A woman uses tap on a credit card reader to pay for groceries at a neighborhood market.
Choose a credit card processor that suits your business model, transaction volume, customer payment preferences, and whose pricing structure is more favorable to you. — Getty Images/pixdeluxe

A recent report found that 83% of point-of-sale (POS) payments in 2022 consisted of credit, debit, and digital wallet transactions. Indeed, consumers appreciate the convenience of paying with credit and debit cards. Credit card processing companies provide the infrastructure and software so you can accept credit card payments, including online and in-person transactions.

However, monthly subscription fees and pricing structures vary by the merchant account provider. Since a good portion of your credit card sales (1.5% to 3.5%) goes to your payment processor, picking a credit card company that suits your business model, transaction volume, and customer payment preferences is essential. Learn how credit card processing works, what to look for in a merchant services provider, and how to negotiate lower processing fees.

What is credit card processing, and how does it work?

At first glance, it seems simple. A customer comes in and swipes or inserts their credit or debit card into your card reader. The in-person transaction is approved or declined within seconds. Behind the scenes, payment processing is more complex. It involves you (the merchant account), the customer (the cardholder), the issuing bank (your customer's bank that supplied the card), the acquiring bank (your financial institution), and payment networks.

Let's start with the credit card networks, as they establish the interchange fees and security standards and ensure the transaction goes through. Payment networks consist of American Express, Discover, Visa, and Mastercard. Each organization works with hundreds of issuing banks, and financial institutions have hundreds of cards, from cash-back to store-specific options. And every issuing bank and card has different interchange fees.

But you can only connect directly to credit card networks if you have sophisticated architecture in place. Most small businesses don't have the resources, so they use credit card processing services. A credit card processor is the intermediary.

So how does credit card processing work? Here's what happens during the transaction process:

  • Your online payment gateway or credit card reader software (the credit card processing system) sends the data to your credit card processing service.
  • The credit card processor transfers the credit card transaction information to the correct payment network.
  • The credit card network sends an authorization request to the cardholder's issuing bank.
  • The credit card issuer verifies customer identity and available credit, approves or denies the purchase, and responds to the payment network.
  • The payment network relays this information to the credit card processing company. In return, your customer's transaction is approved or denied.
  • Lastly, the payment processor or point-of-sale system retains sales data and provides a customer receipt.

[Read more: 16 Common Credit Card Processing Terms and Definitions]

Credit card processing fees and pricing structures

Credit card processing fees range from 1.5% to 3.5% per credit card transaction. Typically, debit card transactions cost less than those done by credit cards. The Federal Reserve limits interchange fees to .05% plus $0.21 per debit payment, but small issuing banks are exempt.

Credit card companies like National Processing use interchange-plus pricing, known as the pass-through model. You pay interchange transaction fees, which vary by payment network, credit card issuer, payment method, and card type. Then, merchant account providers charge a markup to cover their costs of processing credit cards. Credit card processing services generally consider your sales volume, average transaction size, and other factors when determining markup rates.

Established companies with higher sales volumes often prefer the interchange-plus pricing model, while startups like the predictability that flat-rate pricing offers.

However, some credit card processors offer surcharging programs to offset fees. For instance, Helcim has a fee-saver program, allowing for fee-free processing. At the other end of the spectrum are credit card processors like Square or Stripe that use a flat-rate pricing model. Regardless of whether your customer uses an American Express or a Visa rewards card, you pay a flat rate based on the method (online transactions vs. in-person payments vs. card-not-present (CNP) or keyed).

On top of transaction fees, payment processing companies may charge various one-time or monthly fees. Sometimes they hide these in the fine print, so reading the contract terms and asking questions before signing any agreement is vital.

Consider the following costs when accepting credit card payments and choosing a merchant account provider:

  • Credit card processors like Paysafe and Stax (Fattmerchant) charge monthly subscription fees to cover payment processing costs.
  • Many credit card processing companies require a one- to three-year contract and charge early termination fees if you or the provider cancel it.
  • When customers dispute payments, you pay chargeback fees to the credit card processing company, ranging from $10 to $35 per transaction.
  • You may pay a monthly fee to lease credit card readers or POS hardware. Alternatively, you can buy the equipment outright.
  • Some payment processing providers charge a batch settlement fee each time you submit a group of credit card transactions for processing and payout to your financial institution.
  • Certain processors require small businesses to pay monthly minimum fees if their credit card processing volume falls below the expected amount.
  • Payment processing fees may include charges for the company maintaining PCI compliance on your behalf or noncompliance fees if your business fails to self-certify compliance or faces regular problems with credit card fraud.
  • A credit card processing company may charge monthly fees for payment gateways, which let you accept credit card payments via an online store.

Credit card payments and merchant bank settlements

At the end of your work day, you submit all credit and debit card transactions (authorization codes) to the credit card processing company through a process known as batch credit card processing. The merchant account provider requests funds from each issuing bank account. It typically takes one to five business days to process payments. Some processors offer next-day funding for an additional fee. They deposit credit card payments into your merchant bank account.

[Read more: How to Accept Apple Pay]

Choosing a credit card processing company

Once you're ready to accept credit cards, it's time to find the right payment processor. As a business owner, you should decide if flat-rate or interchange-plus pricing is more beneficial. Established companies with higher sales volumes often prefer the interchange-plus pricing model, while startups like the predictability that flat-rate pricing offers.

Other considerations include the following:

  • Are the majority of your payments via an online store or in-person transactions?
  • Does the provider charge monthly fees for payment gateways or credit card readers?
  • Can you reach your credit card processor 24/7 if your system goes down?
  • Will your credit card processing work with your POS and e-commerce software?
  • Can you accept payments from digital wallets?
  • Does the merchant services provider offer a demo account portal?
  • Is the company willing to negotiate credit card processing fees?

Popular credit card processors

When it comes to payment processing for small businesses, the best credit card merchant services for one company might be the worst solution for another. It’s essential to compare your options when accepting electronic payments and revisit them after you have more transaction data.

Reputable credit card processing companies include:

  • Helcim: All Helcim accounts come with value-added features. The pay-as-you-go interchange-plus pricing model gives business users access to a virtual terminal, POS, subscription manager, payment pages, invoicing tools, and online checkout.
  • National Processing: This merchant account provider integrates with many widely used POS and e-commerce systems. National Processing provides new clients with a free terminal or mobile reader; monthly plans start at $9.95. The flat-rate fees are identical to Square’s online rates, and the in-store fees are slightly lower.
  • Square: Retailers, service professionals, and restaurant owners often pick Square for its convenience and integration with other Square products, including the free website and POS. It has flat-rate pricing but charges additional fees for order pickup and delivery.
  • Stripe: This popular payment platform is a favorite among tech-savvy business owners. You can program the Stripe terminal with an existing POS system, and Stripe offers many ways to accept payments online. It charges flat rates and has the same online fee as Square and National Processing.
  • Clover: Shop and restaurant owners or service professionals get the most from Clover, as it’s an all-in-one POS and payment solution. The full-featured software provides industry-specific tools, including analytics. It offers a lower in-store rate than rivals but has a much higher online fee.
  • Paysafe: As a Clover and SwipeSimple reseller, Paysafe creates accounts based on your business needs and budget. It serves industries other payment processors won’t work with, such as cryptocurrency, direct marketing, and gas stations.
  • Stax: If your processing volume is growing rapidly, Stax could be an excellent option. While it has a pricey monthly subscription fee, you only pay cents per transaction plus the interchange rate. Stax provides tons of analytics and reporting tools for monitoring your cash flow.

This article was originally written by Dawn Allcot.

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