What are Merchant Accounts and How Do They Work?

Accepting payments is the most important functionality that a business needs to start selling. But to accept payments seamlessly and securely, you need a merchant account.

A merchant account acts as a pathway between your business, your customers, and the issuer and acquiring banks to process electronic transactions like credit cards. Without a merchant account, it’s very difficult to ensure consistent cash flow or manage multiple sales channels effectively. Moreover, many merchant accounts today come bundled with a payment gateway, another crucial component of the online payment process that streamlines transactions and protects against fraudulent activity.

In this blog, we’re going to explain how merchant accounts work in both eCommerce and offline settings and what businesses need to consider when selecting a merchant services provider.

TL;DR

  • A merchant account is a type of business bank account that facilitates electronic payments, including credit cards, and acts as a temporary holding place for funds incurred from customer transactions.
  • Different types of merchant accounts exist that cater to different business needs, such as retail merchant accounts for in-person transactions, online merchant accounts for eCommerce and high-risk merchant accounts.
  • Setting up a merchant account involves choosing the right merchant account provider for your needs, identifying your type of business, submitting an application, and undergoing an underwriting process to assess risk.
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What Is a Merchant Account?

A merchant account refers to a business bank account that allows businesses to accept electronic payments for goods and services. This includes credit card payments, debit cards, and other payment options that require a merchant account to process payments, such as eChecks and ACH. A business will typically set up a merchant account in collaboration with a merchant services provider or merchant account provider.

Merchant accounts form an essential piece of payment infrastructure for businesses that want to process online transactions. In addition to streamlining the payment process, a merchant account makes it easy for businesses to accept a variety of payment methods and maintain cash flow.

How Merchant Accounts Differ from Regular Bank Accounts

Unlike a regular bank account, a merchant account is not a place for businesses to store funds for an indefinite period. Instead, it acts as an intermediary holding place to secure and verify funds when a customer makes a purchase. When a transaction takes place, the payment arrives first in the merchant account before being transferred to the business owner’s business checking account. It usually takes one to two business days before these funds are available to the business, though some payment processors may offer same-day deposits.

How Merchant Accounts Work

The process of transaction handling

When a customer makes a payment, their payment information is securely transmitted from the checkout to the payment processor for verification. In the case of a credit card or debit card transaction, the processor will check with the card network that there are sufficient funds to complete the purchase and that the details provided match what the card processor has on file.

Once funds are verified, the card issuing bank will issue an approval code for the acquiring bank to transfer funds to the business’s merchant account. The merchant account provider will deduct any necessary fees, including markups, processing fees, and interchange fees before the money moves to the business’s checking account and becomes accessible.

Because the merchant account acts as a temporary holding pen for funds incurred from a transaction, payment gateways and processors are key pieces of infrastructure that make it possible to move money between the issuing bank and the business’s bank account. The payment gateway provides a pathway between an eCommerce website or app and the payment processor, ensuring that accurate transaction and payment information are provided. Meanwhile, the payment processor facilitates the final transfer of funds.

Understanding Fees and Charges Associated with Merchant Accounts

Assessing the pricing structure used by merchant account providers is important to understand the cost of accepting electronic transactions. Different providers will charge different fees for their services, such as per-transaction fees or monthly and annual fees based on sales volume. The type of business you operate may dictate what pricing model is best for your business’s needs.

Common merchant account fees include:

Processing fees. Credit card processing fees represent the biggest cost of using a merchant account, as the processor will pass on merchant fees charged by the card network. Processing fees are typically a mix of percentage fees and flat-rate fees, depending on whether it involves a virtual terminal or in-person.

Setup fees. Some merchant account providers will charge a one-off setup fee to cover the cost of getting your account off the ground. This is especially common for high-risk accounts, as more vetting and due diligence are typically required.

Early termination fees. If you signed up for a fixed-term contract with a service provider, they may charge an additional fee to break this contract ahead of time.

Chargeback fees. If a customer initiates a chargeback, the merchant account provider may charge an extra fee to reverse the transaction to the issuing bank.

Types of Merchant Accounts

Type Description Ideal for Services Notes
Retail Merchant Accounts Process payments in-person at brick-and-mortar stores Retail stores, supermarkets, restaurants, beauty salons POS integration, high-volume processing Fast processing, secure transactions.
Online Merchant Accounts Process payments for online businesses eCommerce websites, marketplaces, mobile apps Secure payments, fraud prevention, payment gateway integration PCI DSS compliance, multi-currency, recurring billing.
High-Risk Merchant Accounts Process payments for high-risk industries Online gambling, pharmaceuticals, insurance, subscription businesses Specialized approval process, secure transactions Higher fees, additional due diligence.
Mobile Merchant Accounts Process payments on the go Businesses at trade shows, markets, pop-up stores Mobile card readers, contactless devices Flexible, convenient for mobile businesses.

Many variations of the traditional merchant account now exist to cater to a specific type of business or industry:

Retail merchant accounts

A retail merchant account caters to small business owners that operate brick-and-mortar storefronts and require in-person payment processing capabilities. This type of merchant account can manage debit and credit transactions at a POS (point of sale) as well as card-not-present transactions.

Because physical store locations may be required to process high sales volumes, retail accounts are capable of quick credit card processing. They integrate seamlessly with a variety of POS software and hardware components including card readers, cash registers, and barcode scanners. Common retail merchant account holders include retail stores, supermarkets, restaurants, and beauty salons.

Online merchant accounts

Online merchant accounts are specifically designed for eCommerce businesses that sell goods and services digitally. This includes purchases that are made via standalone eCommerce websites, online marketplaces, or mobile shopping apps.

The focus of online merchant accounts is ensuring that payments are processed securely and fraudulent behavior is identified. They will include or integrate with a payment gateway to securely submit credit card transactions from the merchant’s website to the payment processor, and then onto the merchant account itself. This should comply with Payment Card Industry Data Security Standard (PCI DSS) requirements to ensure that customer data is kept as safe as possible. Additional services offered by online merchant accounts may include multi-currency payments, virtual terminal services, and recurring billing.

High-risk merchant accounts

Because of the nature of the goods and services they sell, some merchants may be classified as ‘high-risk’ for payment processing. Industries commonly considered high-risk include online gambling, pharmaceuticals, insurance, and subscription businesses.

Because many merchant account services will not work with high-risk merchants, it may be necessary to work with a specialized account provider who can run a more thorough approval process.

Just like a regular merchant account, high-risk account providers offer credit card processing, integrations with payment gateways, and accept a range of payment methods. However, they typically charge a higher monthly minimum fee and/or per transaction fee to cover the additional due diligence or security measures.

Mobile merchant accounts

Mobile merchant accounts offer businesses the flexibility to accept payments on the go, as well as via traditional brick-and-mortar locations. This is valuable for business owners who regularly attend trade shows and markets, or host pop-up stores away from their regular storefront.

These accounts enable businesses to process card and debit card payments via mobile card readers or contactless devices. Some will include their own payment processing apps or integrate with others, facilitating a seamless payment process for customers.

Top Merchant Account Providers

Stax

Stax offers an industry-leading payment solution for eCommerce and in-person businesses. As well as integrating with a range of payment gateways and shopping cart plugins, the Stax Pay system brings all payment types into a single dashboard for seamless payment management. It’s a good fit for subscription businesses that require a full-service toolkit for billing and analytics. However, the higher monthly fee means that Stax is better suited for larger businesses with high processing volumes.

Features

  • eCommerce, in-person, and mobile payments all in one
  • U.S.-based customer support
  • Customizable batch times
  • Recurring billing
  • CRM management

Fees

Plans start at $99 per month

0% markup on interchange processing rates

FIS Global

Fintech company FIS Global offers a range of banking and merchant services to businesses, including payment processing for eCommerce merchants. After acquiring the Worldpay system in 2019, FIS became the largest payment processing company in the world. FIS Global also offers both a virtual terminal system and Commerce 360 platform for integrated payment processing and inventory management. Worldpay’s quote-based pricing means it’s highly customizable based on business needs, but is lacking in transparency and locks businesses into long contracts.

Features

  • Accepts a wide range of debit/credit card options
  • Includes POS technology
  • 24/7 customer support via phone

Fees

Quote-based pricing only

Stripe

Stripe Payments is tailored to eCommerce businesses that require a cost-effective and reliable payment processing solution. The wealth of payment options and currencies makes it well-suited to merchants with a global customer base. While Stripe does offer in-person payments, these capabilities are pretty limited. A system like Square, which offers a range of hardware and tailored plans, is a better choice for brick-and-mortar businesses.

Features

  • Easy set-up
  • Accepts multiple currencies
  • 24/7 customer support via email, live chat, and phone
  • Offers 100+ payment methods
  • No-code fraud protection tools

Fees

No monthly fees

In-person: 2.7% + $0.05 per transaction

Online: 2.9% + $0.30 per transaction

Authorize.net

Authorize.net is a comprehensive payment solution that offers businesses either a combined merchant account and payment gateway, or a payment gateway-only option. What separates Authorize from other providers is their comprehensive built-in fraud detection tool, which is fully configurable to the business’s preferences with filters like payment velocity and international currencies. However, Authorize is a relatively expensive option, and the outdated interface means a less seamless user experience than those offered by Stripe or PayPal.

Features

  • Recurring billing
  • Custom digital invoicing
  • Customer Information Management (CIM) for repeat customers
  • 24/7 customer support via phone, chat, or online form

Fees

$25 monthly gateway fee

2.9% plus 30 cents per transaction

ACH: 0.75% per transaction

Key Requirements for Opening a Merchant Account

To open a merchant account, businesses need to undergo a thorough underwriting process to assess their suitability. This process will vary depending on the merchant account provider, but usually involves the following:

  • Having the appropriate business license.
  • Having a dedicated business bank account.
  • Providing details such as contact information, business address, and website address.
  • Undergoing a credit check.
  • Providing current financial statements.

Steps Involved in Setting Up a Merchant Account

Identify the type of business/industry you belong to

The structure of your business (i.e. sole proprietorship, LLC, or corporation) as well as the industry you operate in will dictate which merchant account providers are available to you. Some industries may have specific requirements or restrictions, especially if they are considered to be high-risk.

Select a merchant account provider

As we covered earlier in this blog, there are different types of merchant accounts available that address different business needs. If you operate a brick-and-mortar storefront, for example, you will need a merchant account that is capable of integrating with a POS and processing in-person payments. Other factors to consider are pricing structure, contract length, security features, and relevant add-on services such as recurring billing or analytics (more on this below).

Submit your application for an account

Your chosen merchant services provider will require you to complete an application. This includes submitting certain information, such as your business license or EIN, as well as providing information about your business’s specific payment processing needs. Be prepared to answer questions about:

  • Your expected transaction volumes.
  • The payment methods you want to accept.
  • The types of products you sell.
  • How you can process transactions i.e. online or in-person.

Await the underwriting process

Underwriting is where the merchant services providers assess your business to understand how much risk your account presents and whether they can support your needs. At this point, the provider may conduct credit checks and ask for additional information, such as payment processing history and sales volume, to understand how vulnerable your business is to fraud or chargebacks. This process may take a few days or several weeks, depending on how thorough the checks are.

Set up your account

Once your application has been accepted, you can begin setting up your merchant account and payment processing tools. What this process looks like will depend on your provider and what types of payment you want to accept. Your merchant account provider should provide you with an account manager to guide you through the onboarding process, in addition to providing you with a wealth of self-service resources like knowledge hubs or set-up webinars. Key steps your business will need to complete to begin processing payments are:

  • Integrating with a payment gateway or POS.
  • Configuring security settings.
  • Completing a test transaction.

Choosing the Right Merchant Account Provider

Merchant account fees. Different providers will use different fee structures for transaction fees and account management, so it’s important to compare providers to understand which option offers the best value for your business.

Payment methods. Your account provider should be able to accept all of your chosen payment types, in-person payments, contactless payments, and other electronic transaction types like ACH.

PCI compliance. Make sure that the merchant account provider you select is fully compliant with PCI DSS standards for handling credit card transactions securely.

Scalability. Switching merchant accounts is time-consuming and disruptive, so your provider should be able to support your business’s growth and meet growing transaction volumes efficiently.

Customer support. Your merchant account is a critical piece of payment infrastructure, so you need to be able to access help quickly if you run into technical issues. Look for a provider who offers 24/7 support across a range of channels, including live chat, phone, and email.

Final Words

For eCommerce and in-person businesses alike, merchant accounts are essential to support payment security as well as growth. A merchant account enables businesses to accept payments securely and seamlessly via a range of payment types, from credit and debit cards to ACH and digital wallets, and receive them into their business bank account promptly. Businesses need to assess carefully the right merchant account provider for their needs, taking into account considerations such as fee structure, contract terms, payment options, and customer support. 

By selecting the best merchant account provider for your needs, you can feel confident that your business is ready to scale and provide customers with a seamless payment processing experience.

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FAQs about merchant accounts

Q: What is a merchant account?

A merchant account is a type of bank account that allows businesses to accept and process electronic payment card transactions. Merchant accounts are necessary for handling the funds that are transferred from the cardholder’s account to the business’s account after a credit or debit card transaction is completed. 

Q: What is an example of a merchant account?

An example of a merchant account would be a business account at a bank or financial institution specifically set up for a retail store or online business. This account enables the business to accept payments from customers using credit or debit cards, either in a physical storefront or through an e-commerce platform.

Q: What do you need to open a merchant account?

To open a merchant account, a business typically needs to provide:

  • Business information (like legal name, address, and tax ID)
  • Bank account details for fund transfers
  • Financial statements and credit history
  • An estimate of expected monthly card transaction volumes
  • A business license or proof of business registration
  • Personal identification documents for the business owner(s).

Q: What is a merchant account vs business account?

A merchant account is specifically designed for processing credit and debit card transactions and holding funds from these transactions temporarily. A business account, on the other hand, is a general bank account used for day-to-day financial operations of a business, like paying suppliers and receiving payments from clients that are not made by card.

Q: Who sets up a merchant account?

Merchant accounts are set up by a merchant acquiring bank or a specialized financial institution that processes credit and debit card transactions. The business seeking to accept card payments must apply for this account, and the provider evaluates the application based on various criteria, including the type of business, financial health, and projected sales volumes.

Q: Who qualifies as a merchant?

A merchant is typically defined as a business or individual that sells goods or services. Virtually any type of business, including retail stores, restaurants, online sellers, and service providers, can qualify as a merchant as long as they have a product or service to sell and meet the requirements set by the merchant account provider.

How To Find the Best Credit Card Processor for Small Business in 2024

Although credit cards have been around since the 1950s, in recent years, they’ve started to dethrone cash from its position as king of payment methods. With a whopping 84% of American adults owning at least one credit card (the average is 3 credit card accounts per person), card payments reached $9.43 trillion in 2021. In fact, that’s the fastest growth rate for card payments…ever.

As a small business owner, it’s important to accept different payment methods like cash, credit card, and contactless or NFC mobile payments to ensure an easy shopping experience for your customers. But to do most of that, you need to have a credit card processor.

Since we’ve spoken a lot about credit card processing before, today we’ll take a look at how to find the best credit card processor for your SMB in 2024. Since the big players in the landscape generally all offer a robust set of services, data shows that most SMBs are satisfied with their payment processors and aren’t likely to switch. However, for lower transaction fees, over half of SMBs would be willing to switch to another provider—which means finding the best credit card processing rates is an important criteria to factor in. If you have no idea where to start with evaluating potential payment processing solutions, fret no more. Here are the top factors you need to look for when finding a credit card processor, as well as our ranking of the top players in the industry. 

