An essential part of being a business owner is getting paid for your products and services. If your business doesn’t currently accept credit cards, offering them as a payment option can make a difference for your bottom line. For many small businesses, though, the process of accepting credit cards can seem overwhelming and confusing. This guide will explain how credit cards can benefit your business, how the process works, what features to look for, and how to start taking credit cards.
Credit card processing allows you to accept credit card payments and includes everything that goes on behind the scenes from the time that a customer hands you a card as payment until you receive the money in your account. This process takes place whether the purchase is made in person, online, over the phone, or by mail. To accept credit cards, your business needs to be set up with one or more providers whom you will pay on a per-transaction basis and sometimes a monthly fee. You will also need software and, for in-person sales, card processing hardware.
Editor’s note: Looking for the right credit card processor for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
To understand how credit card processing works, you need to understand the various players involved.
There are more entities involved in credit card processing than you might think. Here is a list of them:
If your business is strictly e-commerce, you may be able to keep costs down by using just a merchant account and a payment gateway.
These are the steps that take place in a credit card transaction:
Merchants, credit card facilitators and credit card processors are responsible for adhering to certain security protocols called the Payment Card Industry Data Security Standard, or PCI DSS for short. These requirements ensure that cardholder data is protected from internal misuse and data breaches. It includes computer safeguards such as firewalls and encryption, as well as personnel policies like assigning a unique ID to each person with computer access and restricting access to cardholder data to only those who need it for business processes.
PCI compliance is necessary; a noncompliant company could face hefty fees. If you have a traditional merchant account with a bank or independent company, you will usually be responsible for your own PCI compliance. Credit card processors provide PCI compliance either by charging for it separately or bundling it into their monthly fee. They offer this compliance at no extra charge, but have somewhat higher transaction fees to cover this cost, among other things.
Card-present transactions are the most secure, since the card reader hardware provides a lot of the verification, especially with chip readers and debit transactions that allow the customer to use a PIN. That is why transaction fees on this kind of sale tend to be the lowest. When a credit card is not physically present, there is a higher incidence of fraud, resulting in higher fees.
Credit card facilitators like PayPal, Square and Stripe are all PCI compliant.
Since so many different organizations are involved in credit card processing, there are various credit card processing rates and fees. Rates are transaction-based and include a percentage of the overall purchase amount and sometimes a flat per-transaction amount. Fees are charged either on a monthly basis or only when certain events occur, such as a chargeback.
Some rates and fees are paid to the card network, some to the credit card processor or facilitator, some to the issuing bank, and, if you have a payment gateway, to the gateway provider.
This is usually a percentage of the sale amount, and sometimes a per-transaction fee.
A credit card processing rate breaks down into three components:
Some credit card processors charge a monthly fee in addition to the processing rates. This may be a bundled fee that includes a variety of services, or it may be a separate charge for each service used. Here are some of the common fees:
|Monthly fee||This covers preparing your monthly statement and providing customer service, but it may include some of the following services as well.|
|PCI compliance fee||This provides the required security measures to protect cardholder data.|
|Batch fee||This is charged whenever you receive a batch of transaction money.|
|Merchant account fee||This is a monthly charge for your merchant account if you use a third-party provider.|
|Payment gateway fee||This is a monthly charge if you use a third-party payment gateway; otherwise, it is usually included in the monthly fee.|
In addition to these regular fees, credit card processors may charge incidental fees when certain events take place.
You may wonder if it is worthwhile to accept credit cards. After all, there is a lot of setup involved, and it costs you money when a customer pays with a card rather than cash. But more and more people do not carry cash with them, and this trend is accelerating among Millennials and Gen Z consumers. In addition to using credit cards, younger consumers often use cashless payment apps like Venmo to make purchases. Most credit card processors allow merchants to accept this type of payment through their credit card processing system along with traditional credit cards.
Credit card use is widespread; 70% of Americans have at least one credit card. If your customer has a card and wants to use it to buy something from you, being able to accept that card enables you to make that sale. Since paying with a credit card is convenient for consumers, they often use them for impulse purchases, and they also buy more when paying by card, boosting your overall sales revenue. For online sales, accepting credit cards is even more critical, since 9 in 10 e-commerce sales are made via credit card.
