Credit cards are a staple in the wallets of consumers today, and they will continue to be a payment method of choice for years to come, particularly as the adoption of mobile and contactless payments continue to grow.
In fact, ResearchAndMarkets.com forecasts the global credit card payment market to grow from $477.63 billion in 2021 to $762.16 billion by 2027—exhibiting a 7.8% compound annual growth rate over the next five years.
To give you some clarity, here’s a practical guide that answers the most common questions small business owners have about credit card processing.
In This Guide
- What is Credit Card Processing
- How to Accept Credit Cards
- Credit Card Payment Channels
- Entities Involved
- Credit Card Association Roles
- Acquiring Banks and Merchant Services Providers
- How Credit Card Payments Are Processed
- Traditional vs Integrated Payment Systems
- Costs to Accept Credit Card Payments
Answering Your Questions About How To Accept Credit Card Payments
According to studies, the number of open credit card accounts in the United States stands at an all-time high of 537 million. With 83% of Americans owning at least one card (while the average American owns three), it’s safe to say that credit card purchase volumes have increased significantly over the last decade.
That means if your business shies away from accepting credit cards as a mode of payment, it can have detrimental effects on your business growth.
With Americans being 40% likely to pay for their purchases using a credit card, it’s easy to see why more and more small business owners are now turning to merchant services providers to start offering credit cards as a payment option.
In addition, as credit card transactions continue to grow due to digitization and other factors, many businesses are adding the ability to process payments made via debit cards, credit cards, and mobile wallets (like Google Pay, Apple Pay, PayPal, or Venmo) in order to be more accommodating to their customers.
Navigating the realm of credit card payment processing can be tricky because there are several entities and moving parts involved in facilitating transactions.
So let’s more about the basics of credit card processing including how it works, the entities involved, the fees you may have to incur, and how you can start accepting credit card payments easily.
What is Credit Card Payment Processing?
Credit card processing refers to the series of steps involved to facilitate transactions made using credit cards. The process begins from the moment the customer makes a card payment to the point when the transaction is authorized and settled. This can be done through a variety of channels, which include but are not limited to:
- Point of Sale (POS) Terminals
- Mobile POS Terminals
- Mobile Card Readers
- Mobile Apps
- Online Payment Gateways
Before you learn more about the more detailed aspects of credit card payments, such as the difference between traditional and integrated payment platforms, it is important to learn the basics.
This fundamental knowledge will help you learn more about the process to accept credit cards. It will also contribute to further realizations on how it works for your small business.
You can understand the relationship between credit card processing fees, the nuances of debit card and credit card transactions, and how it ties back to your business bank account.
These essentials will also enable you to work with payment service providers and credit card processors more seamlessly.
Ready to learn more? Let’s start with the mechanics of accepting credit card payments.
How Do Businesses Accept Credit Cards?
Some businesses choose a traditional payment solution to accept credit card payments, while others go with an integrated payment platform.
For example, businesses such as coffee shops may choose to use a point-of-sale system (POS system) or hardwired credit card reader to accept card payments at the counter. Or they could use a mobile credit card terminal if they prefer to collect payments at the table.
Mobile card readers are particularly suited for merchants that sell their products at farmers’ markets, fairs, trade shows, etc., as well as mobile businesses like dog groomers, food trucks, plumbers, etc.
Other businesses may consider a more feature-rich platform to account for the integration of a variety of online and in-store payments into a single payment platform.
Different types of businesses require various solutions ranging from mobile device options to the ability to accept credit card payments online.
But the common factor remains their pursuit to accept credit card payments, which lets them serve more customers and increase their revenues.
Credit Card Payments Are Not Limited to One Channel
POS terminals are present in brick-and-mortar stores. Further, more business owners are shifting to POS payment methods that are consistent with other payment solutions to keep their overall payments process simple.
Mobile solutions are becoming increasingly popular with popups, service professionals, and doorstep delivery services. They can use the typical method of swiping or dipping the card or also go the route of modern tap-to-pay or contactless payments. Essentially, swiping, dipping, and tapping are the three ways that customers can make in-person payments with a credit or debit card.
Swiping, of course, is the oldest of the three methods and is used with a card that has a magnetic stripe (or magstripe) on it. Both dipping and tapping require an EMV chip card that generates a unique one-time code for every transaction.
