Small Business Credit Card Processing: What You Need to Know

• Accepting credit card payments can grow your customer base and revenue; however, it can also be costly and has the potential to lead to fraud.
• When deciding whether to accept credit cards, consider the increasing use of digital wallets, the growing obsolescence of cash payments and the costs of credit card processing.
• The most affordable credit card processor for your company depends on how much you expect to receive in credit card payments per month.
• This article is for small business owners deciding whether they should accept credit card payments.

As a small business owner, you have a lot of decisions to make, including whether or not you want to accept credit and debit card payments. If you do, you'll need to work with a credit card processing company. 

Finding the right card processor for your small business can be daunting, but here are three questions to ask potential partners to make your decision easier: 

1. Does my business need to accept credit cards, debit cards and digital payment methods?
2. Why do businesses need credit card processing companies?
3. How much will it cost me to accept credit cards? 

Should your small business accept credit cards?

If you run a small business, it's almost impossible not to accept credit cards, but the decision is ultimately up to you. 

The number of people who carry cash on them daily is rapidly shrinking. Phillip Parker, founder of CardPaymentOptions.com, said, "People prefer to pay with cards, and fewer people are carrying sufficient cash for all of their purchases." If you don't accept credit and debit card payments, you risk losing out on a significant amount of sales.

Editor's note: Looking for the right credit card processor for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

According to the recent Federal Reserve Payments Study, total credit card payments grew to $131.2 billion in 2018, up nearly $30 billion since 2015.

Accepting digital payment methods ‒ including contactless card payments – is just as necessary as accepting credit and debit cards. More small businesses and merchants have implemented the near-field communication (NFC) technology required for these types of payments. 

Digital wallets such as Venmo and PayPal are fast becoming customers' preferred payment option. Because this payment process connects directly with a customer's banking information to send and receive payments, it's an ideal payment option for e-commerce businesses. 

With the low cost of processing these payments (much lower than processing credit and debit card payments) and the ease of integration into most websites and payment gateways, it's a great mobile payment option to offer.

Key takeaway: When deciding whether to accept credit card payments, consider the gradual decline of cash payments, the increasing use of digital wallets and the cost of credit card processing.

How much does it cost to work with a credit card processing company?

There are costs involved with using a credit card processing company, including:

• Setup fees. Depending on the processing company, you might have to pay a setup fee.
  
  
• Interchange fees. These are the fees the processor charges for each transaction, which typically range from 2% to 3%. Many processors charge 2% for purchases made in-person and 3% for purchases made online or over the phone.
  
  
• Monthly minimum fees. If you don't meet the minimum monthly requirement – usually between $10 and $25 – you'll have to cover the difference.
  
  
• Monthly statement fees. Many processors charge a fee to send you a monthly paper statement; check whether the processor has an electronic alternative that you can opt into.
  
  
• Early termination fees. Canceling your contract early could incur an expensive early termination fee, sometimes amounting to thousands of dollars. To avoid this fee, look for processors that offer flexible month-to-month service options rather than long-term contracts. 

How much money you'll be charged to accept credit card payments depends on a few factors, including the transaction amount, how the payment was processed, and, ultimately, the credit card processor's pricing model. Some processing companies charge a flat rate, plus a percentage of the sale, while others only charge a percentage of the sale. 

If your small business sells big-ticket items, being charged a flat-rate fee and a percentage of the sale might be more beneficial than if you only sell lower-priced items, in which case, forking over a percentage of the sale to the processor might be better for your business in the long run. 

When you're researching card payment processing options, ask for a sample bill to give you an idea of how much you'll spending monthly on fees for their service. 

In addition to the above-mentioned fees, consider whether or not it's more cost-effective for you to rent or purchase the necessary processing equipment. Some processors provide the equipment for free. Others may charge you a monthly rental fee or an upfront fee for using their equipment.  

TIP: To accept credit card payments, costs may include several fees, as well as the price of buying or renting card processing equipment.

Is there a difference between processing in-person credit card transactions and mobile credit card transactions?

The type of business you run (brick and mortar, e-commerce) dictates the type of payments you process. Ideally, you want a credit card processor that accepts all major credit and debit cards; prepaid and gift cards; and digital wallet payment methods, including Apple Pay, Samsung Pay, and Google Pay. If you have a physical store, your point-of-sale (POS) system should allow customers to insert and swipe cards or tap their smartphone to complete the transaction. 

If you run an e-commerce business, your payment processing solution should work on both mobile and desktop devices.

Did you know: Some credit card processors do not accept digital wallet payments, but you should opt for one that does. Ultimately, the type of business you operate dictates the type of payments you can accept.

Which credit card processor is the cheapest for small businesses?

Finding the cheapest credit card processor possible might not be the most cost-effective option for your small business. 

If your small business processes less than $2,500 per month, payment facilitators – or mobile credit card processors like Square, or Stripe are the best options for you. While payment facilitators charge a higher percentage compared to other rates, you'll save money in the long run because there aren't any other fees, including setup fees and annual PCI compliance fees, associated with using a payment facilitator. 

If your small business processes more than $3,000 per month or has large sales totals, you'll want to work with an ISO/MSP – independent sales organizations (ISO) and merchant service provider (MSP) processing companies.

These companies can set up a merchant account for your business, and although they charge additional fees that payment facilitators don't, you'll save money because of the lower rate they charge for processing transactions at a higher volume. [Get some tricks on how to lower your credit card processing fees]

If your small business processes a low volume of credit card payments each month, look for a processor that won't charge you a monthly minimum fee, which is the minimum dollar amount of credit card processing fees you must meet each month. If you don't meet the minimum requirements, you'll have to pay the difference. 

For more information about accepting credit card payments and finding the right credit card processor for your small business, check out our reviews of the best credit card processors.

What are the pros and cons of accepting credit card payments?

Among the reasons you might want to accept credit card payments include:

• More customers. According to a 2019 report, cash usage accounted for 26% of all transactions, down four percentage points from the prior year. Cash use is expected to continue declining, thus leaving more room for credit card, debit card and mobile wallet payments.
  
  
• Increased revenue. Since credit cards don't require an immediate payment by consumers, accepting credit card payments can encourage customers to buy more from your business, thereby increasing your revenue.
  
  
• Easier payments. Accepting credit card payments can automate your business financial management through your POS system far more easily than cash can.

Among the reasons you might hesitate to accept credit card payments include:

• Potential for fraud. Although credit card processing is highly secure – especially if you comply with the Payment Card Industry Data Security Standard (PCI DSS) and accept EMV (Europay, Mastercard and Visa) chip cards – the potential for fraud remains. Credit card fraud harms you in two ways: You might not receive money for goods sold, and credit card companies may hold you, not the scammer, liable for credit card fraud. 
  
  
• More costs. When chargebacks occur, they can be costly. Additionally, credit card fees can't be avoided, though there are numerous tricks for lowering your fees. [Get tips on how to negotiate with credit card companies]

Max Freeman contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.