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TL;DR

  • To understand what the best credit card processing rates for small businesses are, it is important to know what options you have, what’s included in the rate, and what’s negotiable. In order to ensure you have the best credit card processing rates possible for your merchant account, avoid providers who charge percentage markups and ensure that you always understand what fees to expect from your provider.
  • Other factors you should take into account are integration with existing systems, security and fraud protection, customer support, and ease of use.
  • When looking for a credit card processor, assess your business needs upfront: decide on your non-negotiables and must-haves, then work from there and look for providers that offer features that match your needs and goals.

Fees and Pricing Structure 

You’ve most likely agonized over your credit card processing rates and wondered whether or not you have the best ones possible. With the majority of processors relying on negotiations and tacking on hidden costs like exorbitant setup fees, dishonest monthly subscription fees, or unfavorable long-term contracts, it can be hard to know what the best rates really are. To understand what the best credit card processing rates for small businesses are, it is important to know what options you have, what’s included in the rate, and what’s negotiable.

Knowing your processing rate

Want to know if your rate is “good” or not? You first need to determine what exactly is included in the rate you are looking at. The most common fees you’ll see are percentage markup rates and effective rates.

Percentage markup rates

Percentage markup rates are the rates a payment processing provider charges in addition to interchange. These rates can vary from 0% to 3%; therefore when looking at a percentage markup rate, you want to be as close to 0% as possible. Stax, for example, charges 0% markups on top of interchange, giving you the lowest percentage per transaction rate. However, the percentage markup rate does not give you a full picture of your processing costs.

Effective rates

The effective rate is what you want to look at to truly understand how much you are paying for your credit card processing. The effective rate is calculated by adding up every cost related to processing credit cards, divided by total sales.

These processing costs include interchange, percentage markups, ancillary fees, transaction costs, etc. Thus, the effective rate is the best indicator of whether or not you are paying too much for your payment processing.

Understanding interchange rates

The one part of your effective rate that you can not negotiate or change by switching providers is interchange. Interchange rates are set by the credit card companies themselves and are the same for every single business owner. You can think of interchange rates as your base rate. Everything on top of the interchange will increase your effective rate and vary depending on the provider.

For example, Stax charges a flat monthly membership in exchange for a 0% markup rate, a transaction cost of just a few cents, and no ancillary fees. Since the only processing costs other than interchange are flat (the monthly membership and a few cents per transaction), effective rates with Stax are close to interchange and tend to decrease as transactional volume decreases.

Traditional providers who charge percentage markups and ancillary fees will have higher effective rates and those rates will stay the same or increase as transactional volume increases, ultimately costing your business more money.

Getting the best credit card processing rates

To ensure you have the best credit card processing rates for your merchant account, avoid providers who charge tiered percentage markups and ensure that you always understand what fees to expect from your provider. Asking questions and paying attention to your credit card processing statement will help you never be surprised by an increase in your effective rate.

With Stax’ all-in-one, reliable platform there are no hidden fees: our goal is to ensure that you’re spending less when you need to process payments and putting more money back into your business’s bottom line, to help guarantee maximum satisfaction from our customers.

Security and Fraud Protection

Fraud is rampant in the SMB sector for both brick-and-mortar or eCommerce companies. Whether it’s phishing, fraudulent chargebacks, or account breaches, your credit card processor needs to be properly secured to minimize the risk of security breaches for in-person transactions and online payments. That’s why you need to work with a payment provider that implements secure payment systems and a trustworthy payment gateway.

With Stax, we’re proud to ensure PCI compliance, which means we meet the Payment Card Industry Data Security Standards, created by card associations like Visa, Mastercard, and American Express to ensure sensitive payment data is securely processed, transmitted, and stored. In other words, you can rest easy knowing that we’ve prioritized the security of the cardholder and bank account data of you and your customers.

Integration with Existing Systems

While there will always be a learning curve when you work with a new payment processor, you want it to complement your way of working, not completely upend your small business. A good provider will have the functionality to allow you to easily connect their payment processing solution to popular applications or add-ons to speed up your workflow.

If they don’t offer ready-for-use integrations, ask if they at least allow access to their API so you can create web hooks to send the data to other online business tools or vice versa—but this does require having the technical expertise in your company, so this shouldn’t be the first option!

Customer Support and Service Quality

A top-notch payment processor will go above and beyond to provide a great working relationship with their customers, and excellent customer support is at the heart of that. That means short communication lines so it’s easy to get in touch with a real person, quick turnaround times, and an understanding customer success team.

When looking for a credit card processor, ask them what channels they can be contacted on and if they’re available 24/7. Then, look into reviews regarding their turnaround time on support requests. Remember, if it takes a few business days to resolve an issue with invoicing or processing your credit card transactions, not only could you lose out on valuable revenue, you could damage your customers’ trust in your business.

Accessibility and Ease of Use

This hopefully goes without saying, but the best credit card processing company is one that offers an intuitive solution. With proper customer onboarding, you should feel empowered and confident to use the different tools your solutions provider offers, like the POS system, credit card reader, virtual terminal, and any other unique features. To determine this, ask what sort of support resources are offered, what onboarding looks like, and if you can chat with an expert by phone, email, or live chat if you need additional information to get set up for success.

The Best Credit Card Processors for Small Businesses in 2024

Stax

Throughout this article, we’ve already touched on a lot of the features our all-in-one payment processor offers, but here’s a quick summary: Stax offers secure in-person and online payment processing designed to not only run, but grow your business. With flat-rate, transparent pricing; Level 1 PCI Compliance; and the ability to take all major forms of payments and online transactions, Stax has been consistently ranked as the (one of the) best credit card processing solutions for small businesses. Plus, we support card-not-present (CNP) transactions, offer no cancellation fees, and provide additional services like next-day funding and ACH processing if you want to get paid faster.

If you’re not sure if Stax is a great fit, our team will analyze your existing statements to give you free advice on if you should make the jump or not!

Payment Depot by Stax

Did you know we also offer an alternative to Stax Pay that takes on a cost-saving membership approach to credit card processing fees, which means instead of marking up the interchange rates, Payment Depot by Stax passes these rates on to its members, which lets startups and SMBs benefit from these lower rates (at an average of $400 a month in savings).

Beyond that, you get the same Stax benefits like no long-term contracts or hidden fees, subscription-style pricing, and PCI compliance. As with Stax, this isn’t the best solution for extremely low-volume businesses. If you’re a high-risk merchant account or regularly process recurring payments, this may also not be the right fit.

Choosing the Right Payment Processor for Your Business

While we’ve already looked at some tips on picking the right processor if looking at specific factors, there are a few other things you should keep in mind on a broader level while on the quest for the best payments solution for your small business.

Most importantly, you need to assess your business needs upfront: do you value a provider that offers its own hardware? One that provides invoicing features? Decide on your non-negotiables and must-haves, then work from there and look for providers that offer features that match your needs and goals. Of course, take pricing and credit card processing rates into consideration! Finally, think long-term. If your business scales, will your potential provider be able to support your growth? Armed with these questions, you should be able to make the right decision for the future growth of your business.

Stax’ all-in-one payment processing platform helps small businesses save on credit card processing. Discover how to run your entire business on Stax by contacting us today.

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FAQs about the Best Credit Card Processing For Small Business 

Q: How can small businesses get the best credit card processing rates?

Start by knowing the different pricing models, such as interchange-plus, flat-rate, and tiered pricing. Small businesses should shop around and compare rates from various providers, considering not just the rates but also any additional fees. Negotiating with providers can often lead to better rates, especially if you can demonstrate a steady volume of transactions or a growing business.

Q: How can merchants find the best credit card processing provider for their business?

To find the best credit card processing provider, merchants should assess their specific business needs, such as the volume of transactions, the average transaction value, and whether they need mobile or online processing capabilities. Researching and comparing different providers is crucial. Look for transparency in pricing, quality of customer service, and the range of services offered. Reading reviews and seeking recommendations from other business owners in similar industries can provide valuable insights.

Q: What are the credit card processing rates that merchants need to pay?

Credit card processing rates vary depending on the provider and the plan chosen by the merchant. These rates generally include a percentage of the transaction value plus a fixed fee per transaction.

That said, providers like Stax can give you access to the direct cost of interchange without the markup. We simply charge a subscription fee that you pay per month. 

Q: What factors should merchants consider when choosing a credit card processor?

Some of the key considerations  include: 

  • Pricing Structure
  • Contract Terms
  • Type of Transactions
  • Integration and Compatibility
  • Security and Compliance
  • Customer Support

Credit Card Processing for Small Business: 9 Tips for Accepting Payments Securely and Cost-Effectively

Just starting out with your small business? Finding great credit card processing rates may seem impossible, but there’s hope. By following these simple tips, you’ll be able to secure credit card processing rates that make big businesses jealous.

TL;DR

  • Not all credit card processing companies are created equal. To ensure that you’re able to take payments in a cost-effective way, be sure to carefully compare their fee structures, contract terms, and available features. Look for transparency in pricing, no hidden fees, and options that suit your specific business needs.
  • Make it a point to choose the right pricing models. Prefer interchange-plus pricing over tiered models for transparency and control over costs; avoid leasing terminals by purchasing affordable ones outright.
  • It’s best to avoid long-term contracts. Opt for flexible, month-to-month contracts without hidden fees for credit card processing to avoid being locked into unfavorable terms.

Here are Stax’ Top Credit Card Processing Tips.

In today’s world, knowing how credit card transactions work is super important for any business owner, given that card transactions make up the bulk of all payment transactions. No matter if you’re just starting out or you’ve been in business for a while, making your credit card system work better can really help your business grow—by saving you money, making your systems more efficient, or improving your customer experience.

Avoid Non-Mandatory Contracts

No one likes to be stuck in a contract, from cell phone contracts to credit card processing contracts. It’s common in the credit card processing industry to lock clients into multi-year contracts filled with hidden fees. Contracts are not mandatory, especially contracts with cancellation fees. Most processors will actually waive that fee if you tell them no, so don’t be afraid to speak up. If you can, find a company that doesn’t offer contracts—or offers rolling month-to-month contracts.

If you do opt for a contract, you should read the terms very carefully, looking for hidden fees, rate changes and other specifications that may end up costing you money. 

It’s also worth asking ahead of time what the renegotiation process would look like. It’s not unusual for companies of any type to raise rates quite a bit when starting a new contract, and it’s best to be prepared for what to expect. 

Be sure you know if there is a date you need to provide an opt-out by if you end up switching processors, as well. Some contracts will automatically renew (potentially at higher rates) if you pass a certain date without providing notice that you’re ending usage of the processor.

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Find Affordable Terminals and Avoid Leases

Credit cards and EMV terminals are cheaper than you think. A good terminal can cost around $250 these days, so don’t try and lease one if you have the money to buy one upfront. If your processing company offers to include one in a contract, always make sure to read the fine print to see how much they’re charging you for it. It’s usually better to buy one yourself and get a cheaper rate.

Avoid Tiered Pricing

If you’ve had a business before, then you’re probably used to tiered pricing. It’s expensive and unneeded with its lack of transparency, so stay away from it at all costs. 

Instead, go for interchange pricing. Interchange results in lower costs and doesn’t include any surcharges. Paying interchange rates instead of tiered rates is a common practice among big businesses and it’s the best option for you as it gives you the most control over costs of all the pricing types.

Always Know Where Your Money Goes

Before you start looking for a good credit card processing rate, you need to do your research. Learn where your money goes by looking up interchange and assessment fees. Interchange, as we mentioned earlier, is the best way to go when choosing a pricing option. They are a fixed credit card processing expense, and they’re the same for all processors. Here are the Mastercard and Visa interchange fees, for example.

Assessments are also a series of rates and fees charged by Visa and MasterCard, and they are the same across the board.

Just because you’re a small business doesn’t mean processing companies can treat you like one. Credit card processing rates are the same for all businesses, big or small, so don’t let them make you feel insignificant as a small business starting out. The bigger you think, the smaller your rates.

Secure your transactions

Ensuring your customers’ transactions are secure isn’t just in the customers’ best interests. It’s in yours too.

Secure transactions ensure you can maintain a trustworthy reputation with past and future customers, as well as reducing the financial losses that come from the fines and legal fees associated with compromising customer data. 

One of the most famous data breaches happened to Target in 2013. They were required to pay an $18M settlement, but losses are estimated to top $200M. A large part of that was simply lost customer revenue. Their earnings dropped 46% afterwards because people were afraid to shop there. It was a potent example for everyone of just how important your company’s reputation for security is with your customers. 

Optimize your credit card processing speeds

Slow transactions are, at best, an annoyance to customers, and at worst, result in lost sales, especially online. In order to improve processing speeds, you should make sure your POS equipment is up-to-date and that your internet connection is both stable and fast. Part of this includes performing regular maintenance on your hardware- and software, and ensuring that your settings are configured for reduced friction. 

For instance, you should reduce the amount of prompts that an employee or customer might have to click through in order to actually proceed with payment. 

Use Address Verification Services (AVS)

AVS is a fraud prevention measure for online and card-not-present transactions. It’ll compare the billing address provided in the transaction to the billing address on file with the card issuer. The service can determine if the addresses are a perfect match, partial match, or not a match at all. 

AVS does not prevent all types of fraud, but it’s a good way to detect suspicious transactions. Generally, you’ll implement AVS directly through your credit card processor, and you’ll need to monitor its effectiveness over time to improve the system.

Train Your Staff To Handle Data Securely

For in-person transactions, it’s crucial your staff is able to take payments in an efficient and trustworthy manner. Customers need to feel that their data is secure and that transactions don’t take any longer than necessary. Furthermore, your staff is likely the weakest point in your security due to the factor of human error – among other things. Providing your staff with education on how to handle customer data can help prevent data breaches that even a well-intended employee might cause.

There are a few key areas to provide training on:

  • Recognizing what potential risks may look like (such as common phishing tactics).
  • The physical measures required to keep customer data protected, such as locking devices or safely stowing and securing any actual paperwork with customer data.
  • Require employees to create strong passwords for any systems they access (this includes implementing two-factor authentication wherever possible).

Leverage Your Data

Your credit card processing solution will ultimately gather a lot of unique data on customer behavior and preferences. Analyzing this data in the reports your processor provides can help tailor marketing efforts and improve overall business strategies. The data gathered by a credit card processor is particularly handy in identifying trends and patterns – and therefore forecasting what business will likely look like during a certain time period. 

At this point, most businesses do use systems other than the credit card processor as their central operating system (think an ERP or eCommerce site host). Because of that it’s crucial to ensure that any credit card processor you choose can integrate their data with your preferred central system. Otherwise, you’ll be unable to compare data in real time – and all data comparisons will result in a headache of manual effort.

Many of our tips apply to how Stax works, with no contracts, surcharges, and optimized terminals that pair perfectly with our subscription pricing plans.

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FAQs about Credit Card Processing For Small Business

Q: What is credit card processing for small business?

Credit card processing for small businesses involves enabling these businesses to accept payments through credit cards. This process requires a merchant account, which is a special type of bank account that allows businesses to receive payments in multiple forms, including credit and debit cards.

Q: What are credit card processing fees for small businesses?

Credit card processing fees for small businesses are various charges that businesses incur to accept credit card payments. These fees are typically a combination of percentage-based and flat fees and can vary based on the credit card processor, the type of card used (credit or debit), and whether the card is present during the transaction. 

The main types of fees include interchange fees (paid to the card-issuing bank), assessment fees (paid to the credit card network like Visa or MasterCard), and the payment processor’s markup.

Q: How do I accept a credit card payment for a small business?

