Whether youâve been in business for a while or are just starting out, you know how important it is to be able to accept credit and debit cards as payment from your customers. Credit card usage has soared over the past twenty years or so, while the use of traditional payment methods such as cash and paper checks has dwindled. Put simply, accepting credit cards will lead to increased sales and happier customers.
Unfortunately, adding credit card acceptance to your suite of business tools is neither easy nor inexpensive. The credit card associations (i.e., MasterCard, Visa, etc.) charge a fee known as interchange every time their cards are used, and youâll need to sign up with a credit card processor to process your transactions and pay those fees for you. Your processor will, in turn, add a markup to your processing charges to cover their costs, and â in most cases â also charge you a bewildering variety of fees for maintaining your account.
In this article, weâll provide a brief overview of the requirements youâll need to meet to set up credit and debit card processing for your small business. There are a huge number of providers out there on the market, all offering different variations on the same basic services that most companies need. Weâll give you a quick and dirty explanation of how credit card processing works, what a merchant account is, and whether you need one to accept credit or debit cards. Weâll explain the various options for taking card payments, including the required hardware and software youâll need to get started. Finally, weâll give you some tips to help you avoid having your account suddenly frozen or terminated â a situation you can and should avoid.
If you’re looking for the best credit card processing companies for your business, you should take a look at our favorite payment processor shortlist to get you headed in the right direction.
How Credit Card Processing Works
You donât need to be familiar with all the intimate details of processing a credit card transaction, but itâs a good idea to have a basic understanding of the steps involved and how they go together. A little knowledge of how processing works can help you avoid some of the common problems that can result when a transaction doesnât go smoothly.
First, youâre going to need a way to accept your customerâs card data. This can be accomplished using either a traditional credit card terminal or a payment gateway in the case of online transactions. Another option is a software service known as a virtual terminal, which turns your computer into a credit card terminal and allows you to either input the card data manually or read it using a compatible card reader.
Once youâve input your customerâs card data, itâs sent to your providerâs processing system for approval. Your providerâs network will check with the cardholderâs issuing bank to confirm that funds are available to cover the transaction. For debit cards, this is a simple check of the remaining balance on the banking account linked to the card. Credit cards require that the cardholder wonât exceed their available credit if the transaction is approved. The processing networks will also run a few anti-fraud checks to (hopefully) detect a suspicious transaction. If sufficient funds are available and there arenât any clear indications of fraud, the transaction is approved, and you can complete the sale.
At the end of the day, youâll upload all completed credit/debit transactions to your processorâs network for processing. This usually occurs automatically if youâre using a payment gateway or a modern credit card terminal. For each transaction, your processor will deduct both the applicable interchange (which is then forwarded to the cardholderâs issuing bank) and their markup. Youâll receive whatever is left over after these fees have been deducted. It usually takes another two to three days for these funds to be transferred back to your bank account.
From our payment processing infographic:
Do You Need A Merchant Account To Accept Credit Cards?
For many years, the only way to accept credit cards was to open a merchant account. At its most basic, a merchant account is simply an account to deposit funds into from processed credit/debit card transactions. Of course, maintaining a merchant account also requires transaction processing services, equipment and software to process the transactions, security features, and numerous other services, depending on the needs of your business. Traditional merchant accounts tend to end up being rather expensive, and merchant services providers often require that you agree to a long-term contract with a hefty early termination fee in case you close your account before the contract expires. As a result, traditional merchant accounts tend to be expensive, especially for a small business thatâs trying to minimize their expenses.
In recent years, an alternative has become available that lowers costs for small businesses while still providing most of the essential features available with a full-service merchant account. Payment service providers (PSPs) allow you to accept credit and debit card transactions without a traditional merchant account. PSPs such as Square (see our review) and PayPal (see our review) have revolutionized the processing industry by offering simple, flat-rate pricing, no fees for basic services, and month-to-month billing that eliminates long-term contracts. Theyâre able to do this by aggregating accounts together, so you wonât have a unique merchant identification number for your business. PSP accounts are easier to set up, but theyâre also vulnerable to sudden account freezes or terminations which can make them a risky proposition for businesses that depend on being able to accept cards without interruption.
Cheapest & Easiest Ways To Accept Credit Cards Without A Merchant Account
There are now quite a few well-known PSPs on the market, each one specializing in providing credit card processing services to particular segments of the business community. Hereâs a brief overview of each of the most popular options:
This is the best all-in-one solution for low-volume users, especially those in the retail sector. Square also supports eCommerce businesses, but doesnât have quite as many features for online enterprises as its competitors. Square features a mobile processing system that uses a new, EMV-compliant card reader, no monthly fees, month-to-month billing, and a simple flat-rate pricing system thatâs more affordable for a small business than a traditional merchant account. See our review for complete details.
