How to Accept Credit Card Payments

Whether you’re looking to run a neighborhood garage sale, start an e-commerce website, or build your small business, providing a system for people to make debit and credit card payments is very crucial. A recent study done by the Federal Reserve Bank of San Francisco found that debit and credit card payments make up a28% and 23% of all purchases, respectively, and they continue to grow. It’s no wonder that more people are shifting to these mediums, especially due to the security and rewards that credit cards provide. Check out some of our reviews on credit cards with great rewards, and you will understand where the incentive comes from to use credit cards.

Considering this, if you are a merchant, you certainly want to set up ways for people to pay with credit—you’ll get more customers this way, and they will actually spend more per sale. However, understanding the different methods and steps to accept credit card payments can be difficult. Throughout this article, we’ll go over the basic knowledge and steps that you need in order to successfully begin taking credit card payments.

Step Zero of Accepting Credit Card Payments: Understanding the Costs

The upside of accepting credit card payments is more customers and sales. The corresponding downside would be the fees and percentages that you as a merchant would pay to the processing company. The most important consideration is how to minimize those fees and costs. Understanding costs is the first step to figuring out how to accept credit card payments.

Different methods of accepting credit card payments have different pricing structures. Within the pricing structures, it is crucial to understand the two types of fees—fixed and variable. There are two major fixed fees (or flat rates): the percentage of your total sales that goes to the processing company as well as any monthly rates that you pay for software, equipment, and services. The variable fees would be the per-transaction cost that doesn’t account for how large a single sale was. Let’s look at a quick example situation that should help with understanding. If you net $1,000 in credit card sales with a 3% flat-rate fee, no matter how many transactions it took to get you to $1,000, you would still pay a fixed 3% (or $30). However, if you had a per-transaction fee of 10 cents, receiving 10 credit card payments of $100 would be much more costly than receiving one payment of $1,000.

Now that we’ve talked about the costs of credit card processing, let’s understand some more key definitions and then walk through our actual options and steps.

Key Terms to Know First

Here are some key terms to know that are common when talking about credit card payments.

• POS system - A POS (point of sale) system is the combination of hardware and software that is used to make the actual, physical transaction. A POS system also keeps track of a lot of bookkeeping for all the sales made.

• Merchant account - A merchant account is a business bank account where the debit and credit card sales go to after a transaction.

• ISO (independent sales organizations) / MSP (merchant service providers) - ISOs and MSPs are third-party companies that are contracted by banks to handle merchant accounts. By operating with them, you don’t have to have a personal merchant account.

• Merchant aggregator - Also known as payment facilitators, merchant aggregators have master merchant accounts that handle a lot of different businesses. Think Square or PayPal.

• Direct processor - Direct processors are pretty much a bank’s direct merchant services. You would have your own merchant account with direct processors.

• Interchange-plus pricing - A pricing structure used that is typically the most transparent. The interchange is the percent of a sale (for example, 1.5%) that represents the cost of banks processing credit card payments. The “plus” represents the profit that the processing company is going to take from you (for example, 0.5% and 10 cents per transaction). That example combined together would be 2% of each sale and 10 cents.
• Payment gateway - A payment gateway is a system used for e-commerce payments. Think about it like a digital POS system.

Now that we have some helpful terminology, let’s take a look at the different options of accepting credit card payments.

Different Major Methods of Accepting Credit Cards

The entire process of accepting credit cards is rather complicated. When a consumer swipes or uses their credit card, information and ultimately money is transferred to processors, banks, back to the POS, and eventually to a merchant account. Typically, managing all parts of this process would be more cost-effective in the long-run but cost-heavy in the short run. Additionally, smaller businesses would require less infrastructure than bigger ones. The following methods of accepting credit card payments have been organized from being better for smaller businesses to being better for bigger ones.

Peer-to-peer payment services (Venmo, Zelle) - Technically, this method of receiving payment is available to everyone, thus, it is easiest for the smallest of businesses. If you are running something more personal like a small-scale garage sale or shop, this would be the easiest method. 

Use a payment facilitator (PayPal, Square, Stripe) - Payment facilitators, as mentioned earlier, have their own master merchant accounts. By working with a payment facilitator, a lot of backend processing is down through their accounts. Payment facilitators can provide you the physical equipment required for transactions—for example, Square is known for easy, portable, and cheap card readers. Transaction fees are relatively high at around 3% of sales or so, with a few cents per transaction as well. This option is great for businesses with smaller sales (for example, under $3,000) because it is simple.

Partner with an ISO/MSP (Payline, Flagship Merchant Services) - ISOs/MSPs resell you merchant accounts that they contract out from direct processors. Through this method, you’ll typically get slightly better rates. If your sales still are not super high, you won’t reap enough benefits to offset the higher initial and fixed costs that come with direct processors.

Work with direct processors (Chase Merchant Services, Elavon) - Direct processors pretty much give you your own merchant account. By working with direct processors, you can expect higher initial costs and lower variable costs, especially in the long run. If you are a business with a very high volume of sales, this is probably the best option.

Step-by-Step for Setting Up Credit Card Payment System

Now that we know the different methods for creating a credit card accepting system, let’s take a look at the basic steps you can take to actually set it up.

• Identify what kind of system best suits your type of business - Take time to understand how large your business is as well as which medium it takes place in. Is it in a brick-and-mortar store that has a lot of smaller transactions? Consider payment facilitators or ISOs. Is it completely online? Set up a payment gateway. There are many options, so put some due diligence into researching at first
• Determine what equipment you need - After knowing what sort of system you want to go with, figure out what sort of equipment you need. Do you need a full-fledged POS system with hardware and software? Do you already have some hardware and just need software updates? Do you only need a simple card reader? Once you know what equipment you need, you can purchase it from your processing company.
• Research and compare pricing models/fees - Knowing what you know about costs now, an important step of setting up your payment system is comparing the different options. Be sure to look at multiple quotes before deciding on one.
• Study your contract before signing anything - This is probably the most important step. Before signing anything or giving up personal information like your SSN, make sure to read and understand the terms. Some companies may try to sneak in hidden fees over time, especially if they require a longer contract term.
• Set up your merchant account (if necessary) - After you choose a method and company, you can now set up a merchant account if necessary. If not, then you simply have to set up the infrastructure and equipment.
• Start accepting payments - Congratulations! You can now accept credit card payments from customers.

Key Risks and Factors to Consider

Now that you know the basics to accept credit card payments, your opportunities for sales have increased. However, always be sure to keep some of the following things in mind.

• Fraud - Credit card fraud is real, and you don’t want to become a merchant that is involved in that situation. There are ways to be more aware and preventative of this. For example, getting a card reader that takes cards with security chips is much more secure than taking only magnetic strip cards.
• Hidden fees - As mentioned before, be wary of any hidden fees in your contracts! They could increase your costs for no reason.

Concluding Remarks

Being able to accept credit card payments is crucial for most businesses. Hopefully, this article gave you some basic insight into understanding the process. As long as you are careful in understanding your fees and costs, you will be well suited to creating a more secure and consumer-friendly way of doing business.