To accept credit card payments for a small business, you first need to set up a merchant account with a bank or an independent payment processor. After this, you choose the appropriate hardware and software for processing transactions. This could be a traditional credit card terminal, a point-of-sale (POS) system, or a mobile card reader that works with smartphones or tablets. You also need to ensure you have a payment gateway if you’re accepting online payments.

Q: What’s the cheapest way to take card payments?

The cheapest way to take card payments often depends on the volume and nature of your transactions. That said, comparing different providers and negotiating for better rates can also help you in finding the most affordable solution.

It’s also important to choose a payment processor that offers a merchant-friendly pricing structure. As mentioned earlier, tiered pricing is NOT the best option because it often lacks transparency and can be more expensive in the long run. In tiered pricing, transactions are categorized into different tiers (qualified, mid-qualified, non-qualified) based on various criteria, and each tier has its own fee. This model can be confusing and unpredictable, making it hard for businesses to forecast expenses. 

Instead, opt for a transparent and cost-effective pricing method such as interchange-plus or subscription. 

Q: How can I start taking credit cards for my business?

First, choose a credit card processing service that aligns with your business needs. Once approved, you will need to acquire the necessary hardware (like credit card terminals or mobile card readers) and software for processing transactions. If you’re planning to accept online payments, setting up a payment gateway is essential. Finally, ensure your system is compliant with industry security standards (PCI DSS) to protect your customers’ card information.  

Demystifying Credit Card Interchange Fees: What You Need to Know [2024 Rates and Updates]

When you research payment solution providers, you’ll start hearing the term “interchange” used when talking about payments. Interchange is the fee that credit card companies like Visa and Mastercard charge businesses to accept their cards.

The interchange fee depends on a number of factors and isn’t always easy to understand. In this article, we will break down credit card interchange fees so you will know exactly how much you’re spending when running your business.

In this post:

  • What are interchange fees?
  • How much does interchange cost?
    • Visa interchange fees
    • Mastercard interchange fees
    • Discover interchange fees
    • American Express interchange (OptBlue)
  • What is the total cost of accepting credit cards?
    • Set rate processing
    • Subscription rate processing

TL;DR

  • Interchange fees are not collected by your payment processor or bank; they go directly to the card-issuing banks.
  • Interchange fees vary significantly depending on the card issuer, the issuing bank, type of transaction and/or merchant type. Memorizing all of the nuances is impossible, but understanding the interchange rate range most common for your business is a good best practice.
  • While interchange fees are unavoidable, there are strategies to help minimize their impact, including choosing a cost-effective payment processor, implementing surcharging, and more.

What Are Interchange Fees?

Interchange is the fee credit card companies charge businesses to accept their cards. Essentially, the merchant pays the card brand for the convenience of accepting this payment method since that is the way your customers want to pay.

Interchange fees help cover the risks associated with accepting electronic payments while ensuring your company has access to guaranteed payment when a customer makes a purchase. Interchange fees are simply a cost of doing business.

Understanding the concept of interchange fees is crucial for businesses looking to optimize their payment processing costs. These fees are set by the payment networks and are typically expressed as a percentage of the transaction value or as a fixed amount per transaction. The exact fee structure varies depending on factors like card type, transaction type, industry, and location.

It’s important to note that interchange fees are not collected by your payment processor or bank; they go directly to the card-issuing banks. Your payment processor, however, plays a role in facilitating the transaction and deducts its own processing fee from the overall charge.

Debit card transactions generally have lower interchange fees compared to credit card transactions. This is because debit cards are linked directly to the customer’s bank account, and the risk of non-payment or default is lower. By actively encouraging customers to use debit cards, businesses can effectively reduce the interchange fees associated with card payments.

While interchange fees may seem like an added expense, it’s crucial to recognize the value they bring to your business. Accepting credit and debit cards allows you to cater to a wider customer base, improve customer satisfaction, and enhance the overall shopping experience. By offering convenient payment options, you can attract more customers and increase sales.

To ensure the interchange fees you pay are reasonable and competitive, it’s essential to regularly review and negotiate your fee structure with your payment processor. Stay informed about any updates or changes in interchange fee schedules to ensure you’re paying the most optimal rates for your business.

Additionally, optimizing your payment processing infrastructure and implementing measures to minimize chargebacks can have a significant impact on reducing interchange fees. By investing in secure payment gateways, fraud detection systems, and robust transaction processing protocols, you can lower the risk of chargebacks and avoid unnecessary fees.

Remember, while interchange fees are an inherent part of accepting card payments, implementing smart strategies and staying proactive can help you minimize their impact on your business. One such strategy includes implementing credit card surcharging to offset the cost of interchange fees. By understanding the fee structure, promoting debit card usage, and optimizing your payment processing operations, you can effectively manage and reduce interchange fees, ultimately improving your bottom line.

Interchange fees are an essential consideration for businesses that accept card payments. These fees are a cost that businesses incur to facilitate the convenience and security of card transactions. While it’s true that businesses pay interchange fees, it’s important to understand that they are a necessary part of the payment ecosystem.

Interchange fees enable payment networks and card-issuing banks to cover the costs associated with maintaining the infrastructure, managing fraud risk, and providing the benefits and rewards programs associated with credit and debit cards.

As a business owner, it’s crucial to factor in these interchange fees when evaluating the overall costs of accepting card payments. By understanding the dynamics of interchange fees and implementing strategies to optimize their impact, businesses can effectively manage their expenses and find a balance that allows them to provide convenient payment options to customers while minimizing the amount they pay in interchange fees.

How Much Does Interchange Cost?

Interchange fees vary widely across card brands, credit card networks, card types, and how you process cards. Credit cards that offer points or rewards cards typically come with higher interchange fees, as do corporate cards.

Generally, debit card transactions are much less expensive than credit card payments for you to process and come with a lower interchange rate than credit cards. Card-present transactions also incur lower rates compared to card-not-present transactions. However, an exemption to this is debit cards issued by a bank with less than $10 billion in assets, also referred to as “exempt”, often a local bank or credit union—these have some of the highest interchange rates of all.

While you have control over whether a cardholder’s card is swiped or keyed in at the point of sale, you can’t control what kind of card they use. That’s why interchange varies so widely. For a $100 transaction, a swiped Mastercard debit card will cost you around 27¢. However, for the same transaction, using a Visa corporate commercial credit card will cost you around $2.60. It’s easy to see how over the course of the year, these fees can stack up.

Below, we’ll give a sampling of interchange rates for the most popular card brands. Please note there are many other categories not covered in this table, including variations by card type, business type, whether the bank is regulated or exempt, and more.

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Visa Interchange Fees

As mentioned earlier, interchange fees will depend on several variables. Before reading on, let’s also clarify the terminology you’ll see below. 

Beyond the card type (debit, or the various kinds of credit cards), you’ll also see “exempt” or “regulated” which indicate different fees for debit cards. The Durbin Amendment established these two ratings to differentiate the card-issuing banks based on their assets. 

For card issuing banks with assets in excess of $10 billion, these are regulated; card-issuing banks with less than $10 billion in assets are non-regulated and fall under the “exempt” category. The difference in these fees does vary significantly and is something the merchant has no control over or visibility into when the customer presents their card to pay.

Below is a list of common interchange for various scenarios, for the full list of interchange fees by Visa card type, refer to the guide linked below:

Transaction Type Card Type or Bank Classification/Interchange Fee
CPS/Retail, Debit – Card Present Exempt: 0.80% + $0.15

Regulated: 0.05% + $0.21

CPS/Card Not Present, Debit Exempt: 1.65% + $0.15

Regulated: 0.05% + $0.21

CPS-Restaurant, Debit – Card Present Exempt: 1.19% + $0.10

Regulated: 0.05% + $0.21

CPS/e-Commerce Basic, Debit Exempt: 1.65% + $0.15

Regulated: 0.05% + $0.21

CPS/Retail, Prepaid Exempt: 1.15% + $0.15

Regulated: 0.05% + $0.21

Retail, Credit, Performance Threshold III Visa Signature: 1.65% + $0.10

Visa Signature Preferred: 2.10% + $0.10

Traditional Rewards: 1.51% + $0.10

Small Merchant Product 2, Credit  Visa Signature: 1.43% + $0.10

Visa Signature Preferred: 1.88% + $0.10

Traditional Rewards: 1.43% + $0.10

See full Visa interchange rates.

Mastercard Interchange Fees

You’ll see below that MasterCard and Visa do not use the same criteria to delineate the type of transaction or card types, nor does their official guidance use the same verbiage. However, you’ll find the average interchange fee range of percentage plus the flat fee per transaction is similar to other popular card issuers.

Transaction type Program Name (Card Type)/Interchange Fee
Restaurant World (USD): 1.85% + $0.10

World High Value (USD) 2.00% + $0.10

Small Ticket (Transaction Amount <$5), Card Present Core (USD): 1.65% + $0.02

World (USD): 1.90% +$0.02

World High Value (USD): 2.30% + $0.02

Small Ticket (Transaction Amount <$5), Card Not Present Core (USD): 1.95% + $0.02

World (USD): 2.20% +$0.02

World High Value (USD): 2.60% + $0.02

Regulated POS Debit, purchases and purchases with cash back Debit Rate (USD): 0.05% + $0.21

Prepaid Rate (USD): 0.05% + $0.21

Payment Transactions, Debit and Prepaid Cards Exempt Debit (USD): 0.19% + $0.53

Exempt Prepaid (USD): 0.19% + $0.53

PIN Debit Payment Transaction Rate (USD): 0.19% + $0.53
PIN Regulated POS Debit Rate (USD): 0.05% + $0.21

See full Mastercard interchange rates.

Discover Interchange Fees

Discover does not publish its full interchange rates online, so below is an estimate provided by a third-party provider. Please note that for debit cards, the fees will vary depending on whether the bank is regulated or exempt and for credit cards it will vary depending on whether the card is swiped or hand-keyed.

Card Type Interchange Fee 
Discover Debit, card present Exempt: 1.10% + $0.16

Regulated: 0.05% + $0.22

Discover Debit, card not present Exempt: 1.75% + $0.20

Regulated: 0.05% + $0.22

Discover Consumer credit card Swiped: 1.56% + $0.10

Keyed: 1.87% + $0.10

Discover Rewards Swiped: 1.71% + $0.10

Keyed: 1.97% + $0.10

To access full Discover interchange rates, you need to use a verification code provided by your acquirer.

American Express Interchange Fees

American Express works differently from the other brands in that the card type does not impact the processing rate. Instead, your industry or merchant category code (MCC) will play a larger role in deciding how much you pay in credit card processing fees.

For smaller businesses, you’ll probably be accepting American Express through their program called OptBlue. Through OptBlue, your payment technology provider will determine how much you pay for AmEx and bundle it in with the ability to accept more popular card types. This way, you can accept AmEx customers (who historically have higher ticket prices) without breaking the bank.

You can read more about the OptBlue program at Merchant Maverick.

How Do Credit Card Interchange Fees Work?

As you can see, interchange fees vary from one credit card network to the next. These fees are set by Visa, Mastercard, Discover, and American Express every April and October. As for how these fees are split, a percentage of the interchange rates goes to the card issuers aka card-issuing banks—e.g., Capital One, Chase, or Bank of America. The rest of the fees go to the credit card brand. This is important to point out because it shows that interchange fees are not charged by your payment processing company (and thus, they’re non-negotiable).

Payment processors typically charge a markup on top of the interchange, which is essentially how they make money. So while you technically can’t negotiate your way to lower interchange fees, you can still save on overall payment processing costs by working with the right provider.

How Much Do You Pay?

At the end of the day, how much you’re paying for credit card processing relies on your payment solutions provider. Many payment processors like Stripe, Square, PayPal, and bank merchant services offer flat-rate processing. Some others, including Stax, offer subscription-style processing that gives you access to the lowest rates of interchange.

Avoiding Higher Interchange Fees

In the modern digital age, electronic payments have become the norm, with credit and debit cards being widely used for transactions. However, along with the convenience of card payments, businesses face the challenge of interchange fees, which can significantly impact their bottom line.

Choose the Right Payment Processor

The choice of payment processor plays a crucial role in managing interchange fees. Different processors offer various pricing models, so it’s essential to compare options and negotiate competitive rates. Look for processors that provide transparent pricing structures and offer interchange plus pricing, where the interchange fee is passed through directly without any markup. This approach can help you avoid unnecessary additional charges and optimize your fee structure.

Optimize Card Acceptance

Understanding the types of cards you accept and their associated interchange fees is key to minimizing costs. Payment networks classify cards into different categories, and fees vary depending on factors like card type (credit or debit), payment method (chip and PIN, contactless), and industry-specific cards (corporate, rewards). By optimizing your card acceptance policies, you can encourage customers to use lower-cost payment methods and reduce interchange fees.

Encourage Debit Card Usage

Debit cards generally carry lower interchange fees compared to credit cards. Actively promoting debit card usage among your customers can help lower your overall interchange fee expenses. Consider offering incentives, such as discounts or rewards, for customers who choose to pay with their debit cards. This not only benefits your customers but also reduces your payment processing costs.

Streamline Processing and Reduce Chargebacks

Efficient transaction processing and minimizing chargebacks can have a positive impact on interchange fees. Implementing secure payment gateways and fraud detection systems can help reduce the risk of chargebacks, which can result in costly fees. Furthermore, optimizing your payment infrastructure to streamline processing and minimize errors can help prevent unnecessary charges and improve overall cost efficiency.

Regularly Review and Update Your Fee Structure

Interchange fees are subject to change, as payment networks periodically update their fee schedules. It is crucial to stay informed about these changes and periodically review your fee structure to ensure you’re paying the most competitive rates available. This review process may involve renegotiating with your payment processor or exploring alternative options in the market to find the best fit for your business.

Consider Surcharge Programs

Depending on your region and applicable regulations, you may have the option to implement surcharge programs, where you pass on the interchange fees to customers directly. While this strategy requires careful consideration and compliance with legal requirements, it can be an effective way to offset interchange fees (especially for a small business) and transfer the cost to the end-user.

Interchange fees are charges imposed by payment networks, such as Visa and Mastercard, for processing card transactions. While these fees are unavoidable, there are several smart strategies that businesses can employ to minimize their impact. In this article, we will explore practical tips to help businesses navigate and reduce interchange fees effectively.

Here’s how these different rates work:

Tiered Pricing

A common pricing model in the payment processing realm is called tiered pricing. This method bundles the interchange rate with the processor’s markup and then puts your transactions into three tiers: qualified, mid-qualified, and non-qualified.

Card payments that are in the “qualified” tier incur lower rates while “non-qualified” transactions cost more to process.

Here’s where things get dicey: how transactions are categorized is completely at the discretion of the processor. What some payment processing companies consider as “qualified” may not be the same for others. There’s no transparency with tiered pricing fees, making it difficult to figure out whether or not you’re overpaying.

Set Rate Processing aka Flat Fee Processing

With set rate processing, you have a non-negotiable flat fee per credit card transaction, regardless of card or industry type. For instance, Stripe charges 2.9% + 30¢ per transaction. So whether you’re accepting a debit card with a 0.05% + 22¢ interchange rate or a corporate card with a 2.50% + 10¢ interchange rate, you pay the same rate.

While this may seem simpler at first, the reality is that you could be overpaying for credit card processing with these systems. In the example above, Visa would receive the .05% + 22¢, while Stripe would be making a whopping 2.5% + 8¢ on your transaction. That’s why we introduced simple subscription-based pricing.