This is the best option for eCommerce merchants looking to easily set up a fully-featured webstore. While Shopify has better eCommerce tools than Square, itâs also more expensive. Pricing starts at $29.00 per month for the Basic Shopify Plan, with a flat-rate processing fee of 2.9% + $0.30 per online transaction. Billing is month-to-month, but you can receive a discount if you pay for a year (or two) in advance. See our review for more specifics.
Easily the oldest and best-known option for online credit card acceptance, PayPal is now available for retail merchants also. While a standard PayPal account comes with no monthly fee, youâll have to pay $30.00 per month for the PayPal Payments Pro Plan. This upgraded plan includes a virtual terminal and a hosted payments page. PayPal uses a flat-rate pricing plan for processing fees thatâs nearly identical to what Square charges. See our review for details about PayPalâs services.
Very tech-oriented, Stripe only supports eCommerce businesses. They donât charge any monthly fees and have no long-term contracts. All transactions are processed at a fixed rate of 2.9% + $0.30 per transaction. Stripe offers a huge library of APIs that allow you to customize your eCommerce website just about any way you like. However, utilizing these features will require either extensive coding experience or the services of a developer. Check out our full review for more details about what Stripe has to offer.
Braintree Payment Solutions:
Another eCommerce-only provider, Braintree is very similar to Stripe in terms of features and pricing. The primary distinction is that, unlike Stripe, Braintree is a direct processor. This translates to increased account stability, which is very important for an online business where credit and debit cards are just about the only forms of payment you can accept. Braintree charges 2.9% + $0.30 per transaction, but doesnât require a monthly fee or a long-term contract. They also offer a variety of developer tools to help you customize your website any way you like. For more details, check out our complete review.
When & How To Set Up A Merchant Account
With so many low-cost alternatives available, you may be wondering why you would ever consider the added expense and complication of a full-service merchant account. The primary reason that merchant accounts are still alive and well today is that for many businesses the overall cost of a merchant account is actually lower â sometimes much lower â than using a payment services provider. How is this possible? It primarily comes down to processing rates and how your monthly volume and average ticket size affect them. With a full-service merchant account, you can obtain interchange-plus processing rates that are significantly lower than the flat rates charged by PSPs. Providers such as Square (see our review) have to charge an inflated processing rate to pay for all the ancillary services they arenât charging you for with a monthly fee. A traditional merchant account provider bills for those services separately, so they can afford to offer a lower per-transaction markup.
Unfortunately, thereâs no easy way to determine the point at which itâs more cost-effective to upgrade to a full-service merchant account. The primary factor youâll want to look at is your monthly processing volume. Your average ticket size is also important, but to a lesser extent. Weâve seen providers recommend merchant accounts for businesses processing anywhere from $1500 to $10,000 per month at a minimum, and sometimes even more. Where to draw the line will ultimately depend on the unique needs of your business, and what options for upgrading are available to you. Youâll want to compare your current processing costs with an estimate based on a quote from a merchant account provider to see which option is cheaper. Be sure to factor in all the hidden costs that come with merchant accounts. You can usually uncover these in the fine print of your proposed contract.
For more, see our complete guide to credit card processing rates and fees.
Account stability is also an important factor. With a PSP, a single unusually high transaction can be enough to have your account suspended or even terminated. For some businesses, particularly eCommerce merchants, this can be catastrophic. While this situation can still happen with a traditional merchant account also, itâs far less likely and youâll have better access to customer service to get your account working again if it does occur.
Setting up an account with a PSP is usually very easy. Most PSPs have online application forms that you can fill out and submit without ever having to talk to a sales agent. If you need a card reader, your PSP will mail it to you. Account activation is usually also accomplished online.
Traditional merchant accounts are more complicated to set up. Youâll need to contact the sales team at the provider youâre interested in and negotiate the terms of your agreement. Thereâs also a lot more paperwork, although some providers now offer you the opportunity to complete your merchant application online. Beware that automation can sometimes work against you when setting up a merchant account, as some sales agents are now using tablet devices to get your electronic signature. This practice often locks you into a long-term contract before youâve had any chance to review your contract terms and conditions. Insist on a paper copy of all contract documents and study them very carefully before you sign anything. For some suggestions on making this process go more smoothly, please see our article How to Negotiate the Perfect Credit Card Processing Deal.
How To Accept In-Store Credit Card Payments
For retail merchants, youâre going to need at least one credit card machine per location. These days, you have a choice between a traditional countertop credit card terminal and a point of sale (POS) system. Countertop terminals can process transactions, but most models offer little or no other functionality. A POS system, on the other hand, can handle things like inventory management, employee scheduling, and a host of other features to help you run your business. Naturally, POS systems cost more than most countertop terminals, although tablet-based systems such as ShopKeep (see our review) are more affordable (and mobile) than a standalone POS terminal.
