Credit Card Processing Guide for Small Businesses

Small Business Credit Card Processing Information

Credit card processing is a complex process that can be overwhelming for many small business owners. But, it is crucial for merchants to understand the basics of credit card processing, as it will help them save money by avoiding unnecessary fees. Below is our complete guide to knowing the main parties involved in credit card processing, what equipment is needed, and the types of processing fees a small business may encounter.

The Basics of Credit Card Processing

There are 5 Major Players Involved in Credit Card Processing

In order for your small business to make credit card processing a reality, five key players will need to work together. They are:

1. Credit Card Associations

These are your major credit card companies, like Visa, MasterCard, American Express, and Discover. Visa and MasterCard are the overseers behind credit card processing. They coordinate the process of using one of their cards by managing rates, setting regulations, and routing transactions. American Express and Discover do not play by the same rules as Visa and MasterCard, and have a unique way of allowing businesses to accept customers’ credit cards.

2. Issuing Banks

These are the institutions that actually issue the credit cards mentioned above (ex: Chase and Bank of America). Issuing banks are the ones responsible for holding the funds or providing the credit that the consumer will draw on to complete a transaction.

3. Acquiring Banks

These are the institutions that provide and maintain merchant accounts for small businesses. Acquiring banks take on the risk of providing refunds or chargebacks if the business is unable to pay back the consumer.

4. Merchant Service Providers

Merchant service providers are the ones that handle the sales and push the transactions through the networks provided by the different credit card associations. There are different types of organizations that fulfill this role, including:

  • Agents
  • Acquiring Banks
  • Third Party Service Providers
  • Processors
  • Independent Sales Organizations

5. Payment Getaways

Payment getaways are special portals that route transactions to an acquirer (ex: an online shopping cart).

Four Ways to Accept Credit Cards

In order for your small business to accept credit cards, you will need to choose one of the options below. Which you choose will depend a lot on your unique situation, as each method has its own benefits and drawbacks. Your options include:

1. Point-of-Sale (POS) Systems

A POS system is more than just a credit card processing method, as it offers functions such as tracking inventory and accessing sales reports. A high quality POS system will integrate with your existing software and bookkeeping tools. Small businesses that have a higher sales volume typically use POS systems. There are two basic types, which are:

  • Traditional POS System: A traditional POS will require some type of merchant account, and will integrate a terminal and a screen with a cash register and receipt printer. There are additional optional features like pin input devices to process debit cards.
  • Mobile POS System: A mobile POS requires a third party device (ex: iPad) that allows you to run a program to accept credit cards. This type of POS system is extremely convenient, as the POS system can be physically moved and you have access to your data no matter where you are. In addition, some mobile POS options don’t require a merchant account.

2. Credit Card Terminals

For small businesses that do not process a large quantity of transactions a day, a credit card terminal may be a better option. A credit card terminal is a small device with a card reader that allows you to accept credit cards. It does not have the extra features that a POS provides, but it gives your business the ability to accept card payments.

The main benefit of credit card terminals is that it is typically the simplest and cheapest option. All you need to do is choose a processing company, open a merchant account, and plug in a few cords. A major drawback of using a credit card terminal is that you must manually track transactions. This can add a considerable workload if you process a large quantity of transactions every day.

3. Mobile Credit Card Processors

A mobile processor is an app combined with a dongle, which allows you to accept credit cards no matter where you are. This option is best for small businesses that work with customers on the go, like a food cart or street vendor. This type of processor can also be beneficial for retailers that want to swipe cards away from a physical register.

One reason that small businesses choose mobile processors is that you do not need a set location to accept payments. This allows you to accept payments where you actually do business, so you do not have to follow up with customers at a later date to collect payment. In addition, many mobile processors offer additional features, like the ability to generate reports. For more mobile processors, no merchant account is required.

One downfall of using a mobile processor is that small business owners have to pay extra for the convenience of mobility. This type of processor typically comes with higher fees than a simpler terminal. In addition, you will have to supply your own device that is compatible with the app you are considering.

4. Online Credit Card Processors

An online credit card processor is a third party company that processes your credit card transactions without the need for a merchant account. As the name would suggest, this type of processor is great for small businesses that primarily do business online. In addition, businesses lacking sufficient credit history or those with a low credit score can benefit from using an online processor.

One of the main benefits to choosing an online credit card processor is that no merchant approval is needed, which is why it’s a great option for businesses with little to no credit or a poor credit history. The downfalls of choosing an online processor is that there are high transaction fees and a higher risk of disputed charges.

There are 3 Types of Credit Card Processing Fees

No matter what method you choose to accept credit cards, all of them come with fees that your small business will have to pay. There are three main types of fees your small business will experience. They are:

1. Transactional Fees

Transactional fees are charged per business transaction. They are non-negotiable and represent the biggest cost of operating a merchant account. This fee is set by an agreement made by representatives from the major banks and those from the individual card brands. Interchange fees are determined on a “per-transaction” basis, and are dependent on the card type, card category, processing method, and business type.

2. Flat Fees

Monthly flat fees are dependent upon the type of business you run. They vary by name, value, and applicability. While you may not encounter all of them, some of the more common flat fees include:

  • Terminal Fee
  • Payment Getaway Fee
  • Annual Fee
  • Early Termination Fee
  • Monthly Minimum Fee
  • Network Fee

3. Incidental Fees

As the name suggests, incidental fees are charged when something happens. Not all incidental fees can be avoided, but small business owners want to aim to have as few of these charges as possible. Some examples include:

  • Address Verification Service (AVS) Fee
  • Retrieval Request Fee
  • Batch Fee
  • Non-Sufficient Funds (NSF) Fee

For more information on specific fees your small business may be encountering, read our blog on credit card processing fees.