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As a small business owner, setting up your company to accept credit card payments isn’t as straightforward as you would think. When it comes to selecting a payment processor, you have a lot of options—but with those options come equipment and costs to keep track of.

But don’t be put off by the difficulties. Accepting credit card payments is critical to the success of your small company, and the more you understand how the process works, the better equipped you will be to choose a payment processing system that meets your needs.

A Step-by-Step Guide to Using a Credit Card to Pay

Before we get into the specifics of the process’s components, let’s take a look under the hood at what happens when you accept a customer’s credit or debit card at your shop.

1. You use your card reader to enter your customer’s credit card details. The equipment or software needed to receive this data varies depending on whether the transaction is conducted in person, online, or over the phone—we’ll go through equipment in more depth later.

2. Your payment processor sends the data from your customer’s credit card to your merchant account when you swipe/dip/tap/manually enter it. If you’re making an online purchase, your customer’s information will be sent to a payment gateway, which allows merchants to accept online payments and securely submits the customer’s credit card information.

3. Before accepting or rejecting payment information, your payment processor checks in with the customer’s bank, or issuing bank, on the route to your merchant account. This judgment is based on whether the client has adequate money, is spending within their credit limit, and if fraud proof exists.

4. If the customer’s purchase is approved by the issuing bank, you may accept the money and finish the transaction. The customer’s payment will be rejected if the bank does not approve.

5. Once your payment processor has accepted your request, they will subtract their costs and deposit the leftover money into your merchant account. Within a few days, you should see money for each authorized transaction (minus fees) in your company bank account.

Which Should You Choose: Merchant Accounts or Payment Service Providers (PSP)?

You may either go old school or new school when it comes to accepting credit card payments: Choose between a merchant account and an all-in-one payment processing solution. There’s a lot to learn about each of these choices, but here are the highlights

Accounts with Merchants

Opening a merchant account is the conventional method for businesses to accept credit card payments. A merchant account is essentially a bank account. Before being transferred to your bank account, funds from credit card transactions are put into that account first.

Hundreds of merchant account providers are available, including banks, independent sales groups, and payment processing firms. Although you may be able to open a merchant account online, you’ll almost certainly need to speak with a sales person and negotiate a contract. Some merchant account providers provide equipment and services such as mobile card readers and online payment setup in addition to countertop credit card terminals.

However, be aware that merchant accounts may come with a slew of costs, including setup fees, software or equipment fees, monthly fees, early cancellation penalties, and processing fees, to name a few. Many merchant accounts aren’t up front about the presence of these additional fees in the small print, which may leave you with a nasty surprise when your bill comes.

Provider of Payment Services

You may also use a simplified payment service provider as an option (PSP). Stripe, Square, PayPal, and Shopify are all instances of PSPs.

These all-in-one payment processing solutions enable businesses to take credit and debit card payments without having to establish a separate merchant account; the merchant account is built right into the product. In general, PSP costs are less ambiguous than those associated with a conventional merchant account.

Also keep in mind that POS systems may do more than just take credit card payments. You can monitor inventory, manage workers, transfer money promptly into your bank account, and take credit card payments using the Square POS app, for example, even if you don’t have internet connection.

Important Credit Card Processing Fees to Be Aware Of For

Accepting credit card payments, however, comes at a cost.

Although the precise credit card costs you’re liable for depend on your payment processor and the equipment you require, the interchange rate and your payment processor’s markup are the two main (and unavoidable) expenses involved in this procedure.

Rate of Change

Visa, Mastercard, Discover, and American Express, the four main credit card issuers, all charge a fee for utilizing their services. The exchange rate is the name for this charge.

Rates vary depending on the card company and the degree of risk involved in the transaction. For example, a physical transaction is less hazardous for the card company than an online transaction since the merchant can verify the customer’s identification, which reduces the risk of fraud. Certain companies and sectors are also considered riskier by card networks, which may result in a higher charge.

Fee for the markup

Your payment processor will take care of interchange rate costs for you, but they will charge you a markup on top of the normal interchange rate. The processor earns money from each transaction via this markup.

The amount of markup varies based on the likelihood of fraud in the transaction, as well as your specific processor and payment plan. Here are some examples of payment arrangements you may come across:

Plans with different levels of complexity

Tiered or interchange-plus arrangements are common in traditional merchant accounts.

