WHAT IS CREDIT CARD PROCESSING?
Credit card processing is the process of transferring money from a cardholder’s account to a merchant’s account when the cardholder pays for a purchase with a credit or debit card. Though the process is simple and takes just a few seconds on the front end, the back end of the process is intricate, with data traveling between the merchant, processor, credit card network, and multiple banks.
HOW DOES CREDIT CARD PROCESSING WORK?
When a customer inserts a credit card into a merchant’s card reader, it initiates a complex series of data transfers that results in money being debited from the cardholder’s account and credited to the merchant’s bank account. The data passes through the terminal via secure connection to the processor, the credit card network, the bank that issued the customer’s credit card, and the merchant’s bank.
WHY SHOULD BUSINESSES USE CREDIT CARD PROCESSING?
Businesses should use credit card processing because it allows them to accept credit card payments, which is the increasingly preferred payment method for consumers. Although it costs you money to accept credit card payments, consumers tend to spend more money with credit and debit cards than with cash, potentially increasing your sales.
HOW CAN I SAVE MONEY ON CREDIT CARD PROCESSING?
If you currently use a certain processor and want better rates, it may be worth asking your account manager if they can help you reduce your costs. Also, by reviewing your statement on a regular basis, you may be able to identify costs or fees that you’re overpaying.
Take these five steps to make sure you’re getting the best pricing on your credit card processing service:
- Review your statement every month. Credit card processing contracts rarely include pricing guarantees, so monitor your statements closely so you know what’s going on with your account. Regularly review your rates and fees to get a sense of what you’ll pay for processing on average each month. Watch for notifications and reminders of rate increases, new fees, and PCI compliance requirements, such as the annual questionnaire you must take to avoid costly noncompliance fees. If you notice a change in your pricing, don’t understand certain fees, or receive notification of a lapse in your compliance status, call your rep to discuss your account.
- Request a pricing review. If you are an established merchant and want lower fees, you may be able to get a pricing review or audit to see if you qualify for lower prices. Requesting an account analysis could be particularly worthwhile if your business has grown since you signed up with the processor and your transaction volume exceeds your initial estimates, as you may be eligible for lower rates.
- Request interchange-plus pricing. If you’re currently on a tiered pricing plan, ask your processor if it can switch your account to interchange-plus pricing. Many processors allow you to switch to a different pricing model so that you see for yourself which model works best for your business. If you do this, be sure to ask if the new plan triggers any different fees or requirements. For example, ask about the new plan’s monthly minimum and how much you need to process to meet that requirement.
- Ask if fees can be waived. Some fees are negotiable, and your rep may be able to waive or lower them for you. For example, if your business is seasonal and having trouble meeting the monthly minimum in the offseason, your rep might waive or reduce it for you. They might also waive the PCI compliance fee after you complete the annual questionnaire.
- Shop around and renegotiate your rates. If you’ve been with your current processor for a year or longer, consider shopping around to see if its rates are still competitive. As with car insurance, it’s beneficial to take the time to look for better deals every year or two. This is particularly important if your rates have increased over time, or if you have been with your processor for several years and don’t know what pricing is available elsewhere.
If you do find better pricing from another processor, don’t be afraid to contact your current processor to see if you can renegotiate your rates. You have more negotiating power if your service is provided on a month-to-month basis and you own your equipment, since you can switch to a new service without penalty. If you’re under contract, the rep may be less willing to renegotiate, but it’s still worth a try.
If you’re overpaying for your processing and the rep won’t renegotiate your rates, read your contract to find out the procedure you need to follow to switch processors when your contract finally expires. Be aware that most contracts renew automatically, that you have a very short window in which you may cancel without penalty, and that you may need to begin the cancellation process well in advance of the contract’s expiration date.
CARD READERS, TERMINALS AND POS SYSTEMS: WHAT SHOULD I USE TO ACCEPT CREDIT CARDS?
You have several options for the processing hardware you use to accept credit cards at your business. Which one is the best credit card reader for your business depends on how and where you plan to accept cards, and whether you want something basic and inexpensive or a solution built into a larger system.