Whatever type of equipment you decide to purchase, make sure itâs EMV-compatible. EMV (Europay, MasterCard, and Visa) is now the standard method for accepting credit and debit cards in the United States, and since the EMV liability shift in October 2015, you can be held responsible for a fraudulent transaction if you accept an EMV-enabled card using the magstripe instead of the chip. EMV-compatible terminals are widely available and less expensive than ever. With most customers now carrying EMV cards, thereâs really no good reason to continue using a magstripe-only card reader.
If you want the latest and greatest in card acceptance technology, itâs pretty easy to find a terminal or POS system that accepts NFC-based payment methods. NFC stands for near-field communications, and itâs found on payment systems such as Apple Pay, Google Pay, and Samsung Pay. NFC technology is built into most modern smartphones, tablets, and even smartwatches. While it hasnât seen widespread adoption by the general public yet, itâs gaining in use as more people become aware of its availability and convenience.
Regardless of what type of terminal or POS system you decide to get for your business, we highly encourage you to buy your equipment outright rather than signing up for a lease. Equipment leasing is still being pushed by sales agents, who cite misleading arguments about the low up-front cost and the possibility of writing off the lease payments on your taxes. While these arguments are technically true, they mask the reality that leasing a terminal or POS system will cost you far more in the long run than buying. Equipment leases typically come with four-year contracts that are completely noncancelable. The monthly lease payments will, over the term of the lease, far exceed the cost to simply buy the equipment. Adding insult to injury, you wonât even own your equipment when the lease finally expires. Instead, youâll either have to continue making monthly lease payments or buy the equipment (often at an inflated price). For more details on why leasing is such a bad idea, see our article Why You Shouldnât Lease A Credit Card Machine.
How To Accept Credit Card Payments Online
If your business is eCommerce-only, youâll have it a little easier because you wonât need a credit card terminal or POS system. However, you will need either a payment gateway or at least a virtual terminal to accept payments from your customers. A virtual terminal is simply a software application that turns your computer into a credit card terminal. Mail order and telephone order businesses use them to enter their customersâ credit card data manually. They can also be combined with a card reader (usually USB-connected) to accept card-present transactions. For retail merchants, a virtual terminal can replace a dedicated countertop terminal if you add a card reader. Unfortunately, we havenât seen many EMV-capable card readers that are compatible with virtual terminals yet.
A payment gateway is a web-based software service that connects your eCommerce website with your processorâs payment networks. Payment gateways allow customers to enter credit card data from wherever they are, as long as they have access to the internet. Most merchant services providers charge a monthly fee (usually around $25.00) for the use of a payment gateway. You might also have to pay an additional $0.05 – $0.10 per transaction for the use of the gateway in some cases. Authorize.Net (see our review) is one of the most popular payment gateway providers, but there are many others today as well. Many of the larger processors now offer their own proprietary gateways that include the same security and ease-of-use features that youâd find in a more well-known gateway. For more information on payment gateways, see our article The Complete Guide to Online Credit Card Processing With a Payment Gateway.
Depending on how many products you sell on your website and the options you want to give your customers, you may or may not need to use an online shopping cart in conjunction with your payment gateway. Shopping carts allow you to feature products, conduct secure transactions online, and perform a variety of other functions related to running your business. Youâll want to ensure that your chosen shopping cart is compatible with your payment gateway before you set up your site. Most of the popular shopping carts today are compatible with almost all of the more well-known payment gateways. For more information on online shopping carts, see our article Shopping Carts 101: How to Choose a Shopping Cart for Your Business.
How To Accept Credit Card Payments With Your Mobile Phone
When Square (see our review) first introduced their original card reader in 2009, it was revolutionary. For the first time, merchants could accept credit or debit cards using their smartphones or tablets. Square was (and still is) a great choice for very small businesses, startups, and merchants who operate seasonally. Naturally, theyâve spawned a lot of competitors, and today almost all merchant services providers offer some type of mobile payment system.
These systems inevitably include both an app for your smart device and a card reader. Unfortunately, many of the apps are very basic and donât offer the depth of features that Square does. Card readers have lagged behind current technology, with many providers still offering magstripe-only readers. The current trend among smartphone manufacturers to remove the headphone jack has also caused problems, as most mobile card readers use a plug that fits into the jack to connect to the device. Today, Square and a few other providers now offer upgraded card readers that feature both EMV compatibility and Bluetooth connectivity. These card readers are significantly more expensive than the older models, but theyâre still cheaper than a traditional countertop terminal. For businesses that need to accept transactions out in the field, theyâre lighter and far less costly than wireless terminals, which usually run at least twice as much as their wired brethren and require a separate wireless data plan. For more information on mobile payment systems, please see our article on why accepting credit cards with your phone is the easiest option.