This adds an extra layer of security to these transactions. In tap-to-pay transactions, EMV combines with another technology called NFC (near-field communications) that makes it possible for the card terminal to read credit card information from contactless cards.
Mobile apps can also be used by service professionals to accept credit card payments directly into their app accounts. They are also used by businesses that accept credit card payments via modern methods such as QR codes, which are unique to each merchant account.
As the name suggests, online payment gateways are used by eCommerce stores and apps. These solutions require customers to process their credit card payments by manually entering their 16-digit number, expiration date, and CVV code.
Entities Involved in Credit Card Processing
Here are the key parties involved in processing any credit card transaction.
1. The Merchant
This is you or your business. You are also given a merchant account where your processed payments go for your usage. In essence, this is the business that accepts card payments from customers in exchange for their products or services.
2. The Customer
Put simply, the cardholder who uses their debit or credit card to pay for the products or services.
3. Acquiring Bank
The merchant bank that allows the business to receive money from card transactions and store these funds. Sometimes acquiring banks may also serve as the payment solutions provider that supply you with the required equipment/card readers and infrastructure to process credit card payments and deposit funds into your merchant account.
4. The Issuing Bank
The cardholder’s bank or financial institution that issued their credit or debit card.
5. Credit Card Associations
This is the card network or card brand that powers the credit card for the cardholder. Examples such as Visa and MasterCard will help you remember what credit card networks do.
6. Payment Processor
The credit card processing company that connects the merchant, card associations, and issuing banks to facilitate payments.
The Role of Credit Card Associations in Payment Processing
All major credit cards are connected to card associations in some way. Each association has its own interchange fee, so knowing what these fees are and how they are handled by your merchant service provider will help ease any potential confusion.
This component is a core part of your overall transaction fees and you will see this as a part of your processing fees.
Some providers will even allow you to “turn off” acceptance for American Express or Discover, allowing you to simply accept Visa and Mastercard as their interchange rates are typically lower.
This is beneficial if you discover over time that your customers are not really using either of those associations for payment and you want to save on those fees.
Keep in mind that while these are the most widely used payment card networks, they are not the only networks that you can encounter or use as a small business to accept credit card payments on behalf of your customers.
You Need an Acquiring Bank or Merchant Service Provider
Apart from credit card associations, the other key party involved in processing these payments is your merchant services provider or your acquiring bank.
The acquiring bank is a financial institution that accepts the payment and deposits into the business account. Further, they can play the role of the payments processor, making them a critical part of the transaction.
In essence, these solution providers or acquirers are the entity that helps you accept credit card payments via different equipment and software solutions.
How Are Credit Card Payments Processed?
When a card is present, you can swipe the card against a POS terminal. You can also scan it via a card reader. For scenarios where the card isn’t present, you can use its details to perform contactless credit card payments via online or digital payment gateways.
Through your acquiring bank or your payment solutions provider, you can use these methods to send the payment information to the credit card network.
The credit card network receives the information, verifies it, and then sends you its approval. When the transaction goes through, you can know right away and deliver your customers the products or services they have purchased.
It’s as simple as that.
But that’s just a surface-level description of credit card payment processing. The major part of the process comes after these services have been delivered.
Traditional vs. Integrated Payment Systems
If you use a traditional POS method of credit card processing, then it goes like this:
- Create a new sale in POS and scan the item.
- Choose the payment method your customer would like to use (debit, credit, gift card, etc.).
- Grab your terminal or card reader and manually input the sale amount into the terminal.
- Start the process of authorizing and accept credit card payments from the merchant services provider/acquiring bank
- In case the transaction is approved, retrieve the terminal and print receipts.
- Go back to the POS, manually mark the purchase as paid and complete the checkout process.
In an integrated payment, the transaction amount is automatically pushed to the terminal instead of being manually entered. It is also automatically reconciled and marked as paid once payment has been processed.
As such, integrated payment solutions combine payment processing systems with feature-rich technology that helps automate the payments process. By using integrated payment services, you cut through the redundant work required by traditional payment systems.
That’s why most business owners now prefer using integrated payment solutions as opposed to traditional payment systems.