You should be able to accept magstripe cards, chip cards, contactless cards and mobile wallets. No matter which style of card reader you choose, it should be EMV compliant, letting you accept chip cards and avoid liability for fraud occurring at the point of sale. This also allows you to skip signature authorization, speeding up checkout.
If you’re purchasing new equipment, you also want it to include near-field communication (NFC) technology so you can accept mobile wallets like Apple Pay and Google Pay as well as contactless cards, saving you the expense of updating your equipment later as these payment methods grow in popularity.
Consider choosing a device with a built-in keypad or a connected PIN pad if your customers prefer paying with debit cards, as many full-service processors offer special low rates for debit PIN transactions.
Before buying processing equipment from a third-party vendor, check with your credit card processing company to make sure it will be compatible. Here are three types of equipment, along with some of the top brands for each:
- Mobile credit card readers are the most affordable option, typically ranging from free to $100. These card readers connect to your phone or tablet through the headphone jack or Bluetooth and work using a credit card payment app that you’ve installed on your device. Many processors offer free magstripe card readers to their new customers, no strings attached. However, in most cases, you’ll want to upgrade to one that accepts chip cards or splurge on a model that supports all three acceptance methods – magstripe, EMV chip and NFC contactless payments. Mobile card readers are available from both full-service and mobile credit card processing companies. See our mobile credit card processing reviews to learn more.
- Stand-alone and wireless terminals are the next-cheapest options, usually costing $150 to $600. These countertop credit card readers have built-in receipt printers and keypads. Most connect through either dial-up or Ethernet, and wireless models connect with 3G, GPRS, or Wi-Fi via Bluetooth. All new terminals are EMV compliant and allow you to accept both magstripe and chip cards. Many also accept NFC payments. Top terminal brands include Dejavoo, Ingenico, PAX and Verifone.
- Point-of-sale systems are usually the most expensive option, though there’s a wide range of prices, depending on the type you choose. If you plan to use a specific POS system, ask the company which processors the system is compatible with, as some only integrate with a few. Others are proprietary and require you to use that POS company as your payment processor. Tablet-based systems are the cheapest and work with mobile card readers. POS systems with built-in card readers cost $1,000 to $1,500. Top brands include Clover, Square and NCR Silver. See our POS systems review to learn more.
HOW DO SMALL BUSINESSES SET UP CREDIT CARD PROCESSING?
The easiest way for a small business to set up credit card processing is to start an account with a mobile credit card processor that offers an app and a mobile credit card reader. Then, all you have to do to start accepting credit cards is download the app to your phone or tablet and connect the card reader.
WHICH KIND OF CREDIT CARD PROCESSING IS CHEAPEST FOR SMALL BUSINESSES?
If your small business processes less than $5,000 per month, you’ll save money with a processor that has a flat-rate pricing structure and doesn’t charge any account fees (no monthly fee, annual fee or PCI compliance fee). The rates are higher but preferable to other pricing models, as you aren’t processing enough to offset account fees.
If you process more than $5,000 per month, the cheapest credit card processing service will be one that has an interchange-plus pricing structure with a low margin. Fees can be problematic for this type of service as well, so pay attention to the fees different processors charge. For instance, some might have a very low monthly fee but charge a handful of extra fees that add up to high overall costs. Look for a service that is transparent about both its rates and fees, as these companies tend to have the lowest credit card processing fees.
SHOULD I BUY, LEASE, OR ACCEPT FREE PROCESSING EQUIPMENT?
Nearly every credit card processing company has some sort of free equipment offer. Some processors give you a terminal if you sign a contract, while others have a free placement program in which you borrow the equipment.
Accepting free equipment sounds like a great way to save money, but as a perceptive businessperson, you know that “free” often isn’t really free, and you need to do the math to determine whether the free offer is actually the best option for your small business.
Purchasing Credit Card Processing Equipment
Buying processing hardware outright is nearly always your best bet. Although it may be a big upfront cost, it’s less expensive and less restrictive over time than other equipment options. You can keep your purchasing costs low by shopping around for the best price, choosing a basic terminal instead of a fancy POS system, and asking if used equipment is available for purchase.
As you shop around for equipment, find out if the equipment is proprietary or “locked.” This is an important consideration, because you don’t want your purchased equipment to be unusable if you switch processors. If you already own unlocked equipment or decide to shop for new or used equipment online, ask your new processor how much it charges to reprogram the equipment, including shipping and handling costs, and how long the process takes. Many processors offer this as a free service.