Interchange Fees And How To Understand Them | Payment Processing

Flat Subscription Rate Processing

Subscription-based processors have a similar concept to other subscription services you’re used to, such as warehouse stores like Costco. You pay a low fee to get access to warehouse pricing on goods, where you then can buy as much as you want with no cap on savings. Stax’ subscription pricing starts at just $99 per month. Regardless if your sale is $50 or $5,000, you pay the flat cost of processing without a percent markup.

Every business is different, which is why we don’t believe in one-size-fits-all solutions. Based on the types of cards your customers are using and your average transactions, we’ll be able to show you exactly which type of plan makes sense for your business.

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FAQs about Interchange Fees

Q: What are interchange fees?

Interchange fees are charges imposed by payment networks, such as Visa and Mastercard, to businesses for processing credit and debit card transactions. These fees are set by the payment networks and go to the card-issuing banks to cover various costs, including infrastructure maintenance, fraud protection, and rewards programs.

Q: Do I pay interchange fees directly?

No, interchange fees are not paid directly by businesses to the payment networks. Instead, they are deducted by your payment processor or acquiring bank and passed on to the card-issuing banks.

Q: How can I reduce interchange fees?

While interchange fees are unavoidable, there are strategies to help minimize their impact. These include negotiating competitive rates with your payment processor, optimizing card acceptance policies to encourage lower-cost payment methods, promoting debit card usage, streamlining processing to minimize errors, and staying updated on fee structures to ensure you are paying the most competitive rates available.

Q: Are interchange fees the same for all types of cards?

No, interchange fees vary depending on factors such as card type (credit or debit), payment method (chip and PIN, contactless), and industry-specific cards (corporate, rewards). Debit card transactions generally have lower interchange fees compared to credit card transactions.

Q: Can I pass interchange fees on to my customers?

The ability to pass interchange fees on to customers depends on regional regulations and legal requirements. In most states, businesses may have the option to implement surcharge programs where interchange fees are directly passed on to customers. However, it’s important to research and comply with applicable laws before considering this option. CardX by Stax is the leader in automated surcharging compliance and can help your business implement passing on these fees properly.

Q: How often do interchange fees change?

Interchange fees are subject to periodic updates by payment networks. They can change annually or even more frequently. Staying informed about these changes and periodically reviewing your fee structure is essential to ensure you are paying the most competitive rates available.

Q: Is it possible to avoid an interchange fee?

It is not possible to completely avoid interchange fees when accepting card payments. Interchange fees are an inherent part of the payment ecosystem and are charged by the payment networks and card-issuing banks to cover various costs associated with processing transactions, maintaining infrastructure, managing fraud risk, and providing cardholder benefits. Your business cannot avoid paying interchange fees, but you can employ strategies to minimize the impact and optimize your payment processing costs.


 

How to Understand Your Profit and Loss (P&L) Statement

Small and medium-sized businesses (SMBs) often fall into a unique financial management situation. Many are too small to have thorough financial reporting practices in place, but they’re also too big to make sense of their financial data without accurate reporting. In the United States, 41% of small business owners manage their own accounting and financial processes.

Sustained success in this middle ground requires mastering the nuances of financial management, beginning with the profit and loss (P&L) statement. 

Your P&L statement is a simple yet powerful financial reporting tool that not only highlights the current financial position of the business but also charts a course for the future. Think of it as a financial compass; it guides entrepreneurs through their revenue and expenses, enabling them to make informed decisions that can define the fate of their businesses.

For the many small business owners working to improve their financial health and performance, this is your go-to guide for all things profit and loss.

TL;DR

  • 41% of small business owners manage their own accounting and financial processes. P&L statements help them understand their business through their financial data.
  • P&L statements dive deeper into the business finances to uncover valuable insights that reveal strengths and weaknesses.
  • When regularly reviewed, P&L statements are like a consultant in a spreadsheet, identifying trends in revenue, expenses, and profitability over time.
Learn More

Basics of the Profit & Loss Statement

Also known as an income statement, the profit and loss statement is a financial document that provides a snapshot of a business’s revenues, costs, and expenses over a specific period of time. It is used by businesses of all sizes, as well as investors and analysts, to track an organization’s financial performance.

Here is the basic structure of a profit and loss statement:

  • Revenue
  • Cost of goods sold (COGS)
  • Gross profit
  • Operating expenses
  • Operating income
  • Other income and expenses
  • Net Income.

This information can be pulled from accounting software like Quickbooks if it is up to date with transaction data from sources like your payment platform provider.

Breaking Down the P&L Statement Template

Revenues/income

The revenues and income section outlines the gross revenue generated by the business during the specified reporting period, typically 12 months. This includes sales, services, and any other sources of income, such as interest or rental income. It also includes the net revenue after accounting for certain deductions, such as returns, allowances, and customer discounts. 

Cost of goods sold (COGS)

The COGS section represents the direct expenses incurred by a company in producing or purchasing the goods it sells during a specific period. It includes costs like raw materials, direct labor, and manufacturing overhead. The COGS calculation involves adding the opening inventory to the purchases made and subtracting the closing inventory. For manufacturing companies, COGS comprises raw materials, direct labor, and manufacturing overhead costs.

Understanding COGS is pivotal to determining a company’s profitability, especially its gross profit margin. The gross profit margin, calculated by subtracting COGS from revenue and dividing by revenue, indicates how efficiently a company produces or acquires its products. A higher gross profit margin reflects effective cost management, enhancing the company’s financial health.

Gross profit

Gross profit is calculated by subtracting the COGS from the total revenue. It reflects the profitability of the core business operations before accounting for other expenses. 

Gross profit indicates how efficiently a company can produce or acquire its products. A higher gross profit signifies that the company retains more money from sales after covering the costs directly associated with production. This surplus can be used to reinvest in the business, cover operating expenses, or pursue strategic initiatives.

Operating expenses

Operating expenses include all costs not directly tied to producing goods or services. Within this category of the P&L report, there are different sub-categories: selling, general, and administrative expenses (SG&A).

Selling expenses cover costs related to sales, like marketing and salesperson salaries. General expenses include administrative costs like office supplies and utilities, while administrative expenses involve management salaries and other administrative functions. 

Additionally, there are non-cash operating expenses like depreciation and amortization. Depreciation accounts for the decrease in the value of physical assets over time, while amortization applies to intangible assets’ gradual reduction in value, like patents or copyrights. Although depreciation and amortization don’t involve actual cash outflows, they are important for accurate financial reporting as they represent the wear and tear of the company’s assets.

Categorizing and reporting operating expenses helps owners pinpoint areas where cost-saving measures can be applied, ensuring sustainable profitability.

Operating income

Operating income, or operating profit, is calculated by subtracting the total operating expenses from the gross profit. It indicates the business’s profitability after accounting for the cost of goods sold and operating expenses. Operating income excludes non-operating items such as interest and income taxes, providing a clear picture of the profitability directly related to the company’s day-to-day activities.

Operating income is a key metric for evaluating operational efficiency and management effectiveness. A healthy operating income indicates that a company is generating profit from its primary business activities.

Other expenses and income

The “Other Expenses” and “Other Incomes” sections account for financial activities beyond the core operations of a business. 

Other expenses include:

  • Interest expenses: These are costs incurred due to interest payments on loans or credit facilities.
  • Income tax: This includes taxes paid on the company’s earnings.
  • Non-operating losses: Losses from activities not directly related to the business’s core operations, such as losses from expenditures, such as investments or asset sales.
  • One-time expenses: Unusual or exceptional expenses that are not expected to recur regularly, like legal settlements or restructuring costs.

Other Incomes:

  • Interest income: Income generated from interest on investments, savings accounts, or other financial instruments.
  • Non-operating gains: Gains from activities not central to the business, like profits from the sale of assets.
  • One-time incomes: Irregular or exceptional incomes not part of regular operations, such as insurance settlements or legal judgments in the company’s favor.

Including these items in the financial statement provides a comprehensive view of a company’s financial performance. That’s because these components not only affect core business activities but also external financial events and decisions.

Net income

Net income, also known as net profit or the bottom line, is the residual profit a company has after deducting all expenses, taxes, interest, and other financial activities from its total revenue. In essence, it is the P&L—it represents the company’s profit or loss for a specific period and is a key indicator of its overall financial performance.

Calculated by subtracting all operating expenses, interest, taxes, and other non-operating expenses from the gross profit, a positive net income indicates that the company is profitable, while a negative net income signifies a loss (a.k.a. a net loss). This section shows the complete picture of overall profitability and financial viability.

Accrual vs. Cash

There are two P&L reporting methods that businesses should be aware of:

Accrual method

Revenues and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid. The accrual method is what’s used in the Generally Accepted Accounting Principles (GAAP), a standardized guideline for accounting and financial reporting. Public companies will always use the accrual method.

Cash-based method

Transactions are recorded only when cash is received or paid out. Revenues are recognized when the payment is received, and expenses are recorded when they are paid. Small businesses, freelancers, or sole proprietors with straightforward operations may opt for cash-based accounting due to its simplicity and ease of use.

Generally, if businesses have multiple revenue streams and total expenses are beyond single salaries and business operation basics, accrual is the best method.

P&L in Practice

Let’s look at the role of a P&L statement for a small furniture manufacturing company at the end of the fiscal year. With the P&L statement in hand, covering the 12 months prior, the business owner can review the document and see what valuable insights are within it that will help inform strategic decisions for the upcoming year. Here’s what they can assess, identify and achieve:

Revenue streams

From the P&L statement, our manufacturing business finds that the most significant portion of the company’s revenue comes from customized office furniture contracts with local businesses. This insight prompts them to hone their marketing efforts, specifically targeting local businesses.

Viability of current cost of goods sold (COGS)

Through the COGS section, the company can see that the cost of their high-quality wood has increased over the last fiscal year. This affects their profit margins. The business now knows that it’s time to look at alternative wood suppliers and negotiate better rates to ensure their production costs remain competitive without compromising on quality.

Anomalous operating expenses

The P&L statement breaks down operating expenses, including salaries, marketing, and utilities. The management team notices a spike in marketing expenses during a specific quarter. After further investigation, they found that the increase was due to a one-time marketing campaign. With this insight, they analyze the campaign’s effectiveness to determine if similar initiatives should be repeated in the future.

Context within profitability and net profit

Fortunately for the manufacturer, the bottom line of the P&L statement shows a healthy net profit for the year. However, compared with the previous year, the net profit margin has slightly decreased. To address this, they strategize ways to optimize operational efficiency by investing in better machinery or training for their staff to enhance productivity.

Reporting accurate information and insights to stakeholders

Armed with the insights from the P&L statement, the company prepares comprehensive reports for stakeholders, including investors and lenders. These reports showcase the company’s financial performance, highlighting areas of strength and strategies for improvement. Transparent communication based on P&L insights helps build trust and confidence among stakeholders.

Enabling strategic future planning

With a clear overview of their financial standing, the business owner can begin strategic planning sessions. They set goals for the next fiscal year, aiming to increase revenue from new customer segments, optimize expenses, and enhance overall profitability. The insights from the P&L statement served as a foundation for these strategic decisions, guiding the company’s trajectory for the upcoming year.

Analyzing P&L Trends Over Time

As our manufacturer proves, P&L trend analysis is a powerful tool for evaluating a company’s financial performance and identifying patterns and fluctuations in revenue, expenses, and profits. By comparing P&L statements from multiple accounting periods, you can discern trends, both positive and negative, that indicate your financial trajectory. This information allows you to spot cost-cutting, revenue-enhancing, and risk-minimizing opportunities.

Cost-cutting

Cost-cutting opportunities can be identified by analyzing the statement of operations. Look for areas where expenses have increased disproportionately to revenue growth or areas with high operational costs compared to industry standards. Common targets include inefficient processes, unnecessary overhead, or overspending on marketing without adequate returns.

Revenue-enhancing

Look for patterns in revenue growth, customer segments contributing significantly to sales, or successful product line items/services. The P&L statement can also help identify underutilized assets, untapped customer segments, or successful products that can be further promoted or diversified.

Risk minimization 

Risk assessment and minimization can be done by analyzing various expense categories and assessing their potential vulnerability to economic fluctuations, market changes, or internal challenges. For example, high dependence on a single supplier for raw materials (such as in our manufacturer’s example) poses a supply chain risk. Similarly, excessive debt leading to substantial interest expenses can be a financial risk.

The Bottom Line on Your Bottom Line

The profit and loss statement is one of the most valuable internal documents a business possesses. It’s accurate information, based entirely on the company’s own financial data, that reveals where the strengths and weaknesses lie. It’s a consultant in a spreadsheet, identifying trends in revenue, expenses, and profitability over time.

Businesses that utilize this information regularly over time have more control over their success. They set a path for continual improvement. They are better placed to secure investments, and they have the insights to light the way in adapting to changing market dynamics. P&L savvy businesses move forward fully informed, priming them for long-term success.

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FAQs about Profit and Loss Statement

Q: What is a Profit and Loss (P&L) statement?

A Profit and Loss (P&L) statement, also known as an income statement, is a financial report that provides a snapshot of a business’s revenues, costs, and expenses over a specific period of time. It is used by businesses, investors, and analysts to track an organization’s financial performance.

Q: What is the significance of a P&L statement for small and medium-sized businesses (SMBs)?

A P&L statement is a crucial financial reporting tool that highlights the current financial position of the business and helps chart a course for the future. It guides entrepreneurs through their revenue and expenses, allowing them to make informed decisions that can define the fate of their businesses.

Q: What are the basic elements of a Profit and Loss statement?

The primary components of a P&L statement include Revenue, Cost of Goods Sold (COGS), Gross Profit, Operating Expenses, Operating Income, Other Income and Expenses, and Net Income.

Q: How does a P&L statement help reveal the strengths and weaknesses of a business?

A P&L statement dives deep into business finances to uncover valuable insights. By regularly reviewing these statements, business owners can identify trends in revenue, expenses, and profitability over time. This information can be used to optimize operations, cut costs, and boost profitability.

Q: What is the difference between accrual and cash-based P&L reporting methods?

In the accrual method, revenues and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid. On the other hand, in the cash-based method, transactions are recorded only when cash is received or paid out.

Q: How can businesses leverage insights from the P&L statement for strategic planning?

By analyzing their P&L statements, businesses can pinpoint areas of strength and weakness, identify trends, and make informed decisions about future operations. These insights can guide strategic planning, goal setting, and operational optimization.

Q: What role does a P&L statement play in stakeholder communications?

A P&L statement provides comprehensive information about a company’s financial performance. Businesses can use this data to prepare detailed reports for stakeholders, including investors and lenders, highlighting areas of strength and strategies for improvement.

Q: How does a P&L statement help in identifying cost-cutting, revenue-enhancing, and risk-minimizing opportunities?

By comparing P&L statements from multiple accounting periods, businesses can identify patterns and fluctuations in revenue, expenses, and profits. This information allows them to spot opportunities for cost-cutting, revenue enhancement, and risk minimization.

Q: What does the net income in a P&L statement indicate?

Net income, also known as net profit, is the residual profit a company has after deducting all expenses, taxes, interest, and other financial activities from its total revenue. It represents the company’s profit or loss for a specific period and is a key indicator of its overall financial performance.

Q: How does a P&L statement contribute to long-term business success?

Regularly reviewing and utilizing the information from the P&L statement allows businesses to control their success more effectively. They can set a path for continual improvement, secure investments, and adapt to changing market dynamics, thereby priming themselves for long-term success.


 

Small Business Saturday Success Tips

Small Business Saturday, or SBS, is a much-anticipated shopping event that takes place between the Black Friday and Cyber Monday holiday shopping frenzy. This day benefits local businesses since it encourages 72% of shoppers to shop and dine at small, independently-owned retailers and restaurants—not only on SBS—but year-long. 

