Credit Card Processing 101 - Accion Opportunity Fund
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Credit Card Processing 101

Accepting credit cards doesn't have to be complicated. Find out what you need to know about credit card processing and how to get started.


According to the National Federation of Independent Business, America is almost evenly split between small businesses that accept credit and debit cards for purchases and those that don’t. And yet, the Federal Reserve Board says debit, credit, or gift cards make up two-thirds of all payments not made by cash. What this means: If you’re not taking cards, you’re probably not selling as much as you could be. So how does credit card processing work?

Accepting credit cards doesn’t have to be difficult or complicated-these days it can be as easy as plugging a small card reader into your smartphone-but you need to hook up with a company that’ll do the actual payment processing for you. Read on for what you need to know and how to get started.


How Does Taking Credit Cards Work?

There are several steps and multiple vendors involved in making a card transaction happen.


Step 1: Choose a Payment Processor

You will need to choose a service to process credit card transactions for you. This is called a payment processor. A payment processor provides the credit card machines you use to accept credit card payments. There are many choices of processors today. Some banks offer payment processing, there are dedicated payment processing companies, and certain point-of-sale systems also process credit card transactions.


Step 2: Open a Merchant Account

You will also need a merchant account to accept credit cards, debit cards, gift cards, and other types of electronic payment. The payment processor will transfer the money from the sale into your merchant account, where it will be held up to a week until it gets deposited into your regular business bank account.

You can open a merchant account through your bank or you can ask the company you choose to handle payment processing for you. Some payment processors offer their own merchant accounts. As with all other types of accounts, fees will vary, so shop around.


Step 3: Ensure Connectivity

Don’t forget, you’ll need an internet or cellphone connection to transmit payment information when conducting a sale.


How Do You Choose a Payment Processor?

The big differences between processors will be how much they charge you for each transaction, how quickly you get the money after the sale, and their general terms of service. Here are the factors you should consider when choosing a payment processor.


Transaction fees – A payment processing company takes a percentage from each credit card sale. Some processors will also charge a flat fee for each transaction in addition to the percentage. Expect transactions fees to eat up 2 – 3% from each sale.

There are usually two different rates a payment processor may apply to your credit card sales: one if a card is swiped through an electronic card reader, and a slightly higher rate if the number is keyed in manually. This is because swiped transactions are generally a little less risky since they’re done in person.


Monthly and other fees – Expect to also pay a monthly fee that will cover the service and support you get from the company. You may also be charged a separate “gateway fee” for providing a secure connection to protect you from credit card fraud and help protect your customers’ information.

Be aware that some processors will hit you with a minimum charge if they don’t make a certain amount from you through transaction fees for the month. And some will charge a separate fee for complying with the security standards established by the Payment Card Industry. This is called a PCI fee.


Other considerations – You have to apply, but most businesses are approved. Most processors can get you set up very quickly, usually within a day or so, and you likely won’t have to sign a contract, although you may have to cancel in writing with 30 to 60 days notice.

You’ll want to find out how long it takes for the money to clear your account once a transaction goes through. This generally ranges from one to three days.

If you want the ability to accept alternative payments like Apple Pay and Google Wallet, you’ll need a processor with NFC (Near Field Communication) capability.

As credit card companies start switching over to more secure cards with chips instead of magnetic strips, you’ll want to confirm the processor’s capability for those as well.

Probably the most important question is: what kind of customer service is available to you? Ideally, you want 24/7/365 phone support, especially if you do business outside the 9-5 “traditional” business hours.


How Do You Find a Payment Processor?

For comparison purposes, start with your bank. Not all banks provide credit card payment processing services, but many work directly with Visa, MasterCard, and Discover. You might decide your bank is the best fit, especially because you already have a working relationship.

As for processor options other than your bank, it’s like any other business service: get recommendations from friends, industry associations, read reviews online, and do your homework. Independent processors must be sponsored by a bank and registered with Visa and MasterCard. Check to make sure this is the case. If you want to accept American Express, you’ll have to get a separate merchant number directly from them.


Alternatives to a Standard Merchant Services Account

As previously stated, today there are more options than ever, and that includes companies that will handle credit card transactions for you without the use of your own merchant account.

Probably the best-known of these is Square. Square allows you to accept credit and debit cards with only a smartphone or tablet. You can enter the details manually, or use one of their free credit card readers that plug into the audio jack of your device.

Square charges a fee of 2.75% on every credit card transaction for swiped cards, and 3.5% plus 15 cents when the info is entered manually. That’s more than you would pay through a conventional credit card processor, but there are no other monthly fees or setup costs apart from any hardware you might want, such as an iPad stand or receipt printer. There are no monthly contracts or termination fees.

Though, Square isn’t perfect. Negative reviews focus on a lack of customer service. Also, Square uses its own algorithm to decide on a payer’s credit risk, and puts automatic holds on some transactions. This can result in a long delay in being paid.

There are several alternatives to Square that are worth checking out. They include GoPayment from Intuit, PayPal’s PayPal Here, and Flint.


How Do You Take Credit Cards Online?

If you sell online, swiping card information obviously doesn’t work. Many of the same payment processors who handle retail transactions also have online capability, so it’s possible to find one that covers both.

If you’re ONLY doing e-commerce, you have some additional options available to you. The one thing you must have is a payment gateway to authorize the transactions. Some gateways require you to have a separate merchant account, while with others it’s all included. Of course, you’ll also need to configure your website to connect to the gateway so payments can be processed. Most website hosting companies have shopping cart components that will do this.

One of the best-known gateways is Getting set up with them will allow you to accept credit cards and electronic checks through your website or an internet auction site (like eBay). There are various pricing options, and you will need an internet merchant account, which you can open through them, or on your own.

PayPal offers a processing service that’s easy to integrate into your website and will allow you to accept all major credit cards in exchange for a percentage for each transaction. You don’t need a separate merchant account but if you already have one, they offer just a gateway service at a lower cost.

Another option is to set up your online store on a platform like Shopify or Etsy that includes a payment gateway.

While it’s a little bit more expensive to accept credit card payments than cash, the benefits outweigh that small price tag. When people are able to pay for your services in ways other than just cash, you make it easier for them to spend more per purchase, which can translate to the growth of your business.

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