State and local governments have largely cleared the first hurdle in digital payments: giving residents a way to pay online. Now, they’re working on getting more people to use digital payment systems and ensuring that those systems reduce, rather than add to, pressure on government operations.
Seventy-eight percent of state and local leaders surveyed for the 2026 Government Payments Experience Index, a study conducted by payments provider PayIt, said their agency accepts online payments for at least one fee or service, and the remainder of respondents plan to accept digital payments within 18 months.
In addition, the study found that 49.5 percent of payments, on average, go through online systems. That means slightly more than half of state and local government payment transactions still flow through traditional channels such as mail, in-person payments, or phone-based systems.
“The problem isn’t … do you have an online way to pay or access a service. It’s really much more one of adoption,” noted Kelly Davis-Felner, chief marketing officer at PayIt, during a recent MeriTalk webinar with KC Roestenberg, chief information officer for Orange County, Calif.
Usability, legacy integration, reconciliation, security, and data readiness are key factors in whether digital payments deliver meaningful value, the discussion revealed.
According to the 2026 index, ease of use is now the top driver of digital payment adoption, ahead of increased promotion of digital services and expanded payment methods.
A poorly designed payment portal, for example, offers digital access, but it can leave residents confused, keep call volumes high, and require staff to maintain parallel manual processes.
Payments systems must serve diverse populations and operations
Orange County, Calif., serves about 3.2 million residents and tens of millions of visitors each year, Roestenberg noted. It serves a diverse constituency spanning age groups, languages, income levels, and technology familiarity. It also manages a wide array of services and facilities, from building permits and property taxes to courts, parks, beaches, an airport, and a zoo.
This diversity of population and operations requires flexibility across payment channels, even as the county works to modernize. Across its 23 departments, the county supports more than 200 payment methodologies, Roestenberg noted.
“We look at consistency from a technology perspective, but if you’re an inmate in one of our jails, that’s a different payment system than somebody that would [use] in a park. It is complex,” he said.
Payment system fragmentation presents operational, security challenges
Payment system fragmentation can make reconciliation a daily drain on staff capacity, especially when agencies rely on multiple vendors, schedules, data formats, and disbursement processes. “Reconciliation can be excruciating in that context,” Davis-Felner said.
More than one-third of respondents to PayIt’s survey cited faster and more accurate reconciliation as the most important business outcome when selecting a digital customer experience and payments platform.
Payment system fragmentation can also amplify security and compliance risk, according to the index. Forty-five percent of respondents to PayIt’s survey said their biggest challenge in payment collection and processing is data security and payments compliance.
Payment Card Industry Data Security Standard (PCI DSS) 4.0 requirements that became mandatory in 2025 added another layer of compliance pressure for organizations that handle payment card data. (PCI DSS) 4.0 moved security from a check-the-box function to a continuous process.
Governments can modernize in stages
Legacy systems remain one of the biggest barriers to payments modernization. The index identified integration with older systems as the top obstacle to improving the resident-facing digital experience. In many jurisdictions, core systems of record were built for narrow transactions and long-term recordkeeping, not real-time exchange across modern payment platforms, digital wallets, mobile apps, and analytics tools.
Rather than waiting for full system replacement, many governments are looking to improve the front end by layering modern payment platforms over older backend systems.
“The approach keeps the resident experience a little bit more modern and innovative, and … can extend the life of some of those older systems,” Davis-Felner said.
In Orange County, “our go-forward strategy is certainly not to develop applications internally,” Roestenberg said. “We’re looking for SaaS solutions first. … For the older systems, we’ll sometimes bolt on a payment system on top of the old application to try and keep current.”
Artificial intelligence shows promise first in back-office workflows
Artificial intelligence (AI) is beginning to enter the payments arena, PayIT found. Near-term use cases are more likely to support internal operations than fully autonomous resident-facing transactions. According to the index, state and local governments are using or evaluating AI in areas such as data entry, invoice management, reconciliation checks, chatbot support, and service request routing.
The most practical AI applications may be in back-office workflows where human review remains part of the process, Davis-Felner and Roestenberg agreed.
In Orange County, “we’re seeing AI in auditing – backend systems. In fact, our new ERP has some of that functionality,” Roestenberg said.
The next stage of payments modernization will be measured by whether constituents choose digital payment options, staff can manage them efficiently, and government leaders can trust the data and the security behind them. For state and local IT decision-makers, PayIt advised a practical path forward: simplify the resident experience, reduce payment fragmentation, strengthen integration with systems of record, and use AI first where it can relieve operational pain.