You need to choose the payment processor that best meets the unique needs of your business. How do you find one that is the perfect fit for your growing business? Let’s find out.
What is a payment processor?
A payment processor is the intermediary that delivers money from the customer’s bank to the merchant’s bank. Your payment processor will handle company transactions so that customers can buy your products or services.
Each payment processor specializes in different types of transactions (like online vs in-person). Payment processors will create agreements that include a variety of fees and usage terms. They also help maintain the security of transaction details and handle issues with fraud or chargebacks.
How does credit card processing work?
A credit card processor is the middleman running the transaction data between the merchant, customer’s bank, and merchant’s bank. The credit card processor facilitates the exchange of information as well as authorization for payment.
For your customers, credit card processing is a seamless swipe of their credit card. But behind the scenes there is a flurry of activity to exchange information, send and record payment, and complete the transaction.
To understand how credit card processing works, let’s start by identifying the parties involved:
- Cardholder: the customer swiping their card
- Merchant: business owner taking the payment
- Acquiring bank: business owner’s bank account accepting payment
- Processor: credit card processing company that routes data to the card network
- Payment network: the operating network of the credit card, such as Visa or Mastercard
- Issuing bank: financial institution that issued the credit card to the customer
The steps of credit card processing
When a credit card transaction takes place at your business, these are the steps going on behind the scenes.
- Merchant takes a card payment from the customer, online or in-store.
- Credit card processing service routes customer’s payment information to the credit card network via internet connection.
- Credit card network sends transaction data to the card-issuing bank for authorization.
- Bank authorizes payment and places a hold on the amount, or sends a denial if there aren’t sufficient funds or fraud is suspected. This step usually takes less than a minute.
- Credit card processor sends transaction authorization or denial to the merchant.
- Merchant settles transactions in a batch, typically once a day, facilitated by the credit card processor.
- When the credit card processor requests settlement, the customer’s bank releases funds to the merchant’s bank.
- The credit card processor removes interchange and other fees, then deposits funds in the merchant’s bank account. Deposits can usually appear within two days, though some processors may feature faster turnaround times.
Credit card processing fees
Hidden fees are a nightmare for any small business. Many credit card processors tack on additional fees beyond the interchange (from the credit card network) and markup (from the processor). Some credit card processors can even adjust fees without warning. Read the fine print and always check your transaction statements.
Credit card processors manage the same set of tasks, but the range of credit card processing fees is where you’ll find variety. Let’s break down some of the most common processing fees you’ll find as you shop credit card processors.
- Interchange rate: The interchange rate is determined by the credit card network (Visa, Mastercard, etc.), and is the same for every merchant. While it’s important to note these fees, they are nonnegotiable
- Assessment fee: The card payment network also includes an assessment fee that pairs with the interchange rate. It is likewise nonnegotiable and the same for all merchants.
- Markup or transaction fee: Each processor will add their own fees in order to make money from each transaction. The markup fee can vary, so be sure to compare these fees across different credit card processors.
- Keyed transaction fee: Markup fees may be larger for keyed transactions, meaning you pay more when a card number is manually entered versus swiped or inserted.
- Online transaction fee: Generally the markup fees for online transactions are slightly higher than swiped or chip transactions.
- Monthly fees or flat fee: A credit card processor may add a monthly fee or “flat” fee for use of the software. A higher monthly fee may accompany lower transaction fees, so do the math to see if it’s worth it for your business. You may be required to hit a certain transaction minimum each month or be subject to an additional monthly minimum fee.
- Chargeback fee: If a customer disputes a charge or requests a refund, most credit card processors will attach a fee for each chargeback.
- PCI Compliance: Some credit card processors provide PCI compliance for their clients and charge an additional fee for this service. Alternatively, some credit card processors may charge you an extra fee if you are NOT PCI compliant as it can mean increased exposure and risk of fraud.
- Equipment fees: Many merchants choose to rent the processing equipment, such as a credit card terminal, POS system, and mobile card readers, from their credit card processor rather than purchase their own. Be sure to do the math on the credit card payment processing equipment rental fees, since over time it can be cheaper to purchase your own mobile card reader or POS system.
- Batch fees: One of the most annoying fees charged by some credit card processors is the batch fee each time you push to resolve your transactions. Many credit card processors offer free daily batching and only charge for additional batches—like if you want to settle your transactions twice or more per day.
None of these fees should be a dealbreaker or something to scare you off, but it can be important to understand and identify these fees while you weigh the pros and cons of various credit card processors for your business.
Credit card processing pricing models
The next factor to consider when evaluating credit card processors is the pricing model. The fees are important to understand, but they function as just one piece of the larger pricing model for the credit card processor. To make an educated decision about your payment processor, you’ll need to do the math with each individual pricing model to see which will meet your needs and save you money in the long run.
Flat-rate pricing models for credit card processors are popular for the ease and straightforward nature of budgeting. A flat-rate model charges the same amount per transaction regardless of the number of transactions or the transaction total. The transaction fee might be slightly higher than with other processors, but it’s usually the only fee required—there won’t be monthly or other extra fees.
