Is Your Business Ready to Accept Credit Card Payments? Key Considerations and Tips

Paying by credit card is increasingly popular. In 2023, nearly one-third (32%) of all payments used a credit card, up from 18% in 2016, according to a Federal Reserve report.

Accepting credit cards is more costly for small businesses due to fees charged by card issuers and payment processors. However, small businesses may find it worth their while to pay those extra costs.

How Are Credit Card Payments Processed?

To understand how to accept credit card payments, you should have a clear idea of how credit card payments are processed.

Whenever a customer swipes their credit card at a retailer, a complex chain of events is triggered, involving the business, the credit card issuer, the payment processing network, and the business’s bank.

1. When a transaction occurs, it’s first sent to the acquiring bank, which is the merchant’s bank.
2. The acquiring bank then sends that transaction to the issuing bank (the bank that issues the credit card to the consumer) via a payment processing network.
3. The payment processing network is like a middleman that facilitates the transaction between the acquiring bank (the business’s bank) and the issuing bank (the card issuer).
4. After the issuing bank receives the transaction, it determines whether the transaction is safe and determines if the customer has sufficient funds for the transaction.
5. The issuing bank then approves or denies the transaction.

After a transaction is approved, the merchant doesn’t immediately receive funds from the purchase. It may take a few days for funds to be transferred from the merchant account—which is a type of bank account that accepts and processes electronic payments—to the business’s actual bank account.

What Do Small Businesses Need To Accept Credit Card Payments?

Small business owners have two options when it comes to setting up a system for accepting credit card payments:

1. Open a merchant account and then find a separate payment processing network to handle transactions.
2. Use a payment service provider that already includes a merchant account and a payment processing service.

By opting for a payment service provider that includes a merchant account, small business owners can avoid the hassle of having to set up a separate merchant account. Services like Stripe and Square are payment service providers that include merchant accounts.

You’ll also want to think about how you want to accept payments. For example, do you have a brick-and-mortar store or do you run an online e-commerce store? It’s important to determine the payment needs for your small business first because accepting credit card payments in person requires different tools and technology than accepting card payments online.

Accepting Credit Card Payments In-Person

If you want to accept credit card payments from customers making purchases in person, you’ll need to purchase a card reader, which is a physical device that can be used to accept debit and credit card payments.

Typically, these card readers offer customers the option of paying via contactless payment, inserting an EMV chip card, or swiping a card. Some card readers are integrated into point-of-sale (POS) software that tracks sales, updates inventory, and more, which may be helpful for some small business owners.

And if you don’t want to purchase separate hardware for accepting payments, you can opt for a virtual terminal instead. Virtual terminals are a type of software that can be used on a phone or laptop without a card reader.

Accepting Credit Card Payments Online

Payment gateways can be thought of as conduits between customers, payment processors, card issuers, and the merchant. Payment gateways are essential for accepting online payments, as they ensure that transactions are routed to the correct financial institutions and that customers’ payment information is kept safe through encryption.

Note that payment gateways, which connect the merchant with payroll processors, are different than payment processors, which move the funds from one institution to another. But many payment service providers—like PayPal, Square, and Stripe—offer both services.

Fees Can Add Up Quickly

When you’re choosing between different payment service providers, payment processors, or merchant accounts, make sure to carefully analyze the fee structure.

Credit card processing fees can be pricey, so you’ll want to keep track of the various fees charged. For example, there may be payment processing fees, payment gateway fees, chargeback fees, and more.

You may consider opting for a payment service provider if you prefer simplicity. Since these companies bundle together multiple features and services, the fee structure may be more straightforward.

The Bottom Line

Accepting credit cards can help small businesses attract more customers and enhance cash flow. Business owners can either set up their own merchant account and payment processor or rely on a payment service provider like Stripe, Square, or PayPal that bundles these services.

Depending on whether your business operates in person or online, the tools needed to accept credit card payments differ. Brick-and-mortar store owners will likely need to purchase card readers or virtual terminals, while owners of e-commerce stores will need to ensure that they have a payment gateway. By doing research and understanding the associated fees for the different services, small business owners can make credit card acceptance a worthwhile investment.