This Saturday is always the last one in November, falling somewhere between November 24 and November 30. It’s the day small business owners get the chance to show off their offerings to shoppers looking for local gems.

But what exactly is it, what are its benefits, and how can you leverage it to your advantage? Here’s everything to know about Small Business Saturday.

TL;DR

  • Founded by American Express in 2010, Small Business Saturday encourages consumers to shop at local small businesses.
  • Participating in Small Business Saturday can help SMBs boost revenue, foster customer loyalty, and strengthen the local economy. It’s a smart, efficient move to maximize your holiday operations and long-term success.
  • Small businesses can thrive on SBS with these 8 tips: (1) Lay the groundwork with past data, (2) enhance digital presence, (3) improve the in-store experience, (4) run marketing campaigns, (5) promote special offers, (6) engage the community, (7) collect feedback, and (8) develop post-event strategies.

What is Small Business Saturday?

Small Business Saturday, a.k.a. The Shop Small® Movement, is a shopping day dedicated to supporting local small businesses across the US. It was established by American Express in 2010 and gained official recognition from the US Senate the following year. The 14th annual event is set for November 30th, 2024. 

As a partnering non-profit organization, The Small Business Administration (SBA) invites shoppers to patronize 32 million SMBs nationwide and throughout the holiday season. It encourages consumers to shop at SMBs rather than large chain stores (e.g., Walmart, Target) and eCommerce giants (e.g., Amazon, eBay).

Fast-forward to today, the initiative’s cumulative impact has resulted in about $163 billion in purchases across all 12 Small Business Saturdays. Here are some of the advantages of seizing this opportunity.

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Why Participate in Small Business Saturday?

With 71% of surveyed shoppers doing their holiday shopping on Small Business Saturday, SMBs can maximize holiday sales by participating. Check out the remarkable benefits it provides in terms of boosting sales, enhancing customer loyalty, and strengthening community ties.

Increased revenue

Small Business Saturday drove an estimated $17.9 billion in US consumer-reported spending in 2022. Thanks to the strategic schedule between Black Friday and Cyber Monday, coinciding with the holiday shopping season’s peak—right when customers are already eager to shop.

This one-day event garners substantial media coverage and promotional support, which can significantly boost consumer awareness. Shoppers will find your business through Shop Small Maps (i.e., American Express’ database for SBS-registered SMBs). Thus, they’re likely to seek out your special deals and promotions to maximize holiday savings.

Better customer loyalty

Participating in annual Small Business Saturdays lets shoppers recognize your brand as a local staple. They can easily associate you as a reliable go-to during their holiday shopping haul. This instills in them a strong sense of purpose as they contribute to your company’s post-Covid resilience and recovery.

Improved local economy

Over two-thirds of consumers (72%) will continue to shop small throughout the holiday season because of its impacts on their local community. A shopper spending $10 at a small business alone would support $2 billion in local economic activity across the country.

Small businesses benefit from a strong local economy over the long term. With more financial resources circulating locally, SMBs have a better chance of weathering economic challenges.

Now, let’s look at some strategies you can employ to realize these benefits.

8 Small Business Saturday Tips for Success

Small Business Saturday demands careful preparation for businesses aiming to excel. Whether you’re a seasoned participant or new to the scene, these 8 pointers will help you make the most of this annual event.

1. Lay the groundwork

Analyzing past sales data lets you forecast product or service demand during the event. It would help you stock up on bestsellers and maintain optimal inventory levels.

To do so, compile your Small Business Saturday sales records for at least the past few years. It should include sales figures, customer foot traffic, transaction details, etc. Assess which products had the highest sales and cross-reference this with your current inventory level to optimize your stock purchases.

Lastly, establish contingency plans with suppliers to meet unexpected demand (i.e., how many additional units and when they can deliver if needed). The key is to always rely on data, not guesswork.

2. Enhance digital presence

36% of consumers prefer to interact with small businesses online. Strengthening your digital presence is critical to attracting them. Optimize your website and highlight Small Business Saturday deals on your homepage. 

Smore, a beauty eCommerce brand, prominently displays its 15% off and free shipping promotions in the site’s above-fold. It advertises the Saturday sale while making the offerings irresistible for shoppers and new visitors.

Sbs1

Source: Smore

Don’t forget to ensure mobile responsiveness for a seamless user experience. Visit your website on various devices (e.g., smartphones, tablets, and different web browsers) to test if your site looks and functions correctly on all screens.

3. Improve in-store experience

While 36% prefer online shopping, 64% of shoppers want in-person interactions in brick-and-mortar stores. Create an open and welcoming ambiance inside and outside the store to attract foot traffic and engage passersby. 

Use a combination of signage, lighting, and creative arrangements to grab their attention. American Express provides free ‌marketing materials like in-store banners and window displays here

If you want to go the extra mile, organize product demos, mini-workshops, or interactive activities related to your products or services. These events not only provide value to customers but also create a memorable in-store experience. Bonus: Offer freebies or refreshments to set your store apart from the competition. 

4. Implement effective marketing campaigns

Collaborate with local businesses for cross-promotions to reinforce your local community presence. Here’s an example from Denver, Colorado’s Highlands Square neighborhood. The district’s staff and SMB owners team up to promote the Small Business Saturday event.

Sbs2

Source: Highlands Square

Through joint marketing initiatives, it’s easier to pool resources and generate more buzz for the big day. Send engaging email marketing campaigns a week before to create anticipation and drive traffic. You can also use local hashtags (e.g., #SBS2024, #ShopSmall, #SBSDeals) and geo-targeted ads on social media to reach a broader audience.

The AmEx marketing resources have free social media posts and email templates. Pro-tip: Post content between 9 AM to 12 PM CT from Tuesday to Thursday, as these are peak engagement hours.

5. Promote special offers

Some shoppers need an extra nudge to make a purchase. Introduce time-sensitive promotions, flash sales, and bundle deals to entice them. These strategies leverage the sense of urgency and added value to encourage buying decisions.

  • Limited-time offers. By setting a clear start and end time, you motivate customers to act quickly and take advantage of the deal. E.g., “3-hour 20% Off Sale from 2 PM to 5 PM on Small Business Saturday”
  • Flash sales. Surprise your audience with unannounced, short-duration sales—e.g., “Flash Sale: 50% Off Select Items for the Next 2 Hours!” Use different communication channels, such as social media, email, or in-store announcements so they won’t miss out.
  • Bundle deals. Create packages of complementary products at a discounted price to offer value and convenience. E.g., a “Family Movie Night Bundle” that includes a DVD, popcorn, and candy at a reduced price.

Do you notice an influx of first-time Small Business Saturday shoppers? Offer loyalty rewards and discounts to foster retention. This incentive urges them to come back not only on that day but also for future recurring purchases.

6. Engage the community

​​Many places organize special events like local markets, fairs, or festivals on Small Business Saturdays. Identify any local festivals or parades happening in your community. Inquire with the organizers about sponsorship opportunities or participation.

If you operate a bakery and lean toward charitable initiatives, collaborate with a local food bank. You can pledge to donate a percentage of your SBS sales to support the food bank’s mission and community efforts. 

On the other hand, let’s say you own a fashion boutique. Invite a local fashion blogger or influencer to visit your store, explore your collection, and share their experiences online. Both cases help nurture local camaraderie and increase visibility, drawing potential customers to your small business.

7. Engage customers and collect feedback

Gathering feedback allows you to assess your customers’ firsthand Small Business Saturday experience. Understand what worked well and what didn’t to improve future SBS events.

First off, set up a feedback station in your store where shoppers can share their experiences. It could be a physical suggestion box or a digital kiosk where they can leave reviews in exchange for incentives. E.g., a 10% off coupon for their next visit or a small free item or sample like a complimentary dessert.

Another strategy is to interact with old and new customers on social media platforms to further solidify your relationships. Encourage SBS shoppers to share their purchases and repost them on your profiles to express gratitude. You can also turn it into a giveaway contest—either way, it’s free word-of-mouth marketing.

8. Develop post-event strategies

Send personalized thank-you emails or messages to nurture long-term customer relationships. Perhaps add a sneak peek of upcoming products, special promotions, or behind-the-scenes insights into your business. Make them feel like valued insiders.

Pro-tip: Personalize the messages whenever possible. Specify the customer’s name and reference their specific purchase.

To keep the momentum going, share how the SBS day unfolded and how the local community came together to support small businesses. It can help inspire ongoing brand support and turn one-time customers into repeat customers.

Analytics-wise, examine sales data to determine which products or services were the most popular. Review your revenue for the day and compare it to previous Small Business Saturdays to gauge your success.

Small Business Saturday Simplified with Stax 

Small Business Saturday celebrates entrepreneurship and community spirit while providing local businesses a platform for growth. This November, implement the 8 tips above to thrive during the holiday season and be one of the neighborhood champions.

Now, you didn’t boost your SBS sales only to grapple with uncollected payments. Reduce late/failed payments by up to 700% and save 80% of billing time with the help of service providers like Stax.

Our payment processing solutions ensure a seamless checkout process for credit cards, debit cards, mobile wallets, and contactless payment methods. Less stress, more efficiency. Make this year’s Small Business Saturday effortless with Stax.

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FAQs about Small Business Saturday

Q: What is Small Business Saturday?

Small Business Saturday (SBS) is an annual shopping event that encourages consumers to shop at local small businesses. Founded by American Express in 2010, it takes place on the last Saturday of November. The day is dedicated to supporting small businesses across the US.

Q: When is Small Business Saturday celebrated?

Small Business Saturday is always the last Saturday in November, falling between November 24 and November 30. The 14th annual event is set for November 30th, 2024.

Q: Why is Small Business Saturday important for small businesses?

Small Business Saturday is an important event for small businesses as it helps to boost revenue, foster customer loyalty, and strengthen the local economy. It brings significant media coverage and promotional support, which can significantly boost consumer awareness and drive sales.

Q: How can small businesses effectively participate in Small Business Saturday?

Small businesses can participate effectively in Small Business Saturday by preparing well in advance. Key strategies include analyzing past sales data, enhancing digital presence, improving the in-store experience, running marketing campaigns, promoting special offers, engaging the community, collecting customer feedback, and developing post-event strategies.

Q: What are some marketing strategies for Small Business Saturday?

Effective marketing strategies for Small Business Saturday include promoting special offers like time-sensitive promotions, flash sales, and bundle deals. Businesses can also collaborate with local businesses for cross-promotions, utilize social media, and send out engaging email marketing campaigns.

Q: How can a business engage the community on Small Business Saturday?

Businesses can engage the community on Small Business Saturday by sponsoring or participating in local events like markets, fairs, or festivals. They can also collaborate with local charities or influencers to increase visibility and draw potential customers.

Q: How can a business improve its digital presence for Small Business Saturday?

Businesses can improve their digital presence for Small Business Saturday by optimizing their website and highlighting Small Business Saturday deals on their homepage. They should also ensure mobile responsiveness for a seamless user experience.

Q: How can businesses collect customer feedback on Small Business Saturday?

Businesses can collect customer feedback on Small Business Saturday by setting up a feedback station in the store where shoppers can share their experiences. They can also interact with customers on social media platforms to solidify relationships and encourage word-of-mouth marketing.

Q: What post-event strategies should businesses implement after Small Business Saturday?

After Small Business Saturday, businesses should send personalized thank-you emails or messages to nurture long-term customer relationships. They should also analyze sales data to determine the most popular products or services and compare revenue to previous Small Business Saturdays to gauge success.

Q: What role does Stax play for businesses on Small Business Saturday?

Stax is a payment processing solutions provider that ensures a seamless checkout process for credit cards, debit cards, mobile wallets, and contactless payment methods. By using Stax, businesses can reduce late or failed payments and save billing time, making Small Business Saturday more efficient and less stressful.


 

Tap to Pay: What It Is and How It Works

Since the first plastic credit card was issued by American Express in 1959, payment tech progress has been growing exponentially. Magnetic stripe payments enjoyed a 30-year reign between the ’70s and ’90s. EMV chip card technology had a good two decades or so, beginning in the mid-’90s. And the winner of the 2010s and beyond is the NFC-powered, contactless sensation that is tap-to-pay.

Contactless payments became a must-have during COVID. Most modern card readers and payment terminals are NFC-equipped. But tap-to-pay is transcending that plastic card of the last 60+ years. NFC technology is in the midst of an evolution. Customers are driving digital advancements, and savvy small business owners should be aware of what’s to come.

In this article, we’ll dive deeper into the tap-to-pay movement, where it is now, where it’s going, and how businesses can implement tap-to-pay for smooth, future-proof card transactions.

TL;DR

  • The 2010s marked the era of NFC-powered contactless payments, and unlike its predecessors, this technology has the sticking power to take it beyond our traditional plastic cards.
  • NFC payments are faster, more secure, and more versatile than any other payment solution we have seen before
  • Implementation is smooth, and the possibilities go far beyond accepting payments. Tap-to-pay technology will take us to advanced loyalty, marketing, and end-to-end customer satisfaction solutions.

History of Tap to Pay

Although contactless payments weren’t widely adopted until the 2010s, the technology actually dates back to 1995. In Seoul, South Korea, the Seoul Bus Transport Association introduced the UPass, a contactless payment card that commuters could tap on as they entered the bus. Almost ten years later, the US tried the technology, and it was four years after that when all EMV cards became NFC-equipped.

Despite the tap technology being available on most major cards, it was the smartphone advancements that really pushed consumers to adopt it. Tapping their phone to a terminal proved far more exciting than tapping the card.

Google was the first, in 2011, to enable contactless payments via their mobile app. Apple Pay caught up in 2014; in 2015, the wearables market made everyone aware of the tap’s potential.

Once the thought of the tap was there, the behavior followed. In 2015, many merchants switched to NFC-enabled terminals; by 2019, most banks were issuing contactless cards.

How Tap to Pay Works

Tap-to-pay, whether used with a contactless card or a smart device, operates through Near Field Communication (NFC) technology. This short-range wireless communication technology allows data exchange between devices close to each other, typically within a few centimeters.

NFC operates on radio-frequency identification (RFID) principles and electromagnetic induction, enabling communication between devices without needing physical contact or Wi-Fi connectivity.

Here’s how it works:

  1. NFC-enabled devices: The customer’s payment card (credit, debit, or mobile wallet app) and the merchant’s payment terminal must be equipped with NFC technology.
  2. Close proximity: The customer holds their NFC-enabled card or smartphone close to the merchant’s NFC-enabled terminal to make the payment.
  3. Data transmission: The NFC antennas in both devices communicate with each other. The customer’s payment information is securely stored in the NFC chip and transmitted to the merchant’s terminal.
  4. Authentication: The payment terminal validates the transaction by sending the payment details to the payment network (such as the card issuer—e.g. Visa, Mastercard, and the customer’s bank) for authorization.
  5. Secure transaction: The payment network verifies the transaction details, ensuring sufficient funds and confirming the transaction’s authenticity. A unique, one-time code is generated for that specific transaction if approved.
  6. Completion: The transaction is completed, and the customer receives a payment confirmation. The entire process is fast and secure and does not require physical contact between the card or smartphone and the payment terminal.

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Safety and Security

Within the NFC transaction process are encryption protocols to secure the data being transmitted. These protocols ensure that the data exchanged between devices is encrypted and cannot be easily intercepted or tampered with. The authentication methods verify each party’s identity before exchanging sensitive information. This prevents unauthorized devices from participating in transactions. In addition, many NFC transactions often use dynamic data, meaning that a new, unique code is generated for each transaction. This dynamic data makes it difficult for attackers to reuse intercepted information for fraud.

