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Updated Apr 11, 2024

Small Business Credit Card Processing: What You Need to Know

Most businesses today must accept credit cards and digital payments. Learn how payment processing works to ensure you choose the right processor.

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Elizabeth Crumbly, Staff Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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Most businesses today must accept credit cards and digital payments to accommodate their customers, boost sales and increase convenience for everyone. Cash-only businesses are few and far between; this model works for only the smallest operations. 

However, accepting credit cards means working with a credit card processing company. With myriad options to choose from and various pricing models, finding a credit card processing service can be daunting and confusing. We’ll explain credit card processing to help small business owners better understand it, choose a processor that matches their needs and budget, and ensure seamless sales. 

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.

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. 
Did You Know?Did you know
Most top credit card processors support contactless NFC mobile payments and digital payments, including mobile wallets and Venmo. Digital payment options are particularly ideal for e-commerce businesses.

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
TipTip
When researching card payment processing options, ask for a sample bill to give you an idea of how much you'll spend monthly on credit card processing fees and other costs.

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. 

Small business credit card processing FAQs

Mobile credit card transactions are typically in-person transactions. You just use mobile processing hardware and equipment instead of a fixed POS terminal. Your payment processor should allow you to accept mobile payments while also supporting major credit and debit cards, prepaid and gift cards, and digital wallets like Apple Pay, Samsung Pay, and Google Pay. Are cheap credit card processors cost-effective? It's tempting to try to find the cheapest credit card processor possible. However, cheap isn't always the best option for your business. Still, the right processor for your business doesn't have to be expensive. Here are some tips:
  • Small-volume businesses: If your small business processes less than $2,500 monthly, a payment facilitator can be a cost-effective option. PayPal, Square and Stripe are examples of payment facilitators. While they charge a higher percentage, you'll save money in the long run because there aren't any other fees associated with using a payment facilitator, including setup fees and annual PCI compliance fees.
  • Higher-volume businesses: If your small business processes a higher sales volume, you'll want to work with an independent sales organization (ISO) and a merchant service provider (MSP) as processing companies. These companies can set up a merchant account for your business. While they charge additional fees that payment facilitators don't, you will save money because of their lower transaction processing rates at a higher volume.
Tip: Any business that prioritizes lower credit card processing fees should seek out a processor without monthly minimum fees.
The time it takes to get approved by a credit card processor can vary. Different processors have different approval processes. Additionally, your business's size can be a factor. Larger businesses are more likely to need a merchant account, so approval will take longer. Your hardware needs can also affect timing as you wait for equipment delivery.
Funding time frames vary by processor and merchant account type. Payments can be processed as quickly as 24 hours but can take as long as three days. Payments are considered complete when funds have been transferred.
Payment Card Industry compliance ensures credit card transaction security. To guard credit card data transmitted through transaction processes, businesses follow a set of operational and technical standards. Companies follow PCI DSS (Payment Card Industry Data Security Standards) to be considered PCI compliant.

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. 

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Elizabeth Crumbly, Staff Writer
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