If your processor offers a tiered plan, you’ll be charged a different cost based on the kind of transaction you’re doing; the riskier the transaction, the higher the fee. Risk is determined by factors such as the kind of credit card used in the transaction (for example, a rewards card, miles card, or business credit card) and the mode of payment (for example, online, in person, or over the phone).

However, you can never be sure which tier the processor will put your transactions in, thus you can never be sure how much you’ll be charged each transaction. As a result, tiered plans may be expensive, or at the very least, leave a big question mark in your company’s budget.

Plans with Interchange Plus

The interchange rate charged by the card issuer and the markup fee charged by the processor are combined in this payment plan. A tiny fraction of the interchange rate plus a set monetary amount is usually the markup.

Plans with a Fixed Rate

Flat-rate programs impose a set cost for each transaction. PSPs often provide flat-rate payment options.

Square, for example, levies the following fees:

For in-person transactions, the rate is 2.6 percent plus $0.10.

3.5 percent plus $0.15 for payments made by hand

For online payments, the rate is 2.9 percent plus $0.30.

Flat-rate plans allow company owners to better prepare for credit card processing costs within their budget due to their clarity and regularity. However, if your credit card transaction quantities are high, those tiny percentages may soon add up.

Accepting Credit Card Payments at a Store or on the Go

We’ll tell you precisely what equipment you’ll need to take credit card payments in any situation now that you know the guts and bolts of credit card acceptance.

On the Shelf

You’ll need either a merchant account and a conventional credit card terminal, or a point of sale system to take credit card payments in your brick-and-mortar shop.

Your client will swipe, tap, or dip their credit card into the terminal, which starts the procedure described above, whether you have a credit card terminal or a POS. Also keep in mind that markups are often lower for in-person purchases since the danger of fraud is lower.

Online

You don’t need a countertop credit card machine or a POS system with actual hardware to take credit cards online. Instead, you’ll need a merchant account with online payment capabilities as well as a payment gateway, or a payment service provider that already has both—in addition to your ecommerce shop, of course. (It’s worth noting that Square and Shopify also provide services that allow you to build online shops, with Square’s ecommerce platform being free.)

You may also purchase a virtual terminal, such as those provided by Square and PayPal. Virtual terminals are programs that convert your computer into a credit card terminal, allowing you to manually enter credit card information from your customers. As a result, if you intend to take payments over the phone, a virtual terminal is a smart investment.

Keep in mind that online transaction markups are higher than in-person transaction markups since the danger of fraud is considerably higher. Due to the (very real) potential of human mistake in these transactions, processing costs for manually entered credit card information tend to be the highest.

Through tablet or smartphone

If you want to accept credit card payments in person but don’t have a physical location—for example, if you’re a food truck owner, a massage therapist who makes house calls, or if you frequently sell your products at craft fairs or farmers markets—you’ll need to invest in a mobile card reader that connects to your smartphone or tablet.

Fortunately, this gear isn’t difficult to come by—most POS suppliers, such as Square, PayPal, and Shopify, all provide free or low-cost mobile readers and apps. The majority of mobile card readers on the market today can take swipe and chip cards, and some, such as Shopify’s mobile reader, can also accept NFC payments (the “tap” card).

Processing costs are cheaper when you accept credit card payments through your phone or tablet since these are in-person transactions.

Choosing the Best Method for Accepting Credit Card Payments for Your Company

Understanding the procedure, equipment, and costs involved in accepting credit card payments is crucial—but only in the sense that it informs your choice on which payment processor to choose for your company.

Ultimately, the volume and average price of your transactions will determine whether you use a conventional merchant account and credit card terminal or a PSP. If you’re processing a lot of credit card transactions for high-ticket goods, the per-transaction flat costs charged by a PSP can soon add up. A conventional merchant account, on the other hand, may be more inexpensive, despite the fact that it comes with additional kinds of fees.

PSPs are often great choices for startups and small companies, not least because their payment systems are much more clear and controllable than merchant accounts. They also don’t need the kind of long-term, difficult-to-terminate contracts that merchant accounts do.

However, if you’re a bigger small company or expect to expand quickly in the near future (with more credit card transactions to match), a conventional merchant account may provide the assistance and cheaper cost you need.

Whatever path you choose, be sure you have the gear and software you need to accept payments in any situation, particularly if you want to offer your goods or services without having to go to a physical place.