Despite the thorough processes embedded in this transaction type, merchants still play a role in enhancing security through considerations like:

  • Only using EMV-compliant terminals
  • Ensuring network connections are secure
  • Implementing tokenization via their payment processor
  • Regularly updating software
  • Monitoring transactions
  • Implementing strong access controls.

Customers can also take precautions to protect their information when using NFC, particularly when using it through a mobile device. These include:

  • Using secure devices
  • Enabling device lock
  • Only using official payment apps
  • Turning off NFC when not in use
  • Using strong authentication
  • Only enabling NFC on a secure internet connection.

Tools compatible with contactless payments

Contactless cards are most commonly used for contactless payments, but smartphones, smartwatches, and other smart mobile devices (even implants) are now enabled with this technology through their digital wallets.

Contactless cards

All cards today can come contactless. There are contactless credit cards, debit cards, and even gift cards. If it has a contactless symbol such as a checkmark or four curved lines indicating a communication frequency, it’s NFC enabled and can be used in-store wherever the merchant has an NFC reader.

iPhone

Apple’s iPhone and Apple Watch use Apple Pay.

Android

Google’s Android devices use Google Pay, and Samsung’s Android devices use Samsung Pay.

These are all enabled through the respected devices’ payment app, where the cardholder can store their card information on their phone or device to enable secure contactless transactions.

Benefits of Using Tap to Pay

During the pandemic, the number one benefit of contactless technology was the simple fact that it is contactless. No contact, no germs. But the benefits made known during that time were more aligned with the original reason for its development.

It’s faster

Contactless technology speeds up the payment process. Rather than “dipping” the card into the machine, merchants can quickly pass the reader close to the customer. The customer taps the card, and the transaction is complete. NFC devices facilitate the fastest and most convenient data exchange available today.

It’s secure

NFC transactions are secure due to the short distance over which they occur. Moreover, NFC devices can be secured with encryption and authentication protocols that ensure the confidentiality and integrity of the transmitted data, such as the cardholder’s personal information and card number.

It’s universally compatible

Unlike the chip card and magnetic stripe, NFC technology is standardized. This ensures compatibility between different devices and applications. Standardization enables seamless integration of NFC into more devices, including smartphones, tablets, payment cards, and other smart gadgets. It can power a payment future beyond our current plastic cards.

It’s versatile

One way to verify the longevity of a technology is to look at its usability outside of the obvious application. Businesses are using contactless loyalty cards and even loyalty apps that allow customers to store those loyalty cards digitally. Interactive marketing lets customers tap NFC-enabled promotional material to access offers, discounts, and product information. Beyond retailers and accepting payments, NFC is used for public transport, access control systems, smart advertising, data exchange between devices, and interactive gaming. NFC even enables smart packaging to provide customers with product and usage information at the point of sale.

How Businesses Can Implement Tap to Pay

The tap-to-pay revolution is here, and it’s not going anywhere. Any SMEs not yet on board should be looking to change that soon. Here’s how:

Research and choose the right vendor

Many different POS (point of sale) providers offer contactless payment capabilities. There will be a long list with a search online, but not all providers suit all businesses. There are a few options.

Full-service POS and credit card payment providers

Full-service providers like Stax offer complete POS solutions and backend payment processing, which are essential to accepting contactless payments.

At the front end (the POS), all-in-one providers like Stax offer hardware, software, and additional services tailored to specific industries. Stax specifically is POS agnostic, allowing merchants to use any preferred POS hardware, unlike many POS specialists that force merchants to use theirs only. Then, they also handle payment processing services in the backend, ensuring seamless transactions by securely authorizing and settling payments.

These types of all-in-one providers often have direct relationships with card networks, allowing for competitive transaction rates.

Specialist POS providers

Specialist POS providers, such asSquare, offer simple solutions, often appealing to smaller businesses and individuals. The emphasis is on user-friendly interfaces and quick setup. They may lack some advanced functionality but often have low entry costs, making them attractive to small businesses with limited budgets.

Some specialist POS providers offer payment processing services but do not have direct relationships with the card networks. At the entry-level, their fees are low, but once businesses are processing high volumes, these often work out much more costly than full-service providers.

Payment aggregators

Payment aggregators, such as PayPal, have a unique system that doesn’t require businesses to set up a merchant account. Instead, PayPal and other aggregators group all of their clients’ transactions into one. This makes businesses sub-merchants under PayPal’s own merchant account.

Aggregators are appealing for their convenience, but they can be very expensive for merchants processing a high volume of transactions.

Evaluate costs, fees, and customer support

Providers often have different costs and plan structures as they serve different types of businesses. Full-service providers like Stax use flat-rate subscription pricing, which keeps fees low when businesses process high volumes. However, subscription pricing may seem high for businesses with a low transaction rate. So always run the numbers and consider your transaction volume when selecting a merchant service provider. 

Fees, too, differ among providers. Cheap vendors often have hidden fees. Look out for:

  • Transaction fees
  • Chargeback fees
  • Monthly minimums
  • Statement fees
  • Gateway fees
  • PCI compliance fees
  • Upgrade and support fees
  • Cancellation fees
  • Additional hardware costs.

Once the provider is identified, the steps are simple.

Upgrade or purchase necessary hardware

As technology advances quickly, even merchants with NFC-enabled terminals or readers should look at whether theirs is up to date. There may be a need for additional infrastructure, like Wi-Fi or data connectivity, which is not essential for the transaction but is necessary for some of the advanced features this technology offers.

Train staff

To achieve the smooth process promised by contactless card or mobile payments, staff must know how to use and troubleshoot the system. Formal training helps bring everyone up to speed, developing super users who can use the technology and effectively educate customers on the benefits.

Promote the new payment option

The extra security offered by NFC technology is a great benefit to customers. It should be promoted and used to emphasize that customer privacy and security are important. This message will bode well for building loyalty. It may also be worth offering promotions and incentives to encourage the initial usage of this technology, especially for businesses that plan to utilize NFC loyalty cards or other NFC-enabled solutions.

Regularly review and update the system

Providers will regularly update software to improve services. These improvements then flow onto customers and merchants alike. Keeping the software updated ensures it will run for optimal security and performance.

Finally, it’s worth soliciting customer feedback to learn what they think of these NFC-enabled solutions. This insight can inform how advancements in this technology may be used to improve business offerings. 

The Future is Tap to Pay

The era of traditional payments is coming to an end. Tap-to-pay has ushered in a new direction for the payments industry.

For almost a decade, tap-to-pay has offered seamless, secure transactions that can be made in seconds with the wave of a hand. That convenience and advanced security capabilities have solidified this technology as the go-to payment method.

NFC technology has already given businesses the tools to introduce tech-advanced payment solutions, from mobile wallet payments to digital loyalty programs on both cards and phone apps. For those that it benefits, this technology can extend to in-store NFC promotions and pioneering packaging that takes customers straight to the information they need at the moment they need it.

Tap-to-pay is the future, and Stax Payments offers the front and backend tools to power this progress.

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FAQs about Tap to Pay

Q: What is Tap to Pay?

Tap to Pay is a technology allowing users to make payments by tapping or hovering their contactless card or NFC-enabled device over a payment terminal. It’s a fast, secure, and convenient way to handle transactions.

Q: How does Tap to Pay work?

Tap to Pay operates through Near Field Communication (NFC) technology, a short-range wireless communication system that allows data exchange between devices in close proximity. The customer’s payment information is securely stored in the NFC chip and transmitted to the merchant’s terminal for authorization. The process is fast, secure, and does not require physical contact between the card or smartphone and the payment terminal.

Q: What are the benefits of Tap to Pay?

Tap to Pay offers several benefits. Firstly, it is faster and more convenient than traditional payment methods. It is also secure due to the short distance over which transactions occur and the encryption and authentication protocols embedded within the NFC technology. Moreover, it is universally compatible and versatile, opening doors for applications beyond payments, such as loyalty programs, smart advertising, and interactive gaming.

Q: How can businesses implement Tap to Pay?

Businesses can implement Tap to Pay by upgrading or purchasing necessary hardware, training staff, promoting the new payment option, and regularly reviewing and updating the system. It is also important to research and choose the right vendor, considering factors such as costs, fees, and customer support.

Q: What devices are compatible with Tap to Pay?

Most modern devices are compatible with Tap to Pay, including contactless cards, smartphones, smartwatches, and other smart mobile devices. Many of these devices come with digital wallets such as Apple Pay, Google Pay, and Samsung Pay, which can store card information securely and enable contactless transactions.

Q: How secure is Tap to Pay?

Tap to Pay is highly secure. The NFC transaction process includes encryption protocols to secure the data being transmitted, ensuring that it cannot be easily intercepted or tampered with. Additionally, many NFC transactions use dynamic data, generating a new, unique code for each transaction, making it difficult for attackers to reuse intercepted information for fraud.

Q: What is the future of Tap to Pay?

Tap to Pay is seen as the future of payment methods. The convenience, security, and advanced capabilities it offers have made it the preferred payment method for many. With advancements in NFC technology, businesses have the tools to introduce tech-advanced payment solutions, from mobile wallet payments to digital loyalty programs, marking a new direction for the payments industry.

Q: What role did smartphones play in the adoption of Tap to Pay?

Smartphones played a significant role in the adoption of Tap to Pay. Tapping a smartphone to a terminal proved far more exciting than tapping a card for many consumers. Companies like Google and Apple introduced contactless payments via their mobile apps, pushing consumers to adopt the technology.

Q: What are some precautions to protect information when using NFC?

Some precautions include using secure devices, enabling device lock, only using official payment apps, turning off NFC when not in use, using strong authentication, and only enabling NFC on a secure internet connection.

Q: How can Tap to Pay be used beyond accepting payments?

Businesses are using contactless loyalty cards and even loyalty apps that allow customers to store those loyalty cards digitally. Interactive marketing lets customers tap NFC-enabled promotional material to access offers, discounts, and product information. Beyond retailers and accepting payments, NFC is used for public transport, access control systems, smart advertising, data exchange between devices, and interactive gaming. NFC even enables smart packaging to provide customers with product and usage information at the point of sale.


 

How Adopting Mobile Payments Can Help Your Business Grow in 2024

Let’s time travel back, just 20 years ago, to the shopping mall. You’re making a purchase at a retail store, and the cash register is large, clunky, and painfully slow, even for 2004. 

Fast forward to now where much has changed, and research anticipates contactless mobile payments to exceed one billion users globally by 2024. Customers can pay with their watch or phone just by tapping it on a card reader, and businesses can host an entire POS system on a mobile phone. A lot has changed in 20 years, and businesses must either adopt a modern and mobile payment infrastructure or risk becoming about as relevant as the cash register in a mall department store.

So how can you adopt mobile payments for your business, and how can you benefit from these payment services? Thanks to the advancements in payment technology, the answers are not difficult to find. From hardware equipment to specialized merchant services, here’s how you can use mobile payment services to grow your enterprise this year.

TL;DR

  • Mobile payments have evolved significantly over the past 20 years, with current tech enabling payments through watches or phones. 
  • Major companies like Apple, Samsung, and Google have championed mobile payments through NFC-enabled digital wallets; businesses need compatible hardware for adoption. 
  • Adopting mobile payments is crucial for modern businesses to cater to broader audiences, streamline the checkout experience, and ensure operational relevance in the future.

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Upgrade Your Legacy Equipment for Mobile Payments

The world’s foremost mobile phone manufacturers, Apple and Samsung started to foster the use of mobile payments as early as 2014 and 2015, respectively. By using near-field communication (NFC), Apple Pay, and Samsung Pay services turned each company’s mobile devices into highly secure digital payment wallets. Google was a little late to the party, but it also followed with its method called Google Pay in 2016.

Thanks to these modern payment solutions, credit card, and debit card users can now complete their purchases without swiping or inserting their cards at the point of sale (POS) terminals. Instead, they can tap their mobile devices against supporting POS terminals to process their payments securely and efficiently by way of a digital wallet.

Why Is Adding Mobile Payments Important to Businesses Today?

Contactless payments are quickly gaining traction among users, and it’s not just younger generations and tech-savvy consumers. Major card issuers such as Visa, MasterCard, and American Express each have hundreds of millions of NFC-enabled (near-field communication) debit and credit cards in circulation. Further, the adoption of various digital wallet app options—including Apple Pay, Google Pay, Samsung Pay and Google Wallets—make accepting mobile payments a must-have for modern businesses.

Due to its simple yet effective way of making mobile payments, this method is one that is rapidly growing. Many enterprises are now focusing on making it a part of their checkout experience, whether they offer retail services or run other businesses in specific industries. With the promise of increased sales and a better reputation, it seems like it is par for the course to adopt a mobile payments solution.

But even as the adoption of tap-to-pay increases, contactless card and digital wallet payments through Apple Pay, Samsung Pay, and Google Pay need compatible hardware to work at POS terminals.

What Can You Do to Adopt These Mobile Payments Solutions?

Contactless payments are relatively new, only arriving in the U.S. in 2014. Because of this, outdated POS systems lack the ability to accept NFC-enabled credit and debit cards or mobile wallets. So, for businesses working with antiquated POS terminals, now is the time to upgrade to be able to better serve a wide swath of users with contactless cards and mobile wallets.

But not to fear—with the help of your payment processing partner, you can easily modernize your infrastructure and make sure your business is equipped to offer the latest payment processing hardware. So, if you’re operating with older hardware that only accepts EMV chip cards and swiped credit and debit cards, it’s time to talk to your payment processor and enter the modern era. Not only will this be a more secure option and allow for more efficient transaction processing, you’ll also deliver a better customer experience.

How Can Mobile Payments Help?

By accepting these mobile solutions, your business can cater to a broader customer base that now prefers using mobile payments. Accepting mobile payments streamlines the checkout experience for these customers, leaving them with a good impression of your business. After all, especially with a younger generation of patrons expecting modern technology, businesses not only need to but also benefit from meeting their customers where they are.

In the long run, this also future-proofs your operations for when these mobile solutions become the primary way to process payments. Instead of upgrading your payment infrastructure at the last minute, you can benefit from modern merchant services that will take on the challenge of changing times.

Use Card Readers to Turn Mobile Devices into POS Equipment

If the above information tells you anything, it’s the importance of modern payment terminals, including mobile POS systems that complement standard POS terminals. . But what if your business sells its services in the field? That’s where you can turn to mobile payment systems. There are many options available that plug into existing smartphones and tablets , such as the Swipe Simple B250 Reader available from Stax, to solve this problem effectively.

Some mobile card readers attach to modern smartphones or tablets to turn them into payment card processors, and some work on their own as separate devices. This means that these compact devices can work anywhere your customers are or wherever your services can go.  A standalone mobile point-of-sale system, such as the Clover Flex or Dejavoo QD Series are great options for dedicated mobile payment transactions.

Offering mobile payment options is attainable for small businesses and large enterprises alike as well. These compact options are compatible with Apple, Android and other smartphones and have the full functionality needed to process payments in the field.

Leveraging Peer-to-Peer Payments

One trend gaining traction with mobile payments is the use of applications such as PayPal and Venmo for more than peer payments. Many businesses, particularly small businesses, are using mobile payment apps to allow their customers to leave their physical cards at home and submit payments directly from their Venmo, Cash App or PayPal account to the merchant, and the funds are then transferred to the merchant bank account. Because the customer already has their bank account, debit card or credit card information connected to the payment app, the payment can be completed easily within the familiar payment app ecosystem, creating a seamless user experience.

While the fee structures for this service vary depending on the provider, peer-to-peer (P2P) payments are much more than money transfers between friends. There are also several authentication measures, such as verifying the phone number of the recipient or using a QR code to validate that funds are being transferred to the correct account. 

