout to your business bank account is to choose a payment processor. You can choose from Shopify or third-party payment solutions that allow your customers to use different payment methods, such as credit or debit cards, buy now, pay later (BNPL) options, or Amazon Pay. 

A company can act as both a payment processor and a payment method. For example, you might use a payment processor like Shopify Payments as your primary means of accepting credit card payments, while also letting your customers pay through PayPal. 

When using PayPal as a payment processor, customers could then have the option of processing credit card transactions through PayPal or paying with their PayPal balance.

To choose a payment processor, consider factors such as:

• Fees. Payment processors charge varying fees, such as a percentage-based fee plus a per-transaction fee in some cases.
• Security. Because payment processors handle sensitive data, such as your customers’ credit card or banking information, you want to be confident that they have strong security protections in place. Check that your payment processor is PCI compliant and offers encryption and tokenization. 
• Customer experience. Whichever payment processors you use should facilitate a frictionless checkout experience. Some customers prefer to use certain payment processors due to their familiarity and trust of certain platforms, thus you might choose to offer more than one payment processor, depending on your customer base.

2. Link your business bank account or use an integrated merchant account

After choosing among payment processors, decide where you want your payouts to go. For many businesses, that means linking an external business bank account, though some store owners prefer to link merchant accounts that are already integrated with payment processors.

If you’re using Shopify Payments, you can link an eligible bank account to receive payouts, based on country-specific requirements. In the US, for example, externally linked bank accounts just need to be able to receive payouts in US dollars and accept ACH transfers, which is a standard bank transfer in the US. 

Alternatively, set up a Shopify Balance account to receive payouts even faster—as quickly as the next business day from the transaction processing date (instead of the three-business-day time frame for external accounts). A Shopify Balance account is a business financial account that lets you manage all your money from the Shopify admin.

The choice depends on factors like how much payout speed matters to you, your comfort with using different accounts, and additional benefits like access to capital. 

3. Select your local payout currency

Companies with international customers can allow customers to make purchases using their local currencies through Shopify Markets, and you can then receive payouts in your preferred currency. To receive the payouts, you need to have a bank account in the currency that you want to be paid in. So if this situation applies to your business, select your payout currency within your Shopify Payments banking information section in your Shopify admin payment providers page. 

Note that your linked account needs to accept your payout currency to complete the conversion process, so check with your bank or merchant account provider if you’re unsure. Final payouts also depend on your payment provider’s exchange rate and any conversion fees, though any associated costs are often worth it in order to provide a more customer-friendly experience by letting them pay in their home currency.

4. Set a payout schedule or use automatic payouts

Depending on your payment processor, you might receive payouts on a set day of the week. Some providers automatically process payouts as soon as a transaction clears. 

With Shopify Payments, for example, you can automatically receive payouts once per business day for any purchases where payments have been processed, although countries outside of Australia, Canada, New Zealand, and the United States have minimum thresholds before payouts can be initiated.

You could also set up a payout schedule, such as if you want to get paid once per week every Friday. In that case, processed payments would be held until your set payout date. Or get your payouts automatically deposited into Shopify Balance as fast as the next business day. You can keep the funds in Balance to pay bills and make business purchases, or transfer the funds to an external bank account as needed.Note that the specific sum transferred in a payout is calculated after accounting for fees, refunds, and adjustments.

How to manage personal payouts as a business owner

The final aspect of payouts for business owners is figuring out how to send payouts from your business account to your personal bank account. You have several options when it comes to managing personal payouts, such as:

1. Owner’s draw

One option is to initiate payouts from your business account to your personal account through standard bank transfers, based on how much money you have at any given time. If sales have been strong, you might take more out more. Other times, you might wait until the business account reaches a certain level before paying yourself.

2. Salary

Another way to receive payouts is through a set salary that you set up through a third-party payroll platform. This option tends to be more popular the larger a business gets and is required by some business structures, like S corporations and C corporations. But even if you’re a solo entrepreneur, you might prefer to get paid on a consistent basis by giving yourself a salary. That way you have a more stable income to plan out your personal expenses.

3. Dividends

Business owners who receive salaries can also provide themselves with additional payouts by way of dividends. The exact requirements and structure can vary by business, such as based on your articles of incorporation, but often dividends involve initiating a payout as a percentage of your earnings. Keep in mind, however, that you might not want to take all of your profit as monthly or quarterly dividends paid.

In Jones’ view, your overall payout ratio should not exceed “20% in total of what you’re profiting so that you can save for slow months so that you don’t have to go back into your personal savings to pay for business needs.” 

However, depending on factors such as your business size and net profit, what’s considered a reasonable percentage can vary substantially. Consider speaking with a trusted financial advisor such as an accountant if you get to this point.

Manage payouts more effectively with Shopify

With all the hard work you put into marketing your business and making sales, you don’t want to let an ineffective payout process drag you down. Manage payouts more effectively by using a trusted payment processor like Shopify Payments so that your transactions settle in a reasonable time frame.

For the quicker payouts, consider opening a Shopify Balance account. This way you can get payouts as quick as one business day after making a sale. From there, you can then use the money in your Shopify Balance account to pay bills or use it via a spending card, or initiate a transfer to an external bank account.

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Credit: Original article published here.