A Guide to Restaurant Payment Processing

What is a payment processor?

A payment processor is a service that allows you to accept payments using credit, debit and EBT cards. Some payment processors also let you accept other forms of payment, such as Apple Pay, Google Pay, Samsung Pay, PayPal and Venmo. Most companies offer multiple processing methods so you can accept credit cards in your restaurant, on your website or on the go (if you offer delivery service). 

There are many payment processors, and each has advantages and disadvantages. Before you sign a contract, make sure you know the features, benefits, rates, equipment and policies. 

Once you decide on a payment processor and complete the paperwork, it usually takes one or two days to set up your account and at least a week to receive, set up and test your equipment. Once you begin using the processor, funds are typically deposited into your account within a few days.

Who is involved in the payment process?

Many entities and services are involved in credit card processing. 

• Consumer: This is the cardholder and usually the purchaser (your customer).
• Merchant: This is the individual or business selling the products and services that the consumer is buying. In this case, it’s you, the restaurant owner.
• Card network: This is the brand of credit card, such as Visa, Mastercard, American Express or Discover. These major brands set the interchange and assessment fees and create the security standards for Payment Card Industry (PCI) compliance.
• Credit card processor: This company handles communication among the merchant, credit card network and cardholder’s bank and ultimately deposits the money into the merchant’s bank account.
• Payment gateway: This technology encrypts credit card information and sends it from the merchant to the credit card processor. A payment gateway is usually a stand-alone product for online credit card transactions and other purchases for which the card is not physically present. For card-present transactions, this technology integrates with the card reader hardware.
• Issuing bank: The bank that issued the credit card to the consumer is responsible for letting the payment gateway or credit card processor know whether the consumer’s account has enough available credit to cover the transaction.
• Acquiring bank: This is the merchant’s (your) bank. Once the transaction is complete, the money goes into your account at the acquiring bank.
• Merchant account services provider: This organization gives you a temporary account that holds the funds until they are deposited into your account at the acquiring bank. Most credit card processors have their own merchant account, but some require a third-party provider. Typically, a separate merchant account is necessary only if you are using a payment gateway by itself.
• Credit card facilitator: This company does credit card processing for merchants under its own merchant account and payment gateway rather than assigning each merchant their own account and gateway as a credit card processor does. It charges one fee for all transactions, regardless of the card network. Two examples are PayPal and Square.

How payment processing works

Here’s what happens during a credit card transaction at a restaurant:

1. A consumer buys food from you and provides a credit card as payment.
2. You accept the credit card in person with a credit card reader or online, over the phone or by mail through a payment gateway. The payment information is sent through the software or hardware to the credit card processor or facilitator.
3. The credit card processor or facilitator relays the payment information to the card network.
4. The card network sends the payment information to the issuing bank.
5. The issuing bank verifies that the customer has enough money or credit in the account to complete the transaction. It runs a security protocol to verify that the purchase is legitimate and approves or declines the transaction. The issuing bank communicates the approval or denial to the credit card processor or facilitator.
6. If the transaction is approved, the issuing bank starts the settlement, which is the release of funds from the consumer’s account to your account.
7. The bank tells you if the transaction has been approved or declined.
8. The settlement is completed (this may take several days, depending on the card network involved), and the money for the sale is transferred into your bank account, minus processing fees. Most credit card processors gather individual transactions and deposit them in a batch at the end of each day.

Payment processing rates and fees

Credit card processing fees vary by company and factors such as merchant transaction volume. There are several types of charges.

Monthly flat fees

Monthly flat fees are set amounts that are charged monthly to pay for various services. They usually comprise customer service and statements, but they could also include the following: 

• PCI fee: This includes required security measures to protect cardholder data.
• Batch fee: This is the fee for gathering your transactions in a batch for deposit.
• Merchant account fee: This is the fee for having a merchant account if you use a third-party provider.
• Payment gateway fee: You pay this fee if you use a third-party payment gateway; otherwise, the cost of a payment gateway is usually included in the monthly fee.

Processing fees

The processing fees make up the amount you are charged every time you accept a credit card transaction.

• Flat fee: The payment processor sets a certain percentage of the sale amount that it charges each time.
• Interchange-plus fee: This is the interchange rate set by the card networks plus a markup percentage.
• Transaction fee: This is sometimes added to the flat rate or interchange-plus rate and ranges from 5 to 35 cents per transaction.

Situational fees

These fees are charged only in specific situations:

• PCI noncompliance fee: If you fail to implement certain required security measures, you may incur a monthly fine until the issue is fixed.
• Charge-back fee: When customers want their money back, the entire credit card processing has to happen in reverse, which often results in a fee.
• Nonsufficient funds fee: You may be charged this fee if your bank account does not have enough funds to pay fees you owe to the credit card processor. 