How Mobile Payments and Online Payment Options Intersect

For businesses doing business both in-person and online, you’ll find a lot of the widely used payment technology intersects. From a user experience perspective, making an online payment where all of your information needs to be entered manually is a huge hassle. 

Many modern businesses now accept mobile wallets when processing an online payment, meaning the customer can simply click to pay, with all their shipping and payment information automatically populated. Not only is that easier for the customer, but it is also more secure than traditional payments as all mobile wallet payments use tokenization to secure the payment information—meaning the customer doesn’t physically enter their card information into a browser to complete a purchase. 

This is the same technology as accepting digital wallet payments in person, so for businesses that implement standard POS and mobile payment options for in-person transactions and also do business online, you can serve all of your customers using the same payment technology.

How is This Relevant to Your Business?

With well-received trends such as pop-up stores and food trucks, businesses have found a lucrative model in mobile operations. Instead of waiting for customers to come to brick-and-mortar stores, you can now take your services to them. This increases your exposure and your ability to sell, while also cutting infrastructure costs. It’s a win-win situation from every aspect. It also applies to employees who deliver services through field services and delivery.

To go even further, the various types of mobile payments and NFC payments allow your business to move quickly and better service your customers. Mobile payment technology has come a long way in the last decade, not only in the NFC technology, mobile payment systems, and payment options available but also in its adoption by consumers of all ages. So, whether you’re reading this as a food truck owner, small retail business, professional services provider, or a multi-national large enterprise, mobile payments and digital payment trends are highly relevant to you.

What Can You Do to Adopt These Mobile Payments Solutions?

Mobile card readers are now supported by major credit card processors such as Visa, MasterCard, and American Express. This means that you can now get modern payment solutions quickly via credible merchant services providers.

To implement mobile payments—or any payments for that matter—the first step is to choose a trusted payment processing partner. Your payment processor has a huge impact on what you pay and the experience you and your customers have. Choose a processor with POS hardware and software relevant to your business and the ability to scale if and when your business grows. 

There is also a lot of research to do when evaluating options—it’s an important comparison to look at the cost and capabilities. At Stax, we want you to know how we stack up against the competition, which is why we frequently share a side-by-side analysis of our solutions compared to your other options. For more information, check out some of our comparison articles.

Now, let’s assume you made a choice you’re happy with and have all the equipment and software needed to process mobile payments. Educating your employees is the next hurdle to clear. Especially if the technology is new to your workforce, this is a make-or-break moment. Resistance to new technology can be a tough obstacle, so invest in training and make sure your employees are comfortable and well-versed. When your employees are on board, it’s far easier to get your customers accustomed to the new payment options.

Related Article: Your Definitive Guide to Mobile Payments

What is the Best Way to Use Mobile Payments?

One of the simplest ways to implement mobile payments is to turn your employees’ mobile phones and devices into credit card and debit card processors by using a plug-in card reader or accepting peer-to-peer payments such as Venmo or PayPal.

As a result, you can accept payment cards and other payment types virtually anywhere you sell your products and services. Mobile card readers can also cut through the time it takes for them to accept payments for a sale or after delivering a service. To add to their advantages, some mobile card readers also help you in preventing cash tracking issues by connecting with your POS software.

Of course, another simple option is to upgrade your POS options to handheld mobile terminals and a payment processor that supports your business in more ways than hardware.

At Stax, our modern payment services focus on going beyond ordinary merchant accounts. The Stax Platform allows for mobile swipe capabilities through our Stax mobile app. You can also key in payments or add the optional mobile reader to start swiping. Enjoy the ease and convenience of sending invoices and storing payment methods through the Stax Platform.

Contact us at Stax for a custom quote today to learn how our solutions can help you keep up with mobile payments this year. We will be happy to help you find the right solution for your enterprise.

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FAQs about Mobile Payments

Q: What are mobile payments and how have they evolved over the years?

Mobile payments refer to payment services that are operated under financial regulation and performed from or via a mobile device. Over the past 20 years, mobile payments have evolved significantly, with advancements in technology enabling payments through wristwatches or smartphones. Major tech giants like Apple, Samsung, and Google have pioneered mobile payments through NFC-enabled digital wallets.

Q: Why is adopting mobile payments crucial for businesses today?

Adopting mobile payments is vital for modern businesses to cater to a wider audience, streamline the checkout experience, and ensure operational relevance in the future. With an increasing number of customers preferring contactless payments for their convenience and security, businesses need to adapt to this trend to stay competitive.

Q: How can a business adopt mobile payments?

The first step to adopting mobile payments is upgrading your current payment processing systems to be compatible with the latest NFC-enabled devices and digital wallets. This might involve partnering with a reliable payment processing provider and investing in modern POS hardware and software. It’s essential to train your employees on the new technology to ensure a smooth transition and positive customer experience.

Q: What are the benefits of adopting mobile payments for businesses?

Mobile payments can help businesses cater to a broader customer base, enhance the checkout experience, and future-proof their operations. By accepting mobile payments, businesses can also increase their sales, improve their reputation, and stay relevant in a rapidly evolving digital landscape.

Q: What is the role of card readers in facilitating mobile payments?

Card readers can transform mobile devices into POS equipment, enabling businesses to accept payments virtually anywhere. Some mobile card readers can be attached to smartphones or tablets, turning them into payment card processors. This offers a practical solution for businesses that sell their services in the field.

Q: How do mobile payments and online payment options intersect?

Many businesses now accept mobile wallets for online payments, providing a seamless and secure checkout experience for customers. The technology used for accepting digital wallet payments in person is the same as that used for online transactions, allowing businesses to serve their customers with the same payment technology across different platforms.

Q: What is peer-to-peer (P2P) payment and how is it relevant to businesses?

Peer-to-peer payments allow users to transfer funds directly from one party to another through their mobile devices. Many businesses, especially small ones, are leveraging P2P payment apps like PayPal and Venmo to provide customers with a seamless payment experience. This method is secure, easy, and efficient, making it a popular choice for modern businesses.

Q: How can businesses leverage mobile payments for growth?

Businesses can leverage mobile payments to enhance customer experience, streamline operations, and expand their customer base. By adopting mobile payments, businesses can also stay ahead of the competition, increase sales, and improve their reputation in the market.

Q: How do mobile payments impact businesses offering mobile services?

For businesses offering mobile services like pop-up stores and food trucks, mobile payments allow for quick transactions and better customer service. They also help increase exposure and selling ability while reducing infrastructure costs. The various types of mobile payments and NFC payments enable businesses to move quickly and service their customers more effectively.

Q: What is the future of mobile payments?

The future of mobile payments looks promising. With the continued advancement of technology and increasing consumer demand for convenience and security, it’s expected that mobile payments will become the primary way to process payments in the future. Businesses that adopt mobile payment solutions now are positioning themselves for success in this evolving landscape.


 

A Primer on Simple Mobile Payments for Small Business: What Merchants Need to Know

When you’re serving customers, you need to be as fast and efficient as possible—no matter how big or small your business is. Your customers are busy and so are you. 

Thankfully, with mobile payments from Stax, you can quickly accept and process payments from your customers. You’ll get paid right away and they’ll be satisfied with the transaction.

Learn all about mobile payments and why you may want to consider joining the Stax family to streamline payments and boost your small business’ productivity.

TL;DR

  • Mobile payment processing means exchanging money through a mobile device such as a cell phone, smartwatch, or tablet. To stay competitive and make their customers’ lives as easy as possible, small business owners need to consider offering mobile payments as one of their payment options. 
  • There are five types of mobile payments small businesses can offer: NFC (near-field communications) payments, QR code payments, billing and invoicing apps, MST payments, and SMS payments. At the moment, contactless payments are more-or-less the safest mobile payment method—both for customers and businesses.
  • Mobile payments are much more secure than cash and checks. With mobile payments from Stax, you will only have to pay an affordable subscription price, so you won’t get charged any extra transaction fees on top of what credit card companies charge. 

What Is Mobile Payment Processing?

Mobile payment processing means exchanging money through a mobile device such as a cell phone, smartwatch, or tablet. For example, if a field services roofing technician visits a client to install shingles, when they’re done, they can send the customer a link in a text message to pay for the installation. A client could also go on their mobile phone and click a secure link in their messages and pay.

As the world goes cashless, more and more people and businesses are choosing to use mobile payments. According to Statista, in 2022, there were 2.8 billion mobile wallets in use by consumers worldwide. Another survey by Forbes conducted in August 2023, shows that 53% of Americans choose to use their digital wallets rather than make payments in other traditional ways. Moreover, almost half (47%) of those surveyed admitted that they spend more when using digital wallets compared to other forms of payment.  

To stay competitive and make their customers’ lives as easy as possible, small business owners need to consider offering mobile payments as one of their payment options. It isn’t just for young people or startups; anyone with a mobile device can utilize mobile payment processing because it’s so simple.

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What Types of Simple Mobile Payments are There?

Simple mobile payments give small businesses a great deal of flexibility. Taking payments on your mobile device allows you to sell your goods or services anywhere there’s an internet connection. As of 2023, there are five types of mobile payments small businesses can offer.

1. NFC (Near-field communication) payments 

This is the most common way that a business can accept mobile payments from customers. It simply means that the business can accept payments using a mobile device such as an iPhone or Android device. NFC payments are very secure as any data that is exchanged during a transaction is always encrypted. The technology also uses RFID (radio-frequency identification), which makes simple mobile payments safer. 

A business must have an NFC-enabled card reader so that contactless payments can take place between the mobile devices of customers and the card reader. In most cases, your payment software or point-of-sale (POS) will offer an app that allows you to take NFC payments from mobile wallets like Apple Pay, Samsung Pay or Google Pay. 

A mobile wallet is a virtual wallet that links to a customer’s credit or debit card, or stores their bank information on the mobile device. To make a payment, the customer opens the app on their mobile device and taps the device on a POS terminal or card reader, and voila—money is transferred from the customer’s account to the business. 

With an attached mobile card reader, you’ll also be able to accept standard plastic credit card payments from American Express, Discover, and more.

2. QR (Quick Response) code payments 

A QR code is a square, tetris-like box that appears in black and white. One way that QR codes are used to make mobile payments is when a customer scans a merchant’s QR code with their mobile device camera. Usually, the mobile device needs to have an app that can decode the QR code once it has been scanned. Once decoded, a link appears on the customer’s device that they can click on and open to complete the payment. 

What makes this method so convenient for a brick-and-mortar business is that they can print out the QR codes on paper and hang them up near their POS terminals. Customers can then scan the code and make payments quickly leading to shorter queues at checkout and with minimal interaction with the cashier. 

Another way to use QR codes is to have the QR code on the customer’s mobile device that the merchant can scan with their card reader. In this case, the customer needs to have a mobile payment app on their device that allows the customer’s card or bank account details to be embedded in a QR code. When the code is scanned by a merchant, the payment is completed.

3. Billing and invoicing apps 

Some payment providers allow you to invoice from a mobile app like Square and Paypal, so you can send invoices on the go or at the job site. This is especially handy for individual contractors such as handymen, repairmen, technicians, and maintenance workers. After completing a job, they can generate an invoice using an app on their mobile device and send it to a customer via email or a messaging app. The customer can then complete the payment using any one of the payment methods accepted by the merchant. 

4. MST (Magnetic Secure Transmission) payments 

This is a new technology that is currently only available on Samsung (hence only Android) devices. This technology uses magnetic signals to connect a mobile device with a nearby POS terminal. These signals emulate the magnetic strip on physical credit cards to make a payment. As of now, MST payments do work on NFC-enabled terminals. 

5. SMS payments 

Text-to-pay is becoming more popular as well. This option allows you to send the customer a payment link via text message. They can then use the secure link and complete the payment on their mobile device.

How Does the Simple Mobile Payment Process Work?

The mobile payment process works a bit differently for each type of mobile payment.

At the moment, contactless payments are more-or-less the safest of the mobile payment methods for both the customer and the business at the moment. This is because a customer’s payment information isn’t passed along in plain numbers. Rather, it’s tokenized as a random string of characters. 

This token is transmitted via NFC to your payment gateway attached to your POS system. The business’ payment gateway then passes that token off to the payment processor in real time—never handling the customer’s card information at all. The payment processor then checks the token’s validity and authorizes the payment to go through.

Once the transaction is approved, authorization is sent back to the merchant and the transaction is completed. The payment processor will send the funds to your bank account within a few days.

Taking credit card payments on your mobile device at checkout is nearly identical to the method of running credit card transactions at your stationary point-of-sale system. In this case, you’ll have your payment service’s app running and run their card through a credit card reader that speaks to the app typically via Bluetooth. From there, everything runs as it would from the stationary system. 

Finally, for QR code payments and text-to-pay, your payment system will generate a link to online payment for the customer in the appropriate format. You will be able to generate the link from either your system’s mobile app or desktop software.

Paper-Based Payments vs. Mobile Payments

You’re using traditional payment methods such as cash, checks, and credit and debit cards. Perhaps you haven’t considered adding mobile payments into the mix. However, it can have a positive impact on your business if you do.

Why? You’re giving customers more options and providing them with an easy, convenient, and secure way to pay. They probably don’t like writing checks or carrying cash, which is risky. You’ll be able to expand your client base to people who prefer mobile payments just by downloading the Stax iOS or Android app in a matter of minutes. 

This will directly lead to an increase in sales volume and revenues. As mentioned earlier, a survey showed that customers spend more when using their digital wallets, so it can only be beneficial to your business if you can tap into this customer base. Plus, you’ll get paid on the spot, as opposed to waiting for a check to clear.

In this fast-paced world, paying by cash or writing a check at a point-of-sale (POS) can seem tedious to many. Simple mobile payments are quick, where a customer needs to tap their smartphone or any other mobile device on a card reader or a payment terminal, and the payment is completed in seconds. 

They don’t have to provide their signature, type in a PIN, dig through their purses or pockets for a pen to write a check, or unearth cash. This not only improves customer service but also frees up your staff to attend to more customers. If your staff is equipped with mobile card readers, then they will be able to accept simple mobile payments anywhere in your store.

Let’s say you only accept cash or checks. One of your employees then loses your customer’s check or cash before you can safely deposit it. What next? You don’t want to look unprofessional to your customer, but you also need to get paid. Stax can save you from that headache with less room for error.

Additionally, if you’re accepting debit and credit cards, those processing fees can eat into your profits. Why spend more money on payment processing than you have to?

Keep in mind that you do not need to eliminate cash, checks, and debit and credit cards altogether. Customers who aren’t well versed in mobile payments may not know how to use them or they could be skeptical of them and unwilling to change their mind. You could always give them the ability to pay with more traditional methods, too. If checks are the standard form of payment for your business or industry, here’s some good news: Stax has an electronic ACH processing feature for easy collection.

How Secure Are Mobile Payments?

Mobile payments are much more secure than cash and checks. Your employees can lose cash or checks, or a check can bounce. And though it may rarely happen, cash can be counterfeit as well.

Hackers can also steal customers’ information when they swipe their debit and credit cards on an in-person device. With mobile payments, customers’ financial information is encrypted so that hackers cannot see it. 

Essentially, when a payment is sent, the customer data is scrambled and hackers are unable to decipher what it means. Hence, there is much less of a chance of your customers’ information being stolen.

Using platforms that carry the highest level of security is critical. No matter how and where they collect payments, every single business using Stax is protected with the highest level of PCI security standards.

Of course, no system is perfect. You should still take the necessary precautions to protect your mobile devices, like placing a secure password on them that only certain employees know. Another good idea is to change your passwords periodically and to ensure that employees who are no longer with your company cannot access your mobile payments processing system anymore.

