Whether you are starting a new online store or looking to grow your existing brick-and-mortar small business, you must make provisions for accepting credit card payments.
A study by the Federal Reserve Bank of San Francisco showed that credit cards account for 31% of all payments, significantly more than cash at 18%, and debit cards at 29%.
There is no way around it: credit cards are an essential part of the everyday life of your customers and you will only lose customers if you aren’t ready for card payments.
In this article, you will discover all you should know about credit card payment processing for small businesses. We have also put together a list of the top three best credit card processing platforms for small businesses.
TL;DR
- Credit card payment processing encompasses the series of activities that enable your small business to accept credit card payments from customers and facilitate the transfers of relevant funds from the buyer’s bank account to your business account.
- To set up credit card payment processing for your business, you need to apply for a merchant account, and upon approval, get a payment gateway (online payments) and payment terminals (card readers, virtual terminals) to start accepting card payments.
- Stax, Payment Depot, and CardX are three of the very best providers in the industry. Each has its own unique pricing model and the right choice for your business will depend on your sales volume and how you want to manage the impact of processing fees on your bottom line
Understanding Credit Card Processing for Small Business
Credit card payment processing encompasses the series of activities that enable your small business to accept credit card payments from customers and facilitate the transfers of relevant funds from the buyer’s bank account to your business account.
These processes are facilitated by a network of financial institutions and technologies that work together to ensure the seamless and secure transfer of data and funds.
We have broken down the process into three key steps below:
Payment initiation
This first step is triggered when your customer pays for your goods or services using a credit card.
The customer can make the credit payment physically by swipe, dip, or tap, depending on your point-of-sale (POS) system, which will capture the credit card details.
The payment could also be made via digital means. The customer will provide card information and transaction details on the checkout page of your website, and the data will also be captured by your online payment gateway.
Authorization
The credit card details captured by your POS or online payment gateway will be sent to your payment processor.
A payment processor is a company that handles the behind-the-scenes aspects of the credit card transaction process on your behalf.
The company facilitates the transfer of information and funds between the customer’s bank and your business’ bank.
It also ensures that data security best practices, particularly PCI DSS (Payment Card Industry Data Security Standards) requirements, are followed to the letter to prevent any breach or loss of sensitive customer data.
Once your payment processor sends the customer’s data to the issuing bank/card issuer (customer’s bank), the bank will check for the card’s validity and the availability of adequate funds or credit.
If the card checks out, the customer’s bank will send an authorization code to your payment processor, indicating that everything is in order and the transaction can proceed.
Clearing and settlement
With full authority to proceed with the transaction, your credit card processor will forward the transaction details to the relevant card networks, which are responsible for routing the relevant funds from your customer’s bank to your business bank (acquiring bank).
When the funds get to your business’ bank, the bank will remove any associated fees and credit your account with the balance.
Transaction fees are a crucial part of the credit card payments processing ecosystem that you can’t afford to ignore since they impact your cashflow and final revenues.
These fees are deducted by the financial institutions involved in each step of the process and can include:
- Interchange fees: it is the largest percentage of your payment processing fees and it is paid to the cardholder’s issuing bank (customer’s bank) as compensation for providing and maintaining the payment card
- Assessment fees: it is paid to the card network (Visa, Mastercard, American Express, or Discover) as compensation for the cost of processing payment transfers from the issuing bank to the acquiring bank.
- Processing fees: it is paid to your payment processor as compensation for the resources used to facilitate the transfer of information and funds on your behalf.
Disputes and chargebacks
There may be instances when your customer disputes a credit card payment because of a billing error, fraudulent transaction (unauthorized card usage), or non-delivery of goods/services.
When this happens, a chargeback process will be initiated.
The transaction will be investigated, and if the customer’s complaint is verified, the payment will be reversed and the funds will be sent back to the customer.
The issue here is that each chargeback attracts a fee that will be paid by your business, and the more chargebacks you get, the more you lose funds.
Your merchant account can even be terminated if you get too many chargeback fees.
