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How to Accept Credit Card Payments for Your Small Business

By Barb Weidner Reviewed By Mike Lucas
By Barb Weidner
By Barb Weidner Reviewed By Mike Lucas

It’s no secret that having the means to accept credit card payments is critical for small businesses. Not only is it the preferred payment method for many customers: They also tend to spend more with their cards.

According to Worldpay’s 2018 Global Payments Report, credit and debit cards contributed to 49% of global point-of-sale (POS) payment methods and 35% of e-commerce payment methods in 2018.

Learn how to set up the credit-card payment process and determine the best options for your small business.

Merchant Account vs. Payment-Service Provider

There are two primary avenues through which you can accept credit card payments: merchant accounts and use of payment service providers.

Merchant Account

Merchants typically accept payments via credit card by having a merchant account, which is a particular type of bank account for holding deposits. Think of it as a holding pen: Money from the credit-card purchases goes into the merchant account first, then to your bank account.

There is a host of merchant account providers in operation, ranging from banks, payment processing companies and independent salespeople or organizations. Some of these allow you to sign up for a merchant account online. For others, you will need to call a sales representative to work out a contract.

Keep in mind:

  • Most merchant account providers provide you with countertop credit card terminals. Others will additionally provide equipment such as e-Commerce payment setup and mobile card readers.
  • Merchant accounts come with a lot of fees attached. These include setup fees, monthly fees, processing fees, early cancellation fees, software/equipment fees, and many others. Some providers may not disclose these costs upfront.

Payment-service providers include PayPal, Square, Shopify and Stripe. 

Payment Service Provider

A payment-service provider or payment processor permits business owners to accept card payments without the need to have a merchant account. (Actually, the merchant account is part of the product.)

Instead of going the conventional merchant way, you may opt for a payment service provider such as PayPal, Square, Shopify and Stripe.

Keep in mind:

  • Payment-service providers typically have more clear-cut, transparent fees than those of typical merchant accounts.
  • Some POS systems have additional capabilities that go beyond accepting credit and debit card payments, such as managing employees, tracking inventory, depositing money into a bank account, and accepting payments when not connected to the internet.

Accepting Credit-Card Payments: Types of Processing Fees

Unfortunately, accepting credit card payments isn’t free. It comes at a cost — and, in some instances, the fees can be steep.

How much you pay depends on the equipment you use and your payment processor. That said, there are two major unavoidable costs: the interchange rate and the markup fee.

Interchange Rate

Major credit-card companies (MasterCard, Visa, American Express, Discover, etc.) charge an interchange rate for using their products. Each company has a different interchange rate. Also, there are different levels of risk depending on how the credit cards are used.

For example, an online transaction is more susceptible to fraud compared with an in-person transaction. Why? It isn’t as easy to verify a customer’s identity online as it is in person. If you are in an industry that is considered riskier than others, you likely will be charged a higher fee.

Markup Fee

In addition to the interchange rate, payment processors charge markup fees. Simply put. It’s how these companies generate some profit from credit-card transactions.

The risk of fraud tied to every transaction usually determines the markup rate for different payment processors.

Payment plans are a factor, too. Below are a few types of payment plans you are likely to encounter:

Tiered Plans

For tiered plans, a processor charges different fees depending on the type of transaction. The higher the risk, the higher the fee.

What determines risk? Factors include the type of credit card, such as a business card or a rewards card, and the method of payment. (Transactions made online or over the telephone are considered higher risk than an in-person payment.)

That said, you may not be in a position to predict what tier your payment processor will place your transaction or how much you will pay per transaction. Therefore, tiered plans can be costly and sometimes pose lots of questions when reevaluating your business budget.

Interchange-Plus Plans

Interchange-plus plans combine the interchange rate and the payment processor’s markup fee. Usually, the markup is a small percentage of interchange rate with a fixed dollar amount added.

Flat-Rate Plans

Many payment-service providers offer flat-rate payments. Under these plans, you pay a fixed charge processing fee every time you make a transaction.

Transparent and consistent, flat-rate plans help small businesses to plan their budgets better for credit-card fees.

You might ask: What are the cheapest ways to accept credit card payments? Find more about that in the subsequent section.

Check for special offers from your payment-service provider.

What are the Cheapest Ways to Accept Credit-Card Payments?

One cost-effective way to accept credit card payments is to find a provider who will give your small business a reasonable interchange pricing.

You may want to check for special offers from your local payment-service provider. International payment processors such as Stripe and PayPal may have offers, too.

It is important to note that cheap isn’t always safe. A few factors to consider:

  • Choose a payment gateway that is payment card industry (PCI) compliant
  •  Integrate all your payments
  •  Avoid tiered pricing and go for a flat rate
  •  Beware of mandatory contracts and hidden fees.

Ways to Accept Credit-Card Payments

Now that you know the processes and the fees involved, let’s explore ways to receive credit-card payments.

Accepting In-Store Card Payments

For a brick-and-mortar shop, you’ll need to have either a POS terminal or a combination of a merchant account and a conventional credit-card terminal.

Regardless of which system you choose, your customer will either dip, swipe, or tap their card to set off the payment process. It’s important to note that markups for in-person transactions tend to be lower because the risk of fraud is less.

Accepting Credit-Card Payments Online

You don’t need a POS system or countertop credit-card terminal to receive credit-card payments online. What you need is a merchant account that allows for online payments, together with a payment gateway. You can get a payment service provider with a 2-in-1 service in addition to your e-commerce store

As an alternative, some payment-service providers offer virtual terminal applications for laptops and computers in which you manually enter a customer’s credit card information to process the transaction.

Mobile credit-card readers work with tablets or phones.

Accepting Credit-Card Payments via Phone or Tablet

Some mobile business owners (house-to-house massage therapist, food truck owner, flea market vendor, etc.) may not be able to accept credit card payments using an in-store POS system or virtual terminal. In this case, you will need to invest in a mobile credit-card reader that works with your tablet or phone.

The hardware is easy to find. Many POS system providers offer free or cheap mobile credit-card readers and apps. The best part? Most mobile credit-card readers can accept both swipe and chip cards.

Because mobile credit-card payments are in-person transactions, less risk is involved, and that translates to lower processing fees.

Final Thoughts on Accept Credit-Card Payments

Whether you run a brick-and-mortar store or an online business, you’ll find yourself behind the curve if you aren’t accepting credit card payments.

Making it easier for customers to pay for your products can make your life easier as a small business owner.

Barb Weidner CEO at Fast Capital 360
Barb Weidner is the co-founder and CEO of Fast Capital 360, a leading online business loan marketplace. Prior to entering the Fintech space, Barb was the Chief Credit Officer for a mid-sized mortgage bank based in NY. Barb is passionate about simplifying the lives of small business owners and empowering them with the resources they need to thrive.
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