Being able to accept credit cards can make smaller businesses appear more legitimate and established, building trust among your potential customers. It can also level the playing field in regard to your competitors if they already accept cards.
At a minimum, you need specialized software to process credit card transactions. The credit card processor will provide you with this software. If you accept credit cards in person, you will also need credit card processing hardware, which the credit card processor usually sells. The type of software and hardware you need depends on how you do business.
The most basic software is the kind provided with a payment gateway for strictly online transactions. It is web based and has a dashboard to display all of your transactions. You will be able to search for specific transactions and use the data to create sales reports. You can also go into individual transactions to carry out refunds or take other actions.
More sophisticated credit card processing software, like that provided by major credit card processors, includes more reporting capability, the ability to account for promotions and discounts, adding subscription or membership recurring purchases, and appointment scheduling. This software is typically compatible with mobile phones, tablets, computers and POS hardware.
The software with the most functionality is POS software, which is often used with POS hardware. In addition to the above features, it also lists each product or service with details, keeps track of product inventory, accounts for multiple locations, and has a more intuitive interface to make in-person checkout faster and more efficient. Some credit card processors also provide industry-specific POS, such as one for restaurants that allows them to coordinate between servers and the kitchen, provide seating plans, and fulfill other restaurant-related needs.
For strictly e-commerce transactions, no credit card processing hardware is necessary. Your e-commerce website will connect to the payment gateway through its code. You can forgo credit card hardware if you accept card payments primarily by phone, by mail, and only occasionally in person by manually entering the customer’s card information into your gateway.
However, if you have a significant number of in-person transactions, you will benefit from hardware. First of all, card-present (swiped, inserted or tapped) transactions incur lower processing rates. In addition, manually entering cardholder data makes checkout slow, inconvenient, inefficient and prone to errors. There are a few kinds of hardware available:
Both credit card processors and credit card facilitators can process credit card transactions. Credit card processors and facilitators offer many of the same services, but there are some key differences.
Payment processors handle the flow of transaction information from consumer to merchant through the card networks to the issuing bank, and eventually back to the merchant’s bank. They set up a merchant account for each merchant, provide software, provide PCI compliance (included or for an extra fee), and sell credit card hardware to merchants. Merchants apply for an account with them, and may be approved or denied based on criteria like their business size, monthly transaction volume, processing history, or type of business. Payment processors may have cheaper rates, especially if a merchant only decides to accept lower rate card brands. For example, a merchant may decide to keep costs down by not accepting American Express, which has higher rates than Visa, Discover or Mastercard. Stax and Merchant One are examples of credit card processors.
Credit card facilitators have one master merchant account. Each merchant is treated as a submerchant under that umbrella. The facilitator contracts with a credit card processor, who processes the transactions for all of the submerchants. Credit card facilitators charge one flat rate for all credit card transactions, regardless of the credit card brand. So, a transaction paid for with a Visa is charged the same rate as one paid for with an American Express. Debit cards are charged a slightly lower rate. Credit card facilitators often provide a variety of services at once, making them a one-stop shop. They also approve nearly every type of business, regardless of size, history, or volume, so they are a great choice for startups and other very small or new businesses. PayPal and Stripe are credit card facilitators.
The best credit card processor for your business depends on several variables. Overall, look for competitive rates and fees; knowledgeable and available customer service; fast, secure, and reliable hardware; and easy-to-use software that meets your business needs. Aside from these factors, consider the following when choosing a credit card processor:
|Name||Best for||Key points||Review|
|Clover||Point of sale (POS)||A one-stop shop for small businesses, offering excellent POS software and hardware with competitive card processing rates||Clover review|
|Merchant One||Easy approval||Willing to approve small businesses that have been turned down elsewhere; offers a comprehensive selection of services and equipment||Merchant One review|
|Stax by Fattmerchant||Low rates||Uses interchange-plus pricing with a per-transaction fee in addition to the interchange fee||Fattmerchant review|
|ProMerchant||Businesses in high-risk industries||Willing to work with high-risk businesses such as legal sportsbook or CBD product stores; no long-term contracts||ProMerchant review|
|Payment Depot||High transaction volume||Membership pricing with wholesale rates; includes a merchant account and dedicated account rep||Payment Depot review|