This is why it’s so important to go for a payment services provider (PSP) that offers robust credit card fraud prevention services to protect you from fraudulent chargebacks and help you better generate evidence to protect your business during chargeback disputes.
How to Process Credit Cards as a Small Business
Below is a step-by-step breakdown of the elements of an effective payment processing system.
Step 1: Choose between in-store, online, and mobile credit card processing options
Your choice will depend on best practices in your industry and how you want to run your small business.
In-person transactions
This is when the customer physically visits your brick-and-mortar retail store or office to purchase the goods or services.
There are three types of in-person payments:
- Swiped transactions: here the customer swipes a magnetic stripe card through your credit card reader, which will capture the card’s data and transmit relevant information to your payment processor.
- Dipped transactions: here the customer’s card is dipped into your card reader to initiate the transaction process.
- Tapped transaction: here the customer’s credit card is hovered over your card reader to transmit transaction data without any direct contact. This contactless transaction is enabled with NFC (near-field communication) or RFID (radio frequency identification) technology and it prioritizes speed and convenience.
Online transactions
This is when the customer purchases your goods and services online through your eCommerce store or website.
The customer can pay by manually entering credit card information on your checkout page or by using a digital wallet (Apple Pay, Google Pay, Samsung Pay).
Online transactions come with greater fraud risk and usually attract higher processing fees to compensate your PSP for the increased risk it is taking on your behalf.
Over-the-phone transactions
This is when the customer purchases your goods or services via a telephone order.
It is called a card-not-present-transaction and it usually involves the customer providing their credit card details during the phone call for you to enter into your POS system and initiate the payment.
A good example is restaurants that accept customer takeout orders over the phone.
The fact that the customer is not present physically at your store makes it a high-risk transaction, and the use of security measures like two-factor authentication is highly recommended.
Step 2: Set up a merchant account
A merchant account is a specialized account used to hold customer funds temporarily before it is sent to your business bank account.
The funds remain in the account until the credit card is verified and the availability of funds is confirmed.
You need a merchant account to be able to accept credit and debit card payments, and they are usually provided by banks authorized by card networks to issue credit cards on their behalf.
To set up an account, you must apply to a merchant account provider, and it will request a bunch of documents and information, including:
- Proof of your business license
- Tax information
- Your credit report
- Banking history
- Your projected sales volumes
- Industry type
- Your business plan
- Certificate of incorporation
- Your financial statements
To improve your chances of getting a speedy approval, you must ensure you have all these documents and that your credit history and financial statements are free of red flags.
Step 3: Integrate a payment gateway
A payment gateway is a type of payments technology that lets you accept debit or credit card payments on your website.
Once your customer enters credit card information on the checkout page of your website, your payment gateway will encrypt the information and forward it to your payment processor for authorization and settlement.
It serves as a link between your website and your payment processor.
You can build your own payment gateway or use one provided by a third-party payment gateway provider.
As a small business owner, building a payment gateway from scratch may be too time-consuming and expensive. You are likely better off opting for a third-party platform.
However, you must do your due diligence and be sure that the payment gateway will integrate seamlessly with your existing systems and your PSP’s platform.
Step 4: Set Up Payment Terminals
Payment terminals are customer-facing hardware that are used to accept and process in-person credit card payments.
You won’t need payment terminals if you exclusively accept payments online via your website or online store. A payment gateway or an eCommerce CMS like Shopify will suffice for you.
There are several types of payment terminals, including fixed terminals (countertop systems), portable/mobile terminals (card readers, phones, tablets), and virtual terminals.
Payment terminals are usually provided by your payment service provider, though there are some providers like Stax that let you use your existing hardware.
How to Get the Cheapest Credit Card Processing
Given that PSPs have different processing fee structures and services, the right provider for your small business is not necessarily the one with the nominally cheapest offer.
To find the cheapest credit card processing company for your business, you have to assess your industry, specific business needs, the transaction fees of each provider, and the contract terms on offer.
Step 1: Assess your business’ industry
Your industry may have unique credit card payment processing requirements that won’t be met by a generic PSP.
For example, a restaurant business owner may want the ability to accept payments offline from customers dining outdoors in areas with poor internet connectivity.
