What is a payment instrument?

A payment instrument is a concrete and specific iteration of a cashless payment method pertaining to – and unique to – a single customer.

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Rob Binns
January 26, 2024
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What is a payment instrument?

As a business accepting online payments – or looking to – you’ll be familiar with what a payment method (such as a credit card, check, or digital wallet) is. 

But have you heard of a payment instrument?

Despite their name, payment instruments have little to do with music. However, in the orchestra of your business’s payments strategy, they fulfill a vital role – and, if you can get a tune out of them, payment instruments offer big benefits for boosting your business’s revenue, simplifying recurring payments, reducing churn, and polishing the customer experience.

So below, we’re defining what a payment instrument is, and how it differs from a payment method. We’ll also provide an example, offer some advice for choosing the right payment instrument for your business, and explain how you can create one with Checkout.com.

What is a payment instrument?

A payment instrument is a concrete and specific iteration of a cashless payment method pertaining to – and unique to – a single customer. Typically, a payment instrument is either the customer’s credit or debit card, or their bank account.

Just as an “instrument” is defined as a tool or utensil, so too does a payment instrument serve a specific end: facilitating the movement of money between your business and your customers, without the need for cash’s involvement.

As a merchant, you can save a payment instrument – for example, your customers’ credit and debit card details or their bank account – “on file”. By saving and securely storing this data, you enable slicker, more seamless recurring billing: saving your customers the hassle of making repeat purchases manually, reducing churn rate, and enhancing their overall experience.

Each payment instrument has its own unique ID – a series of alphanumeric characters and symbols – which acts as either the source of or the destination for a cashless payment. A payment instrument can be created for both new and existing customers, but – crucially – each instrument can only be linked to one customer, and remains unique to them and to a specific payment method they’ve provided.

Payment instruments: an example

For an example of a payment instrument in practice, let's say you run a SaaS (Software-as-a-Service) company online.

Your revenue relies on a subscription model, which means the ability to accept recurring payments is vital. But to do this, you need to be able to store your customers’ payment data – whether that be their bank account, or payment card – to facilitate transactions, every month, without requiring any input from that customer.

Fortunately, once your customer (let’s call them “John Smith” for the purposes of our example) has provided their payment details initially, and created a recurring billing agreement with you, you’ll be able – with the help of the right payment service provider, such as Checkout.com – to save their card or bank account information on file as a payment instrument. (This can be done with relative ease by you or your developer via an API – for in-depth instructions on how to create a payment instrument, our guide will help.)

With your customers’ sensitive information saved as a payment instrument – and protected by safeguarding processes such as encryption and tokenization – you can accept regular, ongoing payments with ease and without any friction, while sidestepping the financial and reputational risks of seeing those details exposed in a data breach.

Payment instrument vs payment method

The term ‘payment instrument’ is often (and incorrectly) applied in different ways throughout the credit card processing space. And, according to some definitions, payment instruments are closely related to – and sometimes used interchangeably with – payment methods.

Payment methods include:

  • Credit, debit, and prepaid cards
  • Checks
  • Digital wallets (such as Apple Pay and Google Pay)
  • Electronic fund transfers (EFTs), such as direct debits and wire transfers
  • Cryptocurrency payments

So, what’s the difference? Well, payment instruments are concrete and specific iterations of a payment method for a certain customer. For example, your business might have John Smith’s debit card saved on file – this is a payment instrument that is unique to that cardholder, and pertains only to him. A debit card in general, however, is a payment method – a way of paying that anyone can access, and that isn’t tied to a specific individual, cardholder, or account.

To put it slightly differently, the payment method is whatever technology or tool the customer elects to pay with – for example, direct debit. However, the payment instrument refers to the encrypted, tokenized data you have on file, for a specific customer, that stands in for the customers’ actual payment method (i.e. their bank account or debit card).

What’s more, payment instruments don’t include cash; cash does, however, qualify as a payment method.

How to choose the best payment instruments for your business

With Checkout.com, there are two main payment instruments available for your business:

Both are extremely useful tools for ensuring you maintain regular subscription-based income, and for simplifying your recurring card and direct debit payments. We recommend utilizing both, in order to give your customers a wide breadth of choice when it comes to how they pay.

As for payment methods, we won’t go into too much detail on which ones you should select here – we cover that in far greater detail in our guide to the best payment methods for a small business to accept. But in general, some questions you should be asking to this end include:

  • Which payment methods are most popular in the geographic areas my business serves?
  • Which payment methods are most affordable and reliable?
  • Who are the most reliable partners I can work with to process cashless payments at my business?

It’s this last question we’re most interested in, because it’s one the team here at Checkout.com can help you answer. Read on to find out how.

Improve your payments with Checkout.com

Payment instruments; payment methods. It all begs the question…

Where does Checkout.com come in?

As a renowned payment service provider, we’re passionate about equipping your business with the right payment methods and instruments for both you and your customers. With us, you can enable your valued customers to pay in the way they’re most comfortable with, which boosts your revenue and engenders a more engaged, satisfied, and loyal audience.

Want to know more? Get in touch with our team of payment experts here at Checkout.com today for a friendly, no-obligation conversation; to learn more about payment instruments, payment methods, and how we can help you harness them to drive value for your business.

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January 26, 2024 15:41
January 26, 2024 15:41