Top restaurant payment processing companies to consider

There are multiple credit card processing services to consider for your restaurant. To make it easy for you, we analyzed them and chose the very best payment processors. Here are a few of the top choices for your restaurant.

Stripe

Stripe is a good option for restaurants that process less than $3,000 each month, new establishments that don’t know their monthly processing volume yet, or seasonal restaurants. It’s easy to get approved as a Stripe merchant, which is helpful for startups. Stripe charges a flat rate of 2.9 percent plus 30 cents per transaction for in-person payments, with no monthly fee. Learn more in our full Stripe review.

Lightspeed

Lightspeed’s point-of-sale (POS) system is robust and easy to use. It includes restaurant-specific functions such as menu and floor management, online ordering, takeout and delivery, and multilocation management. Although you do not have to utilize Lightspeed’s payment processing if you use the company’s POS, it does make the process easier. POS plans start at $69 per month for a single register, and the payment processing rate is 2.6 percent plus 10 cents per transaction, regardless of the pricing tier for your POS. Learn more in our review of Lightspeed.

Clover

Clover is similar to Lightspeed in that it offers a complete POS system that is designed for restaurants and offers optional payment processing. Clover’s POS hardware options, the Clover Flex and Clover Mini, can be used to take table-side orders and payments. The POS software supports online ordering and delivery, order sending to the kitchen, menu creation and kitchen inventory management. POS systems, which include hardware, start at $160 per month for 36 months. Processing rates are 2.3 percent plus 10 cents per transaction for in-person orders and 3.5 percent plus 10 cents per transaction for online or phone orders. Discover more features in our full Clover review.

6 steps for choosing the right restaurant payment processor

Choosing the best credit card processor for your restaurant is not a simple task. There are many options, rates vary greatly and service terms are often difficult to decipher. If you already own a POS system and don’t want to upgrade, you’ll need a processor that can work with your current system.

We recommend researching three to five processors before you make a decision. That way, you can choose the company that provides your restaurant with the best credit card processing service at the lowest price. Although it’s a significant investment of time, it will save you money and frustration. We recommend following these steps:

1. Talk to fellow restaurant owners. 

Ask your peers about their experiences with payment processors, the companies’ rates and whether they negotiated better prices or terms.

2. Read customer reviews.

Start by finding reputable reviews online. When you’re reading customer reviews, though, keep in mind that people are more likely to post comments when they’re upset than when things are going well. 

3. Look beyond your business’s bank.

Your bank may be able to provide reasonable processing rates and be convenient to work with, especially if you have a good relationship and history with it. However, you’ll likely get better rates, terms and service from companies that specialize in credit card processing.

4. Consult your POS service provider. 

If you already benefit from using a restaurant POS system, ask your representative which services are compatible with your system and which ones they recommend. Keep in mind that many POS providers offer credit card processing and your system may work only with that company’s service, in which case you may have to wait until you’re ready to upgrade your equipment to switch processors.

5. Gather information about your restaurant. 

Before calling credit card processors for pricing quotes, you need a clear picture of which services you want from the company. Be prepared to answer questions about your business so the processor’s account representatives can understand your processing requirements and provide you with an accurate quote.

6. Narrow down your list.

Evaluate the payment processors to make sure they meet your needs, fit within your budget and will likely approve your business. Then, narrow your list to three to five payment processors. Call each one, and spend at least 20 minutes discussing rates, fees and service terms. If you feel a company is a good fit for your restaurant, request a written quote and a complete contract (including an application, the terms of service and a program guide). 

Don’t provide your Social Security number or bank account data, and don’t sign the application until you’re ready to commit. Some companies may use this information as consent to set up an account, because the application is actually part of the contract. When you’re on the phone with account representatives, evaluate them for their thoroughness, patience and product knowledge. You may be working with this company for a long time, and these providers are, in a sense, your business partners — so evaluate the relationship seriously at the outset.

What to look for in a payment processor

To find the best payment processor for your business, consider these important factors.

Your payment acceptance methods

Processors have different rates for card-present and card-not-present transactions. If you accept credit cards both in your restaurant and online, you’ll need price quotes for both methods. If you do the bulk of your business one way, choose a payment processor with a low rate for that type of transaction.

Your processing equipment needs 

If you need new or updated equipment, the account representative can give you a quote. Consider how many credit card terminals, card readers or POS systems your restaurant needs. If you already own a POS system, verify that it’s compatible with the processor.