Another good example is an eCommerce business with an international customer base. Such a business will require a provider that supports international transactions.
You will need to meet established business owners in your industry to learn more about how they currently handle credit card payments.
A good fit will be a payment services provider that intimately understands your industry, with a proven track record of adapting to evolutionary changes in your industry niche.
Step 2: Outline your specific business needs
Here you will consider your specific business model and the services and equipment required to ensure seamless payment processing within that system.
For example, an online-only business can opt for a cheaper payment services provider that only offers payment gateways and no equipment.
In contrast, a business with both eCommerce platforms and brick-and-mortar outlets will need a more sophisticated PSP for payment gateway software, payment terminals, and other complimentary software tools.
Step 3: Evaluate transaction fees
You also need to consider how much of a processing fee you are willing to pay.
Note: the processing fee is charged by your PSP and it’s different from the interchange fee charged by the issuing bank that you must still pay on each transaction.
The idea is to identify the best pricing model for your business. Credit card processing companies use one of three pricing models:
- Flat rate pricing: you are charged a fixed rate (usually a percentage of the sale) regardless of the credit card type. Providers using this model don’t typically charge monthly fees and even offer free equipment, which makes it ideal for very small businesses with low transaction volumes (less than $5000), and ticket prices.
- Interchange-plus pricing: you are charged a varying rate depending on the credit card type. This model is ideal for businesses that process high-volumes of transactions each month because, on the balance, you will save money on credit card transactions with lower-than-average rates.
- Tiered pricing: you are charged a variable rate based on tier pricing. This means you pay the applicable rate for the tier your volume of transactions falls under for a particular month. This model can save you money in the long run if you have a stable volume of transactions.
It’s clear that the right provider is the one that provides the most competitive fees based on your sales volume and the types of transactions you process the most.
Step 4: Scrutinize contract terms to spot hidden fees
A credit card processing company may offer fees that appear cheap on the surface, but when you dive deeper, you may discover that the provider has tacked on multiple add-on charges that may add up over time and severely impact your revenues.
Be on the lookout for the following PSP addon fees:
- Service fees: some providers can charge you a monthly fee for the use of their platform in addition to per-transaction fees.
- Monthly minimum fee: some providers will charge you a punitive fee if you don’t process a predetermined minimum amount each month.
- Equipment setup fees: some providers can charge you a fee for the installation and setup of payment terminal hardware, separate from the money you will pay to buy or lease the hardware.
- Early termination fee: some providers will charge you a fee for terminating your contract with them and moving on to another PSP before the end of the term of your contract.
- Incidental fees: some providers have a raft of one-time fees for specific situations like chargebacks, voice authorization, address verification service (AVS), and non-sufficient funds.
In addition to all these fees, you must also consider the cost of buying or leasing hardware from each provider to get a full picture of what subscribing to that PSP will really cost you.
Opt for a payment services provider that is transparent about any additional fees and offers the best value for money based on the total cost of the subscription.
Step 5: Negotiate better terms
At this stage, you should have a shortlist of credit card processing companies that have passed the first four criteria.
The provider has custom solutions for your industry, meets the specific needs of your business model, offers a cost-effective pricing model, and is affordable based on the total cost of the subscription.
Now you have to compare them side-by-side based on factors like features, customer care, scalability, reputation, and compatibility with your existing systems.
We will expand on each of those factors later in the article.
Once you settle on the most suitable provider, you should reach out to the company’s sales rep to discuss reducing fees.
This is more feasible when you process large volumes of transactions, and if you don’t, you can reach an agreement on how your transaction fees may reduce over time as your volume increases.
Different Credit Card Processing Options for Small Business
The credit card processing companies discussed in this section are three of the very best providers in the industry.
Each has its own unique pricing model and the right choice for your business will depend on your sales volume and how you want to manage the impact of processing fees on your bottom line.
Stax (best for small businesses with high sales volumes)
Stax is an all-in-one payment processing company that charges a fixed monthly fee for your transactions, instead of charging a percentage of each transaction amount like most PSPs.