Free Credit Card Terminals
Although “free” sounds fantastic, even the best processors may require you to sign a contract in return for free equipment. The best contract terms for free equipment are one year and then go forward on a month-to-month basis. Most free equipment contracts last for three years, and many automatically renew for two-year terms. Some companies require you to sign up for a different pricing plan if you accept free equipment.
Also, some processors may charge you the full price of the terminal in addition to an early termination fee if you end your relationship with the company before your contract expires. Before accepting free equipment, consider whether being tied to a contract or paying higher processing costs is worth cutting out the purchase price of the equipment.
Free Placement Programs
These may sound like a good deal, and many processors offer this option, but as with free equipment offers, you might be required to sign a long-term contract. When your contract expires or you switch processors, you have to return the equipment.
Many free placement programs charge monthly fees, and some have additional monthly minimums that you must meet to avoid penalty fees. Be sure to request the contract and a list of all the fees associated with the program – such as insurance or maintenance fees – to read over before you agree to such an arrangement.
Many processors encourage you to accept a lease on equipment because it’s a very lucrative arrangement for them. Some reps give persuasive reasons for leasing equipment, such as “it’s like a cell phone plan” or “many customers choose to lease for tax reasons.” However, carefully consider every other option before you lease equipment, as this is generally one of the worst decisions a small business can make when setting up credit card processing.
Consider these leasing myths and truths.
Leasing myth No. 1: It’s like getting a cell phone, because if the equipment breaks, the processor will replace it.
Truth: While this is technically true, most equipment comes with a manufacturer’s warranty, and you might be able to purchase an extended warranty or insurance. If your purchased equipment breaks while under warranty or insured, the manufacturer replaces the equipment anyway, according to the terms of the warranty or insurance.
Leasing myth No. 2: It’s easier to update to the newest model if you lease your equipment.
Truth: This myth assumes that if you purchase equipment, you probably keep it longer than the four-year term of your lease. The processor expects that when your lease expires, instead of purchasing your existing equipment, you’ll take out a new lease on new equipment. However, the money you save by purchasing the equipment outright puts you in a better position to buy new equipment when it becomes available.
Leasing myth No. 3: Leasing is better for tax write-offs, since you’ll have an expense that you can write off yearly instead of just a one-time purchase.
Truth: The long-term expense of leasing is still higher than the cost of purchasing equipment outright, even if you factor in the tax write-offs you expect to receive. If you’re considering leasing for these tax reasons, do the math to verify that the costs and savings are what they’re purported to be.
Remember, leasing is short-term cheap and long-term expensive. You’ll often find that you could have purchased the equipment several times over with what you paid over the life of the lease. Additionally, most equipment leasing contracts are noncancelable, which means that you can’t return the equipment – and you pay a fee to get out of it. Even if your business fails, you return the equipment, and you get out of your processing contract, you’ll still be held personally responsible for the remaining time on your equipment lease.
HOW CAN I PROTECT MY BUSINESS FROM CREDIT CARD FRAUD?
Data and overall payment security is a huge issue in the credit card processing industry. Although the large breaches that you read about in the news, such as those sustained by Home Depot and Target, may lead you to believe that your business is too small for criminals to be interested in, that isn’t the case. In fact, small businesses are often the preferred targets of security attacks.
According to the PCI Security Standards Council, 71% of cybersecurity attacks are aimed at small businesses. Even more grim is the criminals’ success with their small business targets: The Trustwave Global Security Report found that 90% of data breaches affect small businesses. Criminals target small businesses because many of them don’t prioritize data security, so the data often isn’t as secure as it is with large companies that have the resources and personnel to put stronger security protocols in place.
You can take two important steps to increase your security, protect your data and reduce fraud. First, comply with PCI DSS. Second, if you haven’t done so already, upgrade to EMV-compliant processing equipment. Visa reports that EMV-compliant merchants have seen counterfeit fraud drop by 76% since the liability shift of 2015.
IS CREDIT CARD PROCESSING SECURE?