Optimal processing terms

No matter which credit card processing company you choose, you want flexible terms with the freedom to switch services if you find better pricing or service elsewhere. You also want to avoid nonstandard fees. The best credit card processing companies offer the following terms:

• Month-to-month processing agreements: The best credit card processing companies have flexible terms that allow you to cancel your service or change processors without incurring expensive early-termination fees. Long-term contracts are problematic because you may have to pay a large fee to exit your contract if, for example, you’re dissatisfied with the service, your rates increase or you close your restaurant.
• Rate-lock guarantee: Most credit card processing contracts reserve the right to increase your rates at will. A few, however, have a rate-lock guarantee that promises to keep your rates the same for the life of your account. If your processor doesn’t offer this, it’s all the more important to have a month-to-month agreement so you can shop for better rates if needed.
• No setup or application fee: Most companies no longer charge these fees, but some do. It’s worth your time to ask so you aren’t surprised by extra fees when you get your first bill.
• Ability to purchase unlocked processing equipment: Credit card processing companies often offer equipment leases or “free” equipment programs. Although such arrangements may be less costly upfront, they’re much more expensive in the long term. The most cost-effective strategy is to buy your equipment outright, even if that means you use basic equipment until you can afford a more advanced system. These materials should be unlocked so you can use them with any processor, rather than a locked or proprietary terminal that you won’t be able to use if you switch processors.

How payment processors evaluate merchants

When you apply to a payment processor, there is an approval process because the processor takes a risk with every merchant it accepts. Higher-risk merchants may not get approved or may be subject to higher processing rates. Understanding the criteria helps you choose which payment processor to apply to and allows you to prepare the required information.

Monthly sales volume 

Some credit card processing companies consider your monthly sales volume if they provide custom price quotes. Other companies require you to process a certain dollar amount each month to qualify for an account. If you process below this amount, the service may refer you to a different processor. Others may not have a volume requirement but instead charge a monthly minimum if your processing volume is low.

Average sales-ticket size 

If a processor offers multiple pricing models, the average size of your sales tickets helps the rep determine which pricing model is the most cost-effective for your business.

Your credit rating and history

As with most business relationships, you’ll have better options if you demonstrate good credit and a proven sales record. If your credit isn’t great or you’re just starting out, some companies may refer you to other processors or charge higher rates until you improve your credit or establish a processing history.

Common payment processor pitfalls

Selecting the wrong processor can be an expensive mistake. Based on our years of research, here are the areas you should examine carefully.

Long-term contracts

Some processors require you to sign a contract lasting three years or more. Additionally, some contracts renew automatically for additional two-year terms. You have only 30 days to exit your contract without being charged hundreds of dollars or more in early-termination fees and liquidated damages, which is money the processor would have received if you had finished your contract.

Additional services clauses

Some contracts automatically enroll you in a club or sign you up for additional services. You typically have 30 days to opt out, but if you don’t, you may be stuck paying for services you don’t want or need.

“Free equipment placement” programs 

Some processors advertise free equipment if you sign a contract for a one- to three-year term. However, this equipment can include monthly insurance or service fees, and most require you to return the materials at the end of the term. You’ll likely save money in the long run by purchasing hardware upfront.

Equipment leasing 

Leasing processing equipment is rarely a good idea. Most leases have noncancelable four-year contracts. In most cases, you’ll pay more for the equipment over the course of the contract than you would have if you purchased the equipment. Plus, at the end of the term, you must return the equipment or pay to purchase it. In most cases, there’s no way to exit the lease early, even if you close your business and return the tools.

Starter rates

Some credit card processing companies advertise low starter rates but fail to reveal their full rate schedules. These companies use a tiered pricing model, and the starter rate usually applies only to regular debit cards that you accept in person. Other types of cards have higher rates. Ask how many pricing tiers there are, how much they cost, and which types of cards and transaction methods apply to each. Although tiered pricing can be a good option for restaurants that accept a high percentage of regular debit cards, industry experts recommend interchange-plus pricing for most businesses.

Nonstandard fees

Most credit card companies charge several standard fees, including a monthly fee, a monthly gateway fee and an annual PCI compliance fee. However, some companies charge other, uncommon fees, such as application, setup, annual, customer service, IRS reporting, online reporting, semiannual postage and handling, and quarterly technology fees. If you don’t understand a fee in the contract or on your bill, ask your account representative to explain it or request that it be removed.

Choose a payment processor for your restaurant

After you’ve called multiple credit card processing companies, requested price quotes and read full contracts, you should feel confident in choosing the best processor for your restaurant.

Once you submit your completed application, the company can approve it, set up your account and ship any equipment you purchased. If you’ve chosen a company with month-to-month service and purchased unlocked equipment, you can have peace of mind. You’ll know you can take your business elsewhere if the services don’t meet your expectations, your rates increase or you find lower prices.

Lori Fairbanks contributed to this article.