The usual practice is that a PSP will charge a markup (usually a percentage of the transaction amount) per transaction in addition to the interchange fees imposed by the issuing bank.
As explained earlier, this markup can be a fixed rate, interchange-plus rate, or a tiered rate. The key thing to know is that the markup is applicable to all transactions.
Stax takes a unique approach. It doesn’t apply a markup to each transaction, and instead, charges you a fixed fee each month that covers all your transactions for that period.
The advantage of this approach is that you can save lots of money if you process large volumes of transactions each month.
Once you cross a certain threshold (about $5000+) for the month, the monthly membership fee which stands in for the typical per-transaction fee will have been exhausted, and you will basically start using Stax’s services free for the rest of the month.
Stax features
- Membership pricing
- Easy integration with your existing POS devices
- Centralized dashboard for managing your payments
- Incuded payment gateway software and online virtual terminal
- Support for a wide range of payment methods
- API access
- Mobile payments app
- Invoicing
- In-house customer support
- Chargeback protection
- Next business day funding (same-day funding available for a fee)
- PCI-compliant
- No setup fees
- No cancellation fees
- No hidden fees
Stax pricing
- Processing up to $150,000 per year: $99/month
- Processing between $150,000-$250,000 per year: $139/month
- Processing $250,000+ per year: $199+/month.
Payment Depot (best for custom interchange plus pricing)
Payment Depot uses a tiered interchange plus pricing model where it tailors the markup it charges to your business.
That markup is set according to your average sales volume and it remains consistent regardless of the type of credit card used for each transaction.
By doing this, Payment Depot helps you take advantage of the fact that interchange rates vary depending on the type of credit card used for the transaction.
Since the markup stays the same regardless of the type of sale, you will be able to save money when your customers use credit cards that impose lower interchange fees.
Payment Depot is particularly suited for businesses that have a stable monthly sales volume.
You will be able to save more compared to using other PSP providers that will impose the same markup percentage on businesses of all sizes or charge varying fees depending on the credit card type.
Payment Depot features
- Interchange plus pricing model
- Fixed processing fee for all types of credit card payments
- Online dashboard to manage payments
- Included virtual terminal and payment gateway software
- Chargeback protection
- Funding in 24 to 48 hours
- In-house customer support
- PCI-compliant
- No setup fees
- No cancellation fees
- No PCI fees
- No monthly fee
- Only available in the United States
Payment Depot pricing
Interchange-plus rates between 0.2% – 1.95% per transaction.
CardX (best for 0% processing fees using credit card surcharging)
CardX is a merchant services provider that lets you pass on credit card processing fees to customers via surcharging.
A surcharge is an additional fee added to the nominal cost of a good or service for the convenience of paying with a credit card.
CardX imposes a fixed 3% charge, and this fee is only applicable when the customer pays with a credit card.
The main advantage of surcharging is that it encourages your customers to pay with cash instead of a credit card which is more expensive due to the surcharge.
Your business will also drastically reduce costs associated with credit card payment processing since it’s now mostly borne by the customer.
You will still pay a tiny amount for each debit card transaction and a monthly fee for the use of CardX’s virtual terminal.
CardX is the industry-leading surcharging solution and its services are available in all 48 states where surcharging is legally allowed.
Surcharging is not the right approach for every business and it can turn off customers who may feel you are ripping them off.
We recommend surcharging for food and drink, transportation, and eCommerce businesses.
CardX Features
- Automated surcharging
- 0% credit card fees
- Support for credit and debit cards, ACH (e-checks)
- Custom POS terminal and software
- Virtual terminal
- Low monthly equipment lease fee
- Zero equipment setup fee
- Merchant training
- Funding in 24 hours
- In-house customer support
- PCI-compliant
- No long-term contracts
- No cancellation fees
CardX Pricing
- Equipment and software for in-person transactions: $29+ per month
- Equipment and software for online and in-office transactions: $29+ per month
Security and Compliance in Credit Card Processing
PSPs are required to follow PCI DSS standards in all credit card processing activities to ensure adequate protection of your customer’s financial data.