Company cell phones and other mobile devices should only be utilized for business and not personal use like browsing websites or going on social media. If employees browse the web while working, they could stumble upon a website that installs malware on the device. You should provide your employees with best practices for using your devices, such as never clicking on suspicious links or emails from unknown senders. Keeping your mobile devices updated and using anti-virus software can also provide advanced protection.

The Costs of Mobile Payments

When you take traditional payment methods like checks and cash, you have to spend time and money going to a bank and depositing them. If you accept credit cards, you will have to pay a processing fee of around 1.3% to 3.4%, along with the payment processor’s fees.

However, with mobile payments from Stax, you will only have to pay an affordable subscription price. When it comes to processing, you won’t get charged any extra transaction fees on top of what the credit card companies charge. You will save big, especially as you scale up and grow. The more you process, the greater the chance you’ll have of a higher return on investment even with the credit card processing fees. With Stax, you’ll have direct access to the true rates.

The easy-to-understand Stax model won’t hit you with any hidden fees.  You won’t have to worry about paying multiple vendors since you can process and manage all your mobile payments in one place. You will always know exactly what you are paying for and why. Accepting payments of all types from digital payments to in-store payments has never been easier.

What You’ll Need To Start Taking Mobile Payments

First and foremost, you’ll need one or more mobile devices with internet access. You’ll also need a payment service provider. If you’re planning on taking credit card payments, you’ll also need to get a mobile credit card reader. Once you’ve got all three of those items, you’ll set up your payment methods following your payment provider’s instructions.

You shouldn’t stop there, though. Once you’re able to take mobile payments, be sure to let your customers know this is an option. You can post a sign at your storefront or send your customers an email. You should also make sure your employees are mentioning it as an option at checkout. 

Tips for Choosing a Payment Provider

Choosing a payment provider can be intimidating for small business owners. Here are some tips to help you out:

  1. Take the time to understand your needs. Write out your must-haves and your wants. Keep these front and center while researching options.
  2. Make sure you understand the fee structure of each provider you’re vetting. Many have hidden fees and make it difficult to know what their price tag really is until you’ve already signed up.
  3. Find out if the providers you’re looking at integrate with your tech stack. If they don’t have a pre-existing integration, some providers may be able to build one for you.
  4. Do consider whether the provider is flexible enough to scale with you over time. You may be a small business now, but that may not always be the case. You don’t want to be stuck dealing with cumbersome workarounds once you outgrow your system.
  5. Read the provider’s reviews on third party websites and ask to speak to references. Doing your due diligence now will save on pain later.

Signing Up for Stax

You can easily sign up for Stax today. All you have to do is contact Stax to speak with a Payments Consultant. Stax not only provides secure, affordable, and contactless mobile payment processing; it also offers companies an all-in-one platform of scalable business tech to manage invoicing, financials, sales data, inventory, and customers.

Stax provides our customers with a real and clear view of their finances so they can make better decisions for their business. Once you sign up, you’ll be empowered to grow and ensure your business is a success, one mobile payment at a time.

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FAQs about Mobile Payments for Small Business

Q: What is mobile payment processing?

Mobile payment processing involves the transfer of funds facilitated via mobile devices like smartphones, smartwatches, or tablets. It provides quick, secure, and convenient options for customers to pay for goods or services. Examples of mobile payment processing methods include text-to-pay and secure link payment.

Q: Who can use mobile payment processing options?

Any individual or business with a mobile device can make use of mobile payment processing. As the world transitions towards cashless transactions, both consumers and companies, regardless of their size or nature, are opting for mobile payments. Offering mobile payments can keep businesses competitive, simplify payment processes, and improve customer satisfaction.

Q: What types of mobile payments can a small business offer?

Small businesses can offer various mobile payment options. These include near-field communication (NFC) payments through mobile wallets (Apple Pay, Google Pay, Samsung Pay), standard credit card payments, QR code payments, invoice payments from mobile apps, and text-to-pay options.

Q: How secure are mobile payments?

Mobile payments are considered more secure than traditional payment methods. Customers’ financial information is encrypted in mobile transactions, making it difficult for hackers to gain access. Reputable payment platforms like Stax ensure robust protection by adhering to the highest level of PCI security standards.

Q: What is the cost of mobile payments for small businesses?

Though there are costs associated with accepting mobile payments, they can be more cost-effective when factoring in the time-saving aspect and the cost of other payment methods. With a platform like Stax, businesses are charged an affordable subscription price, with no hidden fees.

Q: What does a small business need to start accepting mobile payments?

To start accepting mobile payments, a business needs one or more mobile devices with internet access, a reliable payment service provider, and possibly a mobile credit card reader. Once set up, the business should make sure to notify their customers about the new payment option.

Q: What should one consider when choosing a mobile payment provider?

When selecting a mobile payment provider, businesses should consider their needs, the provider’s fee structure, the ability to integrate with existing technologies, the provider’s adaptability to business growth, and reviews from other clients. Stax could be an excellent option as it provides secure, affordable, and user-friendly mobile payment processing, which integrates well with other business technologies.

Q: How does mobile payment processing benefit small businesses?

Mobile payment processing can have several benefits for small businesses. It can streamline the payment process, provide flexibility and convenience, increase customer satisfaction, secure customer data, save time, and potentially reduce costs. Additionally, it allows the business to accept payments from a broader range of customers, extending its market reach.

Q: Can a business still accept traditional payment methods while offering mobile payments?

Yes, businesses do not have to eliminate traditional payment methods like cash, check, or cards when they start accepting mobile payments. Offering multiple payment options caters to a wider range of customer preferences and increases the likelihood of sales.

Q: Does Stax have features beyond mobile payment processing?

Yes, in addition to offering mobile payment processing, Stax also provides an all-in-one platform for managing invoicing, financials, sales data, inventory, and customer data. Therefore, businesses can handle all their mobile payments and other related tasks in one place.


 

The Impact of EMV Technology on Payment Transactions

EMV is an acronym for Europay, Mastercard, and Visa as these are the three companies that came together to create the EMV standard. An EMV card is a type of smart card. It can be a card that needs to be inserted into a card reader or a contactless card that uses NFC (Near-Field Communication) technology.

EMV cards have quickly become an integral part of keeping businesses and their customers secure. Chip cards work to protect businesses by decreasing losses and fraud liability related to credit card fraud and creating a safer payments ecosystem.

Hence, most debit and credit cards these days are EMV cards. When you look at your EMV payment card, you will see a small, shiny, square chip on it—this is the EMV chip. EMV cards are much safer than traditional magnetic strip cards as the chip generates a unique verification code for each transaction. 

Data is stored on the IC (Integrated Circuit) chip of an EMV card as well as the magnetic strip. This allows EMV cards to be backward compatible, which means that they can be used on older card readers and payment terminals. These cards are also known as IC cards, chip cards, and integrated circuit cards. Card issuers can choose various authentication methods like digital signatures or PINs for their EMV cards. Depending on the authentication method, EMV cards can also be called chip-and-signature or chip-and-PIN cards. 

Figures published by EMVCo, the company that manages EMV specifications, in 2021 show that by the end of the year, there were 21 billion EMV cards in circulation worldwide. The report also highlighted that the number of EMV cards rose by 1.1 billion when compared to the previous year and that when it comes to card-present transactions, 90% of them are made with the help of EMV technology. 

TL;DR

  • EMV is an acronym for Europay, Mastercard, and Visa as these are the three companies that came together to create the EMV standard. An EMV card is a type of smart card. It can be a card that needs to be inserted into a card reader or a contactless card that uses NFC (Near-Field Communication) technology.
  • EMV chip cards are more secure because they contain a microchip that, generates a code for each transaction. This code is unique and cannot be reused, so even if the cardholder’s information is obtained from stolen cards, if the card is copied, or if the credit card number falls into the wrong hands, fraudsters wouldn’t be able to complete a transaction.
  • The first step to implementing EMV chip technology is to ensure that you have the right equipment. In some cases, you may also need to guide your customers on how to use an EMV debit or card payment card.

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The History of EMV

Europay, Mastercard, and Visa were the founding members of this standard, creating the name EMV in 1993. They were later joined by Discover, JCB, UnionPay and American Express to form EMVCo.

The first version of EMV came out in 1994, although it took a few years before it saw widespread use across Europe. Issuers in Europe adopted this standard because phone line card authorization was prohibitively expensive for them. Due to international call rates, the cost to authenticate cards was 80 to 90 percent higher in Europe.

It took until 2015 for the United States to start its EMV migration. Companies were slow to adopt the more secure payment system because of the expense and lack of synchronization among retailers, credit card providers, and banks.

On October 1, 2015, an EMV liability shift was created, which required businesses to be able to accept EMV cards or risk being liable for fraudulent transactions if it were to occur, pushing for synchronization across the board.

EMV cards have now become the standard, as they are more secure and smarter than magnetic stripe cards or cash transaction.

How EMV Chip Technology Works

EMV chip cards are more secure because they contain a microchip that generates a code for each transaction. This code is unique and cannot be reused, so even if the cardholder’s information is obtained from stolen cards, or if the card is copied, or if the credit card number falls into the wrong hands, fraudsters wouldn’t be able to complete a transaction.

In contrast, card transactions involving magnetic stripe cards are less secure because magstripe cards are only able to store static information. This makes it easy to produce counterfeit cards. An EMV chip card needs to be inserted into a special slot in the card reader or POS terminal to complete a process that is called “dipping.” In comparison, a magnetic strip card is swiped at the payment terminal so that the static card data can be read. 

It must be noted that with EMV cards the card number is never transmitted unlike with magnetic strip cards. The unique code generated by EMV cards is used instead to authenticate the transaction.

Once an EMV card is inserted, the data on the computer chip is read and the card is verified by the terminal. As the EMV verification process is more complex than that of magnetic strip cards and because a unique code is generated each time the card is used, it takes a bit longer to complete a dipped transaction.

Chip-and-signature transactions are still the most common EMV transactions in the US. Here, a customer must also sign on the receipt after the card is dipped to complete the transaction. Chip-and-PIN transactions are more popular outside the US where a customer types in a four-digit PIN during payment processing. In general, the latter is considered to be safer. 

Newer EMV cards can also be used for contactless payments. Customers can simply tap or wave the card across an EMV-enabled terminal, and the card would generate a one-time code for the transaction.

From the customer’s side, using a card with EMV chip technology is quite simple. They present the card at the point of sale (POS), but instead of swiping it, the shopper dips or taps their card using the merchant’s card reader. Once the transaction is authorized, they can proceed with the sale.

EMV Cards Are Safer

Previous methods using magnetic-stripe cards meant that cashiers had to look at the card and signature to verify a purchase. Card information on these cards is stored data statically, meaning that it can be pulled from the stripe with a simple piece of hardware.

The chip in the EMV cards provides stronger security for transactions through cryptographic algorithms, uniquely encrypting the data each time you use it. Authenticating your purchases are made easier with the use of a personal PIN number, instead of requiring a signature.

EMV cards provide a two-fold confirmation during card-present transactions, using the physical card and the customer’s PIN. This verifies the cardholder, allowing the one-time-password (OTP) generated by the chip to be confirmed and approved. In situations of card-not-present purchases these options are unavailable as the card won’t be in the merchant’s hands, making it easier to exploit than retail fraud. Some methods and tools for eCommerce sites to implement verification are to:

  • Continue PCI compliance and follow the specific rules for data security and management.
  • Verify card security codes.
  • Use an address verification service (AVS).
  • Analyze priority shipping requests (especially if free shipping is offered).
  • Validate unusual orders from repeat and regular customers.
  • Confirm the phone number and transaction information before shipping products.
  • Take advantage of fraud prevention services available from credit card companies such as Verified by Visa or Mastercard SecureCode

Keeping a well-maintained authentication system will significantly reduce your business’ risk, while your customers enjoy the ease of purchasing your products with a business that establishes trust and security with CNP payments.

EMV Cards Are Smart

Every chip on an EMV card contains an embedded microprocessor, a type of small computer that provides strong security features and other capabilities not possible with traditional magnetic stripe cards.

When you insert this card into a terminal, the reader is able to exchange data with the card easier. Contactless EMV cards allow for an exchange of data via radio frequency without the card ever leaving the customer’s hand. With contactless cards, a customer does not have to verify the transaction by providing a signature or PIN, which makes contactless transactions much faster than chip and magnetic strip cards. The cashier also does not have to print out a receipt unless specified by the customer. 

How to Implement EMV Chip Technology in Your Business

The first step to implementing EMV chip technology is to ensure that you have the right equipment. Your credit card readers must be EMV enabled in order to support chip-and-pin and chip-and-signature transactions.

The good news is that most credit card terminals these days can support EMV, so if you recently purchased your credit card machines, they’re likely EMV-compliant.

If this isn’t the case, contact your payment processor or hardware provider to discuss your options.

If you already have an EMV card reader or EMV terminal, you should be good to go from the technical side of things. You may need to orient your staff on how to use the terminals if they’re unfamiliar with the technology.

In some cases, you may also need to guide your customers on how to use an EMV debit or card card.

Final Words

As more transactions become digitized, data security is of the utmost importance. 

Additionally,  businesses and their customers need to be educated on how they are transferring money and the tech behind these products that protect their payments.

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FAQs about EMV Technology

Q: What does EMV stand for?

EMV stands for Europay, Mastercard, and Visa. These are the three companies that came together to create the EMV standard.

Q: What is an EMV card?

An EMV card is a type of smart card containing a microchip that generates a unique code for each transaction. This makes EMV cards more secure than traditional magnetic stripe cards.

Q: How does an EMV card work?

When an EMV card is inserted into a card reader, the terminal reads the data on the chip and verifies it. The card generates a unique code for each transaction, which is used to authenticate the transaction.

Q: What is the purpose of EMV technology?

The primary purpose of EMV technology is to enhance the security of payment transactions. The technology helps decrease losses and fraud liability related to credit card fraud, creating a safer payments ecosystem.

Q: How prevalent is the use of EMV cards?

According to 2021 figures published by EMVCo, there were 21 billion EMV cards in circulation worldwide. Moreover, 90% of card-present transactions are made using EMV technology.

Q: What are the different types of EMV cards?

EMV cards can be categorized based on their authentication method. They can be chip-and-signature or chip-and-PIN cards. More modern EMV cards also support contactless payments.

Q: What is the difference between chip-and-PIN and chip-and-signature cards?

Chip-and-PIN transactions require the customer to type in a PIN during payment processing, while chip-and-signature transactions require the customer to sign on the receipt to complete the transaction.

Q: What are contactless EMV cards?

Contactless EMV cards are a newer type of EMV card that supports contactless payments. Customers can tap or wave the card across an EMV-enabled terminal, and the card generates a one-time code for the transaction.

Q: How to implement EMV technology in a business?

To implement EMV technology, businesses need to have EMV-enabled credit card readers. They might also need to provide guidance to staff and customers on how to use EMV cards.

Q: What is the history of EMV technology?

Europay, Mastercard, and Visa created the EMV standard in 1993. Over the years, other companies joined them to form EMVCo. The first version of EMV was released in 1994, and it gained widespread use across Europe over the following years. The United States started its EMV migration in 2015.

Q: What is the EMV liability shift?

The EMV liability shift, created on October 1, 2015, required businesses to be able to accept EMV cards or risk being liable for fraudulent transactions. This pushed for synchronization across retailers, credit card providers, and banks.

Q: How do EMV cards enhance transaction security?

The chip in EMV cards provides stronger security for transactions through cryptographic algorithms, uniquely encrypting the data each time the card is used. The cardholder’s personal PIN number or the physical card itself helps authenticate purchases.