For many consumers, paying with cash is so 20th-century. It’s essential that every small business offers non-greenback options at physical and virtual locations. Customer convenience, however, means an additional cost for companies that includes as much as 2.50% per transaction, plus other fees associated with card processing. This can be particularly hard on small businesses, especially those just that are just getting started.
It’s essential, despite the cost, for businesses to meet customers where they are, especially since so many goods and services are sold online. Companies must graciously accept debit, or credit, or mobile wallet options like Apple Pay and Google Pay to stay competitive. While it’s a fact of life that plastic should be part of your payment acceptance plan, there are many nuances to the credit card game that need to be researched and understand in advance.
Here’s what you should know before you begin.
What to Know About Accepting Credit Card Payments
Which Credit Card Processor Is for You?
Looking for the best processor is a lot like looking for insurance. An ethical agent will find the policy that suits your particular needs. An unscrupulous one, however, will sell you a product that makes the most profit for his company.
This could happen if you encounter a “predatory” processor salesperson, according to Molly K. McLaughlin of PC Magazine: “Small business owners, in particular, are often the targets of such practices.”
Quote-generating sites like CardFellow.com and BuyerZone can help you find the right processor, based on factors such as:
- Number of transactions per month
- The average amount of these transactions
- Total monthly revenue
These sites also have blogs that explain topics such as interchange fees and effective rates. That’s helpful because credit card processing is far too complex to describe in a single article. Additionally, not all card processors are transparent about their practices. Worst-case scenarios include hidden costs, difficult-to-understand contracts, and fees that can be manipulated to the processor’s advantage.
McLaughlin notes that because rates and contracts are different for each customer, “it’s difficult to make a direct comparison” of different credit card processors. It’s essential to read agreements carefully before signing – and just as important to know what your company needs and doesn’t need. For example, a cupcake truck that sells lots of $5 sweets is very different from a New York steakhouse famous for Kobe beef and expensive wines.
How Card Processing Works
All processors accept major credit cards plus those mobile wallet options. Although U.S. consumers have been relatively slow to warm up to services like Google Pay, we’re finally catching on. According to a report from Zion Market Research, nine out of 10 mobile users will be making payments this way by 2020. Back in 2017, only 50% of consumers used mobile payment.
(That’s good news for businesses: A study from the University of Illinois at Urbana-Champaign indicates that mobile wallet customers shop more often and spend more money when they do.)
When one of your customers pays with a card, the company that issued it isn’t the one that processes the payment. That’s handled by one of the major processing companies, such as Global Payments, First Data, and Flagship. These companies pay a flat fee to the card issuers.
Once a processor clears a payment, it doesn’t reimburse the small business owner directly. That’s handled by one of several types of intermediary companies. A small business is most likely to work with:
- Independent sales organizations, which are registered with banks, such as Helcim, Cayan and Sam’s Club Merchant Services
- Merchant services aggregators, which create a sub-account for your small business in its own merchant account; some examples are Square Point of Sale and Intuit Quickbooks
Fees to the card issuer, the processor and the intermediary make it expensive for small businesses to accept plastic. As noted above, these costs are quite complicated and, at times, less than transparent.
More Costs to Consider
Not all payment forms are created equal. For example, debit card fees are lower than credit fees. Corporate or exclusive cards, as well as American Express, carry higher processing fees.
“Card not present” transactions – those done online or over the phone – also cost more due to a higher risk of fraud and chargebacks. The average cost for a card-not-present transaction is approximately 2.30% to 2.50% for Discover, Mastercard or Visa, according to Cardfellow.com (which also reviews processors). But for cards used in physical locations, the amount is about 1.95% to 2%.
To accept credit, you’ll need equipment, such as a point-of-sale terminal, a mobile card reader or, for e-commerce, a virtual terminal. According to PC magazine, it’s smarter to buy rather than rent; even a “free” equipment offer generally means a lease agreement that could wind up costing your business money.
Some companies offer “tiered” or “bundled” pricing, a complicated system that lets processors juggle charges among several categories. Fees are not always fully disclosed, and the amount you pay can be manipulated so that you wind up paying more. Tiered pricing “has played a big role in building the processing industry’s shady reputation,” notes Ben Dwyer of Cardfellow.com.
Some processor agreements include hidden costs, such as cancellation fees. Or a contract might let the company add new fees or increase old ones without notice. Again, due diligence is important. Even if you’ve gotten leads from one of the quote-generating sites named above, it’s essential to read the contracts closely to make sure you’re getting the right deal for your company’s needs. You can also ask colleagues and those who work in your industry what processor they use; trade shows and industry events are a good place to hear about new competitors and special offers that processors could be ready to offer new customers.
Educate yourself about your options, choose carefully – and watch sales grow as you make it easier for customers to do business with your company. While credit card technology will change much over the next decade, those who are already using it will find it easier to adapt. Get in with both feet and prepare to make adjustments as you go.
This article was originally written on February 21, 2019 and updated on December 10, 2020.