The report, titled I Want to Pay That Way, explores shifting consumer payment habits and the challenges small businesses face in adapting, particularly in managing payments to suppliers.

A key finding reveals that one in four consumers will abandon small businesses that don’t offer their preferred payment methods. While 87% of UK consumers use credit or debit cards and 75% still use cash, small businesses predominantly offer bank transfers (73%) and cash (60%), with only 55% accepting credit or debit cards – the top choice among consumers.

The research also highlights the growing popularity of digital payments among younger generations. Over half of Gen Z (55%) and nearly half of millennials (49%) use mobile payment options like Apple Pay or Google Pay, with 47% of Gen Z relying solely on their phones for in-store purchases. Despite this trend, only 33% of small businesses currently offer these digital payment methods.

The report underscores the impact of payment options on customer loyalty, with 25% of consumers stating they would choose another business if their preferred payment method wasn’t available.

Kate Hayward, UK Country Manager at Xero said: “As the UK continues to lead in open banking, it's crucial that small businesses recognise and adapt to the evolving payment landscape. Embracing a wider range of payment options, particularly digital methods, isn't just about keeping up with trends – it's about meeting customer expectations and staying competitive in today's market. The growth of digital payments is transforming the way we transact, making it an important requirement for small businesses to bridge this gap and offer the diverse payment options their customers increasingly prefer.”

Early Adopters Reap Rewards, While Others Hesitate

UK small businesses are divided on the adoption of new payment methods. The main reasons holding them back include:

• Perceived irrelevance to their business (33%), with this figure rising to 42% among sole traders
• Lack of perceived value or advantage (32%)
• No apparent demand from customers (31%)

However, for those who have embraced new payment methods in the past six to 12 months, the benefits are becoming clear. A quarter (25%) reported faster payment times, 24% saw an increase in sales, and 22% spent less time chasing late payments. These positive outcomes may be driving interest in future payment innovations, with one-third (33%) of UK small businesses expressing optimism about the potential of biometric authentication.

Streamlining Payments for Small Business Success

Recognising the importance of efficient payment processes, Xero is committed to developing solutions that help small businesses collect and make payments more smoothly, supporting their cash flow and overall financial health.

Bharathi Ramavarjula, SVP of Payments, Xero, said: “Understanding how different consumers prefer to pay and giving them the flexibility to pay the way they want, will help small businesses get paid faster and grow their revenue. To make it easier to collect payments, Xero is providing small businesses with more ways to get paid.”

When it comes to paying their supplier bills, over a third of small businesses report that their top challenges are making sure there are enough funds to pay bills (36%) and keeping track of due dates so that bills are paid on time (35%). It's not surprising then that 45% of small businesses spend at least four hours each month managing their accounts payable.

“Managing payments and bills is really critical to help small businesses to be in a stronger position to grow their business and keep pace in what is shaping up to be a transformative decade in payments. That’s why we’re offering an embedded bill payment solution to help UK business owners and their advisors manage, approve and pay their bills seamlessly without having to leave Xero,” Ramavarjula said.