However, other industry best practices apart from PCI compliance are also expected from a quality payment processor and they include:
- Multifactor authentication: MFA practices help to prevent unauthorized access to sensitive information by adding an extra layer of identity confirmation before the user is allowed to view the relevant data.
- Tokenization: this is a data security approach where customer data on your system is replaced by representative tokens, while the actual information is moved to an external data vault. The main advantage of tokenization is that if there is ever a data breach of your systems, the hackers will only obtain placeholder tokens that are meaningless without the data they represent.
- Regular security audits: periodic tests that involve paying white hat hackers to conduct controlled attacks on a provider’s digital architecture can help the company spot vulnerabilities before they are exploited by fraudulent actors.
As a small business owner, you also have a part to play. Below are a few best practices that can help keep your in-house digital systems as secure as possible.
- Compliance with regular software updates: software providers often roll out updates to fix recently detected bugs and vulnerabilities and it’s crucial that you consistently update your software apps in a timely manner to prevent targeted attacks.
- Data breach response plan: you should have a detailed plan for identifying, investigating, and responding to data breach incidents so your business won’t be left drifting at sea if such an event ever occurs.
- Regular employee education: your staff must be well-trained on data security best practices and you must implement access control mechanisms to ensure only the right individuals have access to sensitive business information.
Making the Right Choice for Your Business
Below are a few key factors you can use to compare the credit card processing companies that make your shortlist before making a final decision.
Available features
Check the features and services offered by each provider in detail, to see which PSP offers the best value for your business.
You should look out for features like:
- Intuitive user experience
- Ease of setup
- Unified payment management solutions
- Real-time data synchronization across all payment processing channels
- Analytics and reporting tools
- Availability of free trial and demos
- Refunds and chargeback management
A more expensive provider offering better services and integrated features may end up being the more optimal choice when compared to a cheaper provider with less sophisticated payment management services and equipment.
Integrations
The POS software provided by the PSP must integrate seamlessly with your existing business operations software tools like your accounting software and CRM apps.
For eCommerce businesses, in particular, the payment gateway offered by the provider must work well with your online shopping carts.
If you already have payment terminal hardware, you would also want POS software that is platform agnostic.
Customization and scalability
The PSP’s software must allow for customization to fit the specific branding and functionality needs of your business.
You must also be able to adapt the platform for automated compliance with regulations in your specific industry.
Planning for future growth is just as important.
As your business expands, you want the provider that offers the most robust opportunities for scaling your credit card payment processing to match your growing needs.
Customer support services
Prioritize providers that have proven high-level technical customer support.
You should check for things like onboarding support, minimal downtime, support for handling chargeback disputes, and responsiveness.
Ideally, you want a company offering 24/7 customer support and the full range of customer support services, including:
- Live phone support
- Chat support
- Online Documentation
- Social media communication
Contracts
As we mentioned earlier in the article, you must pay close attention to the terms specified in each contract.
You should avoid contracts with lengthy terms that try to lock you into a relationship with the provider that you can’t terminate without a hefty early termination fee.
We recommend opting for providers that offer month-to-month contracts and flexible terms that let you break off the contract at will.
Brand reputation
Check out online review websites like PCMag and MerchantMaverick to view expert opinions on the PSP’s offerings.
You should also check online review ratings sites like Trustpilot and TrustRadius to see what current and past customers have to say about the provider’s services and equipment.
Reading customer testimonials is also a good idea.
Of course, the company will only display positive testimonials on its website, and that’s not your goal.
The aim is to use those testimonials to get a decent idea of the types of businesses using the provider’s platform and how they are using it.
That will tell you if the platform is an ideal fit for the specific needs of your business.
It’s Time To Choose The Best Credit Card Payment Processing Provider For Your Small Business
This article has shown how credit card payment processing works and the right way to start accepting credit card payments in your business.
We have also done the heavy lifting by highlighting the best PSPs on the market, the types of businesses that should opt for each provider, and the fees they charge for their services.
Now it’s time for you to pick one of the three providers that best suits your business’ specific needs, set up credit card payment processing, and unlock the advantages of card payments for your business.
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