Grey-haired man paying for purchase with credit card in a shop.
Accepting credit and debit payments comes with a cost, but it’s most likely a cost you can’t afford to skip. Research your options to get the best deal for you and your customers. — Getty Images/ yacobchuk

How important are credit card sales to your company’s growth? Our credit card processing guide will help you understand how to accept credit cards and what to look for in a credit card processor. It will also cover credit card processing guidelines and procedures you should understand for security and compliance reasons.

To help you understand credit card processing, this guide will:

  • Examine the growth of credit card use in the United States.
  • Walk you through the credit card processing process.
  • Showcase the various ways you can accept credit cards, either at the point-of-sale (POS) or through online transactions.
  • Discuss security concerns and credit card processing tips for accepting digital payments.
  • Cover what questions to ask merchant credit card processors before you choose a company.

Do you need to accept credit cards at your business?

As a business owner today, it’s important to accept debit card and credit card transactions to increase sales and deliver more flexible payment options to your customers. The rate of credit card and mobile wallet transactions (such as Apple Pay) continues to increase.

Statistica shows that Apple Pay users worldwide grew from 67 million users in September 2016 to 507 million in September 2020, jumping by 65 million people between September 2019 and September 2020, alone.

Likewise, the Federal Reserve Diary of Consumer Payment choice showed that credit card payments represented 27% of all transactions in 2020, while debit cards accounted for another 28%. Cash transactions only accounted for 19% of all payments in the study.

Although the global COVID-19 pandemic undoubtedly accelerated the use of credit and debit cards as more people shopped online, the trend may very well continue. The number of online shoppers has been growing steadily since 2014, rising from 1.32 billion digital shoppers in 2014 to 2.14 billion in 2021.

If you run an e-commerce store or sell services online, you’ll need some form of digital payment processing. But even if you run a brick-and-mortar business, it’s a good idea to accept credit and debit card payments as a convenience to your customers.

How does credit card processing work?

Whichever method you use to accept debit or credit card payments, you’ll want to understand what happens at the time of purchase. How does the money get from the customer’s credit card into your bank account?

When a customer pays with cash, of course, the money goes into a register and later gets deposited into your bank. It’s easy and there’s no need for other parties (except maybe a cashier) to be involved in the transaction.

On the other hand, credit card processing methods require the services of multiple parties.

First, there’s you, the merchant, who ultimately receives the payment. Second, there’s the cardholder, the customer using a credit card to purchase your good or service. Third, there is the issuing bank, the financial institution that gave the cardholder the credit card, essentially extending a revolving loan. Finally, there is the acquiring bank, which is the bank accepting payment and providing credit card processing services on behalf of you, the merchant.

If you use a payment processing service such as Paypal, sometimes called a payment aggregator, the “acquiring bank” is replaced by the third-party payment processing service. This can save some hassles upfront, since you don’t need to establish a separate merchant bank account to accept credit card payments through these services.

However, payment aggregators come with their own drawbacks and concerns, which we’ll discuss a little later in this article.

Three ways to accept credit card payments

With the growth of e-commerce and digital payments, retailers and service providers that fail to offer card payment options to their customers could potentially miss out on sales.

There are several ways to accept credit card payments from your customers. You’ll want to familiarize yourself with your options so you can choose the best one for your company.

Here are three common options to choose from:

  • Traditional POS systems.
  • Mobile POS systems.
  • Online payment processors or payment aggregators, which may include mobile POS systems.

Let’s explore the different options to help you choose the best credit card payment processing system for your business.

Traditional POS systems

If you’re selling goods and services in a brick-and-mortar location, you’ll likely benefit from having a POS system. This technology allows you to manage customer interactions and accept multiple forms of payment, including debit and credit cards.

Today’s vast array of POS systems come with a variety of features. It’s important to do your research so you can select the one that best suits your company’s unique needs.

Here are some factors to consider when choosing a POS system for your business:

  • Company size/sales volume.
  • Quality and quantity of features provided.
  • Potential for expansion.
  • Specific industry.
  • Hardware and software costs.
  • Customer service and support.

Some POS systems are designed specifically for businesses in certain industries, which come with customized features that enable you to provide better service to your customers.

For example, if you own a restaurant, you’ll want to find a system like Toast or Lightspeed Restaurant. Retail businesses, on the other hand, might consider Vend or Lightspeed Retail.

Mobile POS systems

A mobile POS system is a smartphone, tablet or other device that acts as a “register” for credit card payments. Many stores with multiple employees on the floor (think Apple) find it convenient to carry a tablet with them to swipe a customer’s credit card on the spot, rather than have them stand in line at a check-out counter.

Some retailers use a mobile POS system if they’re selling goods off-site, such as at a farmers market or festival.

While some mobile POS companies manufacture their own portable devices, most allow you to download their software onto the mobile device of your choice, then purchase the hardware for credit card transactions separately. This hardware connects to the device by plugging it into a port or Bluetooth, wirelessly. Popular mobile POS options include Square, Clover and ShopKeep.

With the growth of e-commerce and digital payments, retailers and service providers that fail to offer card payment options to their customers could potentially miss out on sales.

Online payment processors or payment aggregators

Online payment processors make it easy to accept online payments. Popular options like Paypal, Square and Stripe enable business owners to send invoices or connect the payment aggregator to their e-commerce shopping card. Then, the merchant can easily accept debit or credit card payments without a merchant account.

Popular e-commerce solutions such as Shopify and Etsy have credit card payment mechanisms built in, so all the business owners need to do is connect their bank account to their online account so the funds transfer funds once the transaction is processed.

