Small Business Credit Card Processing: What You Need to Know

What is credit card processing, and how does it work?

Credit card processing is a series of steps that occur after a buyer initiates a credit card transaction with a seller. Here’s how it works: 

1. Purchase: The buyer presents a credit card as payment for goods or services.
2. Payment initiation: The buyer initiates payment. For in-person transactions, they’ll use the business’s point of sale (POS) system or credit card machine to swipe, insert or tap their card. For online transactions, they may enter card information manually or select a saved payment method.
3. Transaction data communication: The POS system sends the transaction data to the business’s credit card processor.
4. Authorization process: The credit card processor communicates with the card network (e.g., Visa, Mastercard, etc.), which in turn communicates with the issuing bank to authorize the purchase.
5. Transaction approval: The issuing bank verifies the customer’s identity and ensures sufficient credit or funds are available. It will approve or deny payment authorization and share this information with the card network. The card network will then inform the credit card processor of the decision.
6. Transaction finalized: The business’s POS system receives the transaction approval or denial. If approved, the transaction proceeds, and the business completes the sale.
7. Merchant settlement: When sales are completed for the day, the business sends all approved transactions to the credit card processor so it can settle the payments. The processor sends this information to the various card networks.
8. Transfer of merchant funds: The card networks and issuing banks transfer the appropriate funds to the business’s merchant account. (They’ll remove their fees.)
9. Cardholders charged: The issuing banks will add the transaction details to the cardholders’ accounts. 

How much does it cost to work with a credit card processing company?

Your charges will depend on several factors, including the transaction amount, how the payment was processed, and, ultimately, the credit card processor’s pricing model. Fees and rates vary by processor, and you can often negotiate lower credit card processing fees.

Here’s a general overview of the fees and costs you might expect:

• Setup fees: Some processors charge a one-time setup fee.
• Interchange fees: Interchange fees typically range from 2% to 3% of each transaction. In-person transactions usually incur lower interchange fees than card-not-present transactions (e.g., online and phone purchases).
• Payment processing fees: Your processor may charge a per-transaction fee or a monthly service fee. Some processing companies charge a flat rate plus a percentage of the sale, while others charge only a percentage of the sale.
• Monthly minimum fees: If you don’t meet the minimum monthly requirement as specified in your credit card processing service agreement (usually between $10 and $25), you may need to cover the difference.
• Monthly statement fees: Many processors charge a fee to send you a monthly paper statement; check whether the processor has an electronic alternative you can opt into.
• Early termination fees: Canceling your contract early could incur an expensive early termination fee — sometimes thousands of dollars. To avoid this fee, look for processors that offer flexible month-to-month service options instead of long-term contracts.
• Hardware costs: Depending on your setup, you may need credit card processing equipment, including card readers and POS terminals. You may have the option to rent or purchase this equipment. Costs vary widely; some processors even provide free equipment.
• Chargebacks: If a customer disputes a credit card transaction or returns a purchase, your processor may issue a chargeback fee

List of credit card processing providers

The best credit card processors will accommodate the payment methods you want to accept and charge reasonable rates. Here are a few examples that may suit various business types: 

• Clover: Clover is an excellent processor for businesses just getting started accepting credit card payments. It provides transparent pricing, flexible terms and easy integrations. This ensures your credit card processing system seamlessly connects to your other business software. Our Clover review details its mobile payment functionality and loyalty program features.
• Merchant One: Merchant One is easy to work and set up. Plus, it offers fast approval. Merchant One provides portable processing for businesses that want to accept credit card payments on mobile devices. Read our Merchant One review for information on its virtual terminal and other features. 
• Stax: Stax provides features like dedicated account managers for organizations doing high-volume business. Its flat-rate pricing and tiered plans make it ideal for growing businesses that may need to scale up soon. Our Stax review examines its additional features, like report generation and invoicing. 

What are the pros and cons of accepting credit card payments?

While accepting credit cards is likely a great move for most businesses, some drawbacks are involved. 

The upsides of accepting credit cards include the following: 

• Accepting credit cards brings more customers. Cash is no longer king. According to McKinsey, cash usage fell 20 percentage points globally over the past five years. It’s safe to assume most of your customers will want to pay with cards or digital options. If you don’t accept credit and debit card payments, you risk losing out on significant sales.
• Accepting credit cards increases revenue. Since credit cards don’t require immediate payment by consumers, accepting credit card payments can encourage customers to spend more.
• Accepting credit cards streamlines finances. Accepting credit card payments can automate your business financial management through your POS system far more easily than cash.

However, accepting credit cards may bring the following downsides:

• Accepting credit cards means risking fraud. PCI compliance rules have made credit card acceptance more secure than ever. Still, the threat of payment fraud exists. Credit card fraud can be costly for businesses. They might not receive money for goods sold, and credit card companies may hold them, not the scammer, liable.
• Accepting credit cards incurs costs. Credit card processing fees and miscellaneous charges can add up. Finding a processor with an ideal pricing model for your business is crucial. 

Credit card processing requires the right processing partner

Credit card processing is a requirement for accepting card and digital payments. While it takes time to thoroughly understand the process and research potential processors, it’s a worthwhile investment. Your credit card processor is a valuable business partner that facilitates seamless payments and boosts customer satisfaction. Choosing one that suits your needs and budget can help set you up for success and improve customer relationships.

Julianna Lopez and Max Freedman contributed to this article.