Can You Accept Credit Card Payments For Free?
Whether you ultimately use a PSP or a traditional merchant account, youâre still going to pay several percent from every sale to cover your processing costs. While there are many ways to get this percentage down to a reasonable level and avoid overpaying, at some point youâre going to ask yourself why you have to pay for processing instead of your customers. After all, theyâre the ones who consciously choose to pay with credit and debit cards rather than cash or a paper check. Wouldnât it be nice if there was a way to transfer this expense to your customers rather than having it come out of your profits?
In fact, there is a way to do this. Transferring the cost of processing onto your customers, also known as surcharging, is allowed in 41 states. However, the practice is currently going through a series of legal challenges that will ultimately either lead to it being banned or expanded into all jurisdictions. With surcharging, your processor will calculate the processing charge when a transaction is submitted for approval and add it to your customerâs bill.
Needless to say, your customers arenât going to like unexpectedly having a few percentage points added to their bill just for using a credit card. For this reason, surcharging isnât popular with most merchants, and youâll usually only encounter it in certain industries where itâs become an accepted practice, such as taxi cabs and busses. For most merchants, itâs much easier to âadjustâ your prices to cover your anticipated processing costs rather than passing those costs directly onto your customers. For a more in-depth look at surcharging, check out our article The Truth Behind Free Credit Card Processing.
How To Avoid Account Terminations & Funding Holds
Once youâve got your merchant account up and running, youâll naturally want it to be available and fully functional every day. While this isnât normally a problem, account holds, freezes, and terminations sometimes occur. Youâll want to understand how this happens, and what you can do to prevent it from happening to you.
An account hold usually occurs when a single transaction is held up, and you donât receive the funds you were expecting. In most cases, your processorâs risk department has flagged the transaction as suspicious, and you wonât get your funds until they can investigate and confirm that the transaction is legitimate. A single transaction thatâs for much more money than your average ticket size is most likely to trigger a hold. Fortunately, you should still be able to process other transactions while the matter is being resolved.
This isnât the case with an account freeze, unfortunately. Your processor can and will freeze your account â preventing you from getting paid for previous transactions or processing new ones â if fraud is suspected that would affect your entire account. While the wait can be excruciating, account freezes are usually temporary unless your processor decides to terminate your account.
As the name implies, an account termination is final. Your account is shut down, and you wonât be able to reopen it. The risk of an account termination is higher with a PSP than a traditional merchant account. Account terminations usually occur when your processor determines that youâve misrepresented your business and the type of goods youâre selling. It doesnât matter if this was intentional or just an honest mistake on your part. If your business type is one that usually falls into the high-risk category, save yourself the aggravation and get a high-risk merchant account from a provider who specializes in these kinds of accounts. It will cost you more, but youâll have a much more stable account. For more information on the various hiccups that can affect your merchant account, please see our article How to Avoid Merchant Account Holds, Freezes, and Terminations.
If youâve read this far, youâre probably thinking that merchant accounts and credit card processing are pretty complicated. Youâre right! Thereâs a lot to know, and unfortunately, thereâs also a lot of misinformation out there. The credit card processing industry has a lousy reputation for misleading sales practices, high costs, hidden charges, and long-term contracts that are very difficult to get out of. The main reason that PSPs like Square (see our review) have become so popular is that they offer a simpler, more transparent alternative to traditional merchant account providers, both in terms of costs and contract requirements.
For many businesses, however, Square can actually be more expensive than signing up for a traditional merchant account, even when factoring in the various account fees and the cost of buying processing equipment. While we heartily recommend Square for very small businesses and startups, realize that if your business grows large enough, youâll eventually want to switch to a full-service merchant account. Youâll enjoy lower costs, improved account stability and (hopefully) better customer support. PayPal is also a great choice for eCommerce businesses that are just starting out. Again, if your business grows large enough, a full-service merchant account with a fully-featured payment gateway will be a better choice.
Note that this article only provides a relatively brief overview of the significant factors that affect credit card processing for small businesses. For more information, please take a look at the other articles weâve linked to above for a deeper dive into subjects you arenât already familiar with. For an overview of several highly recommended providers, please see our article The 5 Best Small Business Credit Card Processing Companies. You can also compare several excellent providers side-by-side using our Merchant Account Comparison Chart.
The post How To Accept Credit Card Payments For Your Small Business appeared first on Merchant Maverick.