  • Benefits and drawbacks of choosing a payment aggregator
  • For many business owners, especially e-commerce companies, a payment aggregator may seem to be the smartest and most cost-effective solution to accepting credit card payments. However, there are pros and cons to this choice.
  • Here are some of the biggest advantages to using a payment aggregator:
  • Simple application process. Setting up a merchant account can be tedious, requiring tax returns and credit checks for approval. On the other hand, payment aggregators don’t require much paperwork to get started.
  • Fast start-up. If you’re just launching your business, you probably want to get started accepting payments quickly. Once the payment aggregator processes your application, you can accept online payments immediately.
  • Straightforward fees. Most payment aggregators charge a flat monthly fee, plus a transaction fee and a percentage of sales, with no application fee or hidden fees.
  • No long-term contract. Payment aggregators bill monthly, so there’s no long-term contract to worry about.

However, a payment aggregator is not always the best solution for every business, especially if you process a high volume of transactions. Here are some of the drawbacks:

  • Delayed funds. When your customer pays you, the money first gets processed through the payment aggregator, which means that third-party service controls your funds. Some put a 24- to 48-hour hold on disbursing funds, although it might be longer.
  • Account holds. Since payment aggregators take the risk that a customer could make a chargeback or declare fraudulent charges, the aggregators take security threats very seriously. Any suspicious activity could lead to a hold on your account.
  • Potentially higher fees. As your transaction volume continues to grow, so will the fees. That’s because a larger transaction volume translates to more payment processing risk. Some payment aggregators put limits on the number of transactions they are willing to process, so you’ll want to find out this information ahead of time.

There’s no one right answer when it comes to how your business should accept payments. But payment aggregators are preferred by many small businesses that process a low number of transactions, especially since some payment aggregators like Square now have the technology for POS transactions.

As with choosing any credit card processing solution, do your homework before choosing a payment aggregator. Find out the company’s fee structure and whether they put a limit on the number of transactions they’ll process. It’s also a good idea to find out what kind of customer support they offer if there’s ever a problem.

Questions to think about when choosing a credit card processing system

If you decide to open a merchant account for credit card processing, there are many other factors to consider. These include overall cost, processing fees, ease-of-use and security. Consider these questions to help you make the best choice:

What fees are involved in credit card purchases?

The two financial institutions involved in a credit card transaction each charge their own fee, which means that the full amount of money from a credit card transaction that ends up in your pocket is less than what you charged the customer.

The bank that issued the card charges an interchange fee and the acquiring bank charges a discount rate. Both types of fees are generally a percentage of the transaction, although there may also be a flat fee per transaction.

When you’re choosing a credit card payment processing company, you’ll want to know exactly what fees you’ll pay and whether you can pass those fees onto your customers or not.

Interchange fees are not the only fees that companies will charge to process credit cards. Merchants should consider application fees for some processing services, setup fees which may or may not include equipment to start accepting payment and monthly gateway access fees. A payment gateway sends the data about each transaction from your payment system to the card issuer.

To get an idea of how much it will cost you to process credit card transactions, ask a processing company to show you a sample bill.

You might also want to look for a processor that offers month-to-month service versus a long-term contract, so you can get switch companies if you’re not happy with the one you picked. Be careful, because some credit card processing companies charge early terminations fees in the thousands if you cancel your contract early.

What types of payments can the system process?

The type of business you own will play a big role in the type of payments you need to process. For example, if your business is solely online, the vast majority of your customers will make purchases with a credit or debit card. You’ll want to make sure the process is seamless, intuitive and secure on computer web browsers and mobile devices. You might even want to consider setting up an e-commerce app that allows customers to make purchases and pay via digital payment right on their smartphone.

If you run a restaurant or retail store, you’ll be handling cash as well as credit, debit, and possibly prepaid or gift cards. You might want a mobile device, like a tablet, to be able to process credit cards from anywhere in your restaurant or on the sales floor. Alternately, a POS system may suit your needs.

Ideally, you’ll want a system that accepts all major credit and debit cards and, if you have a physical retail location, one that allows customers to swipe, insert and tap their cards.

How secure is the system?

Data breaches put customer information at risk on a regular basis. A small business might not be able to afford the hit to their reputation that a data breach could cause, let alone the financial strain, so make sure that your credit card processor is as secure as possible.

Your business and your credit card processor should be Payment Card Industry (PCI) compliant. Failure to remain PCI compliant could result in hefty fines for your business. You could even lose your privileges to process credit card payments.

As hackers continue to find new, more sophisticated ways to breach security systems, PCI compliance guidelines continue to change and adapt.

For instance, the added protections offered by EMV (Europay, Mastercard, Visa) chip cards have caused many hackers to focus on over-the-phone or online transactions, which led to tightening restrictions for online and phone sales.

Some tactics that businesses can use to prevent security breaches and remain PCI compliant include:

  • Enabling multi-factor authentication.
  • Using anti-virus and malware software (and keeping it updated).
  • Restricting access to customer credit card data.

[Read more: How to Make Sure Your Business is PCI Compliant]

Other factors to consider when choosing a credit card processing system

Do your research when it comes to choosing a credit card processor. Check online reviews and ratings on sites like the Better Business Bureau. Also, consider reaching out to business owners in your industry to see which companies they use.

Look for a company offering reasonable processing fees. If you’re opting for a credit card processing company and setting up a merchant account, you’ll want one that will help build your company’s credit history by reporting your company’s credit repayment history to a major business credit reporting agency.

You should also be sure that the company is easily reachable if you run into issues or have concerns about the system. Ideally, you’ll want to work with a company that offers 24/7 customer service.

Accepting credit and debit payments comes with a cost, but it’s most likely a cost you can’t afford to skip. Spend the time to research your options and get the best deal for you and your customers.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published June 23, 2021