As we’ve all seen over the years with major credit card breaches at some of the largest retail chains in the country, there’s no such thing as a completely secure credit card transaction. However, there are measures you can take to secure these transactions against potential intrusions.
The first step you should take is to make sure your credit card processing service is PCI compliant – and that your business complies with these guidelines too, since this dramatically reduces your vulnerability.
Second, make sure your credit card processing equipment can read EMV (Europay, Mastercard and Visa) chips. When comparing the number of card-present counterfeit payment fraud incidents in December 2018 to those in September 2015, Visa estimated that merchants who upgraded to EMV readers saw a 76% decrease in incidents.
If you ensure compliance with these two tech standards, your credit card transactions will be significantly more secure.
HOW CAN YOU AVOID CREDIT CARD PROCESSING FEES?
Credit card processing fees are how credit card companies make their money. With that in mind, there’s no real way to avoid those fees. What you can do, however, is negotiate those rates before signing up with a processor. By taking certain steps during the application process and beyond, you can potentially cut your fees down to a more manageable level.
Your customers can also help you offset these fees in a couple of ways. One of the more common ways is for merchants to set transaction thresholds for credit card purchases. By disallowing credit cards for any purchase below $5 or $10, for example, you come out ahead of the fees. Check the guidelines on minimum transaction amounts from each of the major credit card networks to comply with their rules.
Some retailers tack on the fees to the transaction itself. This surcharging tactic is common at gas stations, where cash customers pay a lower price for each gallon of gas, but it could also work in a retail setting. This method could backfire, but people who pay with cash will likely see it as a discount.
HOW LONG CAN A MERCHANT HOLD AN AUTHORIZATION?
Authorization holds are based on the banking practice of holding electronic transactions in limbo until the merchant marks the payment as settled. If it hasn’t been settled within the time determined by the cardholder’s bank, it “falls off” the account.
An authorization hold can last as long as 30 days, but American Express cards have a limit of seven days and Discover cards have a 10-day limit. Merchants who don’t complete a transaction hold within the allotted time could be charged a misuse fee by the credit card processor.
HOW LONG DOES IT TAKE TO SETTLE CREDIT CARD SALES?
The time it takes to settle a credit card sale varies by credit card processor. Merchant accounts are used to complete the credit card payment process efficiently; the type of merchant account will determine if it takes only 24 hours or as long as three days.
HOW DOES ONLINE CREDIT CARD PROCESSING WORK?
You know how consumers swipe their credit cards at checkout in a store? They do the same online – digitally. When a consumer makes a purchase online, they input their credit card information (number, expiration date, CVV). The payment is then processed just like an in-person transaction.
WHY SHOULD SMALL BUSINESSES AVOID TIERED PRICING WHEN SELECTING A CREDIT CARD PROCESSOR?
Some credit card processors charge on a tiered pricing basis. This means they bundle the interchange rate, assessment fees and markups into different plans. This isn’t that transparent, because they don’t break down what each cost is, making it more difficult to shop around for the best deal.
WHAT ARE THE STEPS INVOLVED IN CREDIT CARD PROCESSING?
Whether you sell baseball hats or cars, when you accept a credit card as payment, it goes through the same process:
- The consumer uses a credit card to make a purchase.
- The transaction is entered into the terminal.
- Data is transmitted for approval.
- The transaction goes through authorization to ensure there are enough funds to cover the purchase.
- The transaction is authorized and completed.
- The merchant closes out the transactions for the day in what’s known as a batch closure. The credit card processor’s acquiring bank collects the money from the credit card companies.
- The processor’s acquiring bank deposits the cash into the merchant’s bank account.
WHAT IS A HIGH-RISK MERCHANT ACCOUNT?
A high-risk merchant account is used for businesses with a higher risk of chargebacks or fraud. Many credit card processors won’t work with high-risk businesses, but some will. The ones that do, however, typically charge more because of the risk. In addition to higher processing fees, high-risk merchants pay more in chargeback fees. They also have to undergo a more arduous application process.
WHAT INDUSTRIES DO PAYMENT PROCESSORS CONSIDER HIGH-RISK?
Payment processors consider a variety of industries high-risk, but these are some of the most common:
- Pawn shops
- Payday lenders
- Ticket sellers