Apart from making credit card payment processing easier, integrated payment solutions also bring other benefits to the table.
If you use multi-channel payments, then integrated payment solutions also help you manage your transactions from different avenues. For instance, if you have multiple stores or if you sell your services at a storefront as well as online, then you can see all your transactions in one place.
What Are the Costs of Credit Card Processing?
Before you sign up with a merchant solutions provider, it is essential to remember that the charges for credit card payments are not set in stone.
While some merchant account providers charge you a separate fee to pay for credit card networks, others do not require you to do so. Some merchant service providers may ask you for a higher setup fee for your credit card readers while others may offer their equipment at a lower price.
All in all, the charges for processing credit card payments depend upon the merchant services provider. It is best to shop around and compare fees as well as services before you sign up with a provider.
This way, you can make sure that you are getting the best deal for your business.
It also helps to understand the pricing structure of different payment processors. These pricing structures include:
Tiered pricing. With this pricing method, the payment processor places transactions into three tiers: qualified, mid-qualified, and non-qualified.
How a transaction is categorized is based on factors like what card was used or where the transaction took place. Premium credit cards such as travel and reward cards are usually placed into the non-qualified tier, which incurs higher payment processing fees.
Meanwhile, transactions that involve debit cards and basic credit cards are usually placed in the qualified tier and get lower rates.
While it’s simple enough to understand, the tiered pricing structure lacks transparency. This is because the rules for how to categorize transactions are completely arbitrary and up to the processor.
As a result, this structure makes tiered models the least transparent. It’s difficult to figure out how much you’re actually paying, given that the processor doesn’t disclose their methods for how transactions are qualified.
Interchange-plus pricing. With this pricing structure, the payment processor separates the interchange fees for processing payment. Your payment processor adds a markup to the cost of interchange (and assessment) which is clearly indicated in your statements.
Interchange-plus pricing is a much more transparent pricing structure, as it enables you to see how much of your fees are paid to credit card networks/banks and how much goes to your processor.
Flat rate pricing. Sometimes referred to as blended pricing, companies that implement a flat rate structure charge you one easy-to-understand rate for credit card processing.
This pricing method blends that interchange rate and the processor’s markup into one competitive fee. Your processor will charge you a flat percentage for every card transaction—regardless of its type. Think Square.
While it’s easy to understand, you may end up paying a lot more for transactions that typically cost less to process.
Membership pricing. Payment processors that implement membership pricing give you access to direct interchange rates—regardless of your processing volume. And instead of adding a percent markup to each transaction, you’re simply charged a flat membership fee every month.
This turns out to be more cost-effective in the long run as your business scales and you process more (including being able to directly benefit from Level 2 and Level 3 interchange rates).
Stax is one example of a provider that implements membership pricing. Unlike traditional pricing structures, Stax’s fees are fully transparent AND we don’t take a cut out of your sales.
A note on payment processing fees
When determining the right merchant services provider, be sure to look beyond their payment processing fees. Some companies charge additional costs on top of processing expenses, so be sure to ask about any extra fees you may encounter.
Here are some of the most popular fees or costs that you will see during the process.
- Setup Fees
- Admin Fees
- PCI Compliance Fees
- Interchange Fees
It is also prudent to remember that while not all merchant account providers charge you the same amount, most of them charge you for each transaction they process. Some of these fees are industry standard, but the actual fee varies on a case-to-case basis.
How to Start Accepting Credit Card Payments
Thankfully, advancements in the payments sector now allow business owners to obtain the required services for processing credit card payments easily. Business owners can simply choose between a traditional or integrated payment platform.
It is also straightforward to obtain online payment solutions or mobile payment solutions for your operations. You just need to find a provider that offers these services under one umbrella while also being known for their reliability.
At Stax, we offer an array of credit card payment processing services to help you take your business to the next level. Through Stax’ integrated payment solutions, we can help you manage your payments in a highly efficient way. We understand the needs of our merchants as we have been in the industry for a while and have served many partners over the years.
Stax offers a superior customer experience due to our excellent customer success, flexibility, and advanced processes and systems. Our seamless, reliable, and subscription-style solutions also keep affordability in mind and help business owners save more money as they scale.
Reach out to Stax for a consultation today.