Women handing credit card to barista Choosing the right credit card processor is essential to your finances and customer service. — Getty Images

As a business owner, you’ll want to decide how important credit and debit card sales are to your growth and what you should be looking for in a credit card processing company.

The rate of credit card and mobile wallet (i.e. Apple Pay) transactions continues to increase annually. The number of Apple Pay users alone jumped from 15 million in 2015 to 86 million in 2017. To help you understand credit card processing, this guide will

  1. Examine the growing use of credit cards in the United States,
  2. Walk you through how credit card processing actually works and who is involved in each transaction, and
  3. Give you questions to consider for your small business when deciding to accept credit cards.

Do you need to accept credit cards?

Payments for goods and services are increasingly made with credit cards or mobile payments. According to data from the 2017 Federal Reserve Payments Study, total credit card payments grew from 103.5 billion in 2015 to 111.1 billion in 2016. That’s more than 7 billion additional transactions in just one calendar year. Additionally, in 2016, 22.2% of those credit card transactions happened remotely. Doing business online makes it almost impossible to not process credit cards.

How does credit card processing work?

So, what happens after a credit card is swiped, dipped or tapped? How does the money end up back in the business owner's pocket?

Well, to start, there are more than just two parties involved with a credit card purchase, as opposed to when a customer pays with cash. First, there’s you, the merchant, who will be receiving the payment. Second, there’s the cardholder, the customer that is 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, thus extending them a line of credit, making them a small short term loan. Finally, there is the acquiring bank, which is the bank accepting payment and providing processing services on behalf of the merchant.

"Acquiring bank" may not always be an apt term, as sometimes third-party companies will provide the processing services for a merchant as opposed to a financial institution. At the end of the day, a small business will either need a merchant account at a financial institution or a third-party credit card processing company.

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.

Your credit card processor will be a business partner for a long time, so choosing the right one is important.

What should I consider when selecting a credit card processing partner?

Once you're ready to choose a credit card processor, there are several things to consider. Your credit card processor will be a business partner for a long time, so choosing the right one is important.

Here are some questions to ask before choosing a credit card processor. [Related: 5 Things to Consider When Choosing a Credit Card Processor.]

What types of payments will I be processing?

The type of business you own will play a big role in the type of payments you process. For example, if your business is solely online, the vast majority of your sales will be paid for with a credit or debit card. In that case, you’ll need to worry most about your customers’ online checkout experience.

If you run a restaurant, you’ll be handling credit, debit, cash and possibly prepaid cards or gift cards.ou might want a mobile device, like a tablet, to be able to process credit cards. 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.

For e-commerce, you’ll also need software that works on both desktop computers and mobile devices. If you run a business-to-business (B2B) company, you’ll probably need to accept ACH electronic bank transfers, the most common form of cashless payment in the B2B industry, according to the Federal Reserve Payment Study.

What fees will I be charged?

Interchange fees are not the only fees that companies will charge to process credit cards. Merchants should consider application fees of 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. Some processors may also charge a monthly minimum, which you will receive regardless of how many card transactions you process. Other processors do not charge interchange fees based on a percentage of the flat fee, but opt for a flat, per transaction fee. The method that makes the most sense for you will probably depend on how many credit or debit card transactions you have.

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.

What will affect these fees?

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 and 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.

The interchange fees that a processing company charges will vary for different businesses. Well-established businesses with good credit history will get better rates for credit card processing. That’s because the acquiring bank puts transacted funds into a merchant’s account even before a transaction fully clears. So your credit history and ability to borrow will be evaluated by the acquiring bank when you apply to use their service.

What are chargebacks?

It’s also a good idea to know how the processing company handles chargebacks. A chargeback occurs when a customer disputes a charge by a merchant. At that point, a charge may be reversed and credited back to the credit card customer. This could cost an acquiring bank time and money. This is part of the risk they assume by entering into an agreement with a merchant.

FInd out how the responsibility for a chargeback is handled. Some processors hold money in a reserve, which is a type of deposit created to protect themselves against chargebacks. Ask how much the processor holds back, in which cases they would use that money, and how you can get your reserve back.

What do I do if I have questions or concerns?

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.

How secure is the system?

Data breaches are real and they 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. Read about PCI security standards, which include the need to (1) use and regularly update anti-virus software, (2) encrypt cardholder data across open and public networks and (3) restrict physical access to cardholder data, among other standards.

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— does not review or recommend products or services. For more information on choosing the best credit card processor, visit our friends at business.com.

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 February 25, 2019