Best for: Flat-rate pricing models are usually designed for small businesses or those with small transaction volumes. Startups, e-commerce, and hobby businesses can benefit from a flat-rate credit card processing service that won’t charge extra for failing to meet monthly minimums or take unexplained percentages of each transaction.
This model is the most common choice for established businesses, because it offers transparency for each transaction. Each transaction will show the interchange fee as well as the processor’s markup which is usually a combination of percentage plus flat fee.
There is a flat-rate/cost-plus hybrid model which can help many businesses save money on credit card processing if they have high transaction volumes each month. This model requires a monthly subscription but then features lower markup fees on each transaction.
Best for: Cost-plus pricing models are best for businesses with a regular, healthy volume of credit card transactions each month.
In a tiered pricing model, each credit card transaction is classified and assigned a tier with accompanying pricing. Classifications can be confusing and transparency is lost. Each transaction is sorted into qualified, mid-qualified, and non-qualified. Qualified transactions are given a very low, favorable rate (which often attracts businesses), but this is compensated for by higher credit card processing rates on non-qualified and mid-qualified transactions. It’s important to note that these fees can be changed without notification
Best for: Businesses that are mostly paid with debit and non-reward credit cards, meaning most of the transactions would be qualified and earn a very low markup rate.
Who is the largest credit card processor?
There are a great number of credit card processors, dating back to the 1970s. In fact, most of the largest credit card processors are those which have been in business for decades.
Who are the largest credit card processors?
- Chase Bank
- First Data
- Bank of America
- Global Payments
While age and size can indicate stability and experience, there are many market disruptors making a splash in the credit card processing industry. Modern credit card processors are changing the game to provide solutions for small businesses, e-commerce, technology integrations, and more.
A good example is the mobile credit card reader company Square, which was founded in 2009 and has been a top choice for startups and innovative entrepreneurs ever since. This isn’t to say that modern processors are your only choice if you want cutting edge technology—in fact, Square and other new options are pushing the existing credit card processors to develop more tech-savvy solutions to match.
How to choose a payment processor in 6 steps
Payment processors are not a one-size-fits-all, so you need to do your research and the math to see which payment processor will meet your needs and earn you the greatest dividends. Here are the best steps to take so that you choose the right credit card processor for you.
1. Decide between third-party or merchant accounts.
Third-party processors handle the credit card transactions outside of your store or application. They might charge slightly higher transaction fees, but you won’t need to worry about PCI compliance or integrations. Good examples of third-party processors include Square and Paypal.
Merchant accounts are used when the business wants credit card payments to take place within its own network. It involves some underwriting and implementation is more complicated, but it allows for better control and customer service.
|Choose a third-party processor if:||Choose a merchant account if:|
|You’re a small business (<50)||You’re a larger business (>50)|
|You have low transaction volume||You want more control|
|You favor simplicity||You want all transactions to occur within your platform|
|You have poor or no credit||You want lower transaction fees|
2. Consider customer service
How often do you encounter special requests, problems, or complications that require the attention of your credit card processor? Difficulties with credit card payments can lose customers, so it’s important to consider the various levels of customer service provided by your payment processor. Ask questions about support, availability, protections, and how much control you’ll have over customer payments and payment portals.
3. Research POS, mobile, and online features
Some modern companies rely solely on e-commerce, and some process the majority of their transaction via a virtual terminal. Other businesses need fast and reliable credit card payments for point-of-sale (POS) transactions. You might need a combination of the three. Look carefully at the way your customers shop and look for payment processors that specialize in the methods you need.
In the wake of COVID-19, contactless payments are on the rise. Square, Shopify, Paypal and others feature mobile credit card readers for easy POS transactions without handing plastic back-and-forth.
4. Assess security and PCI compliance
Every consumer has a right to secure payment processing that protects their data. You need to work closely with your credit card processor to ensure that your operations are PCI compliant.
“The pace of payment services is moving at a tremendous clip, and organizations need to stay current with PCI DSS requirements and security solutions,” – Troy Leach, PCI Security Standards Council CTO
Be sure that any POS terminals or online payment portals allow for encryption of data to protect both you and your customers.
5. Investigate transparency
Communication and transparency are key indicators of a healthy business relationship. As you assess different payment processors, look for the degree of transparency in their pricing models and how clearly they communicate with you as you ask questions about their service. Ask around to get reviews of the service, including unexpected charges or changing fees.
6. Crunch the numbers
Just because a flat-rate model is easier to wrap your brain around doesn’t mean it’s the most lucrative option for your business. More complicated pricing models may save you money in the long run, as well as give you better flexibility and increased benefits such as rewards and spend tracking.
We recommend having your potential payment processor run their various pricing models with your last month’s transaction numbers. With those simulations you should get a better idea of what each payment processor could look like with your business. If your potential payment processor can’t or won’t provide this estimated model, you should still run the numbers yourself or with your finance team. You may be surprised that a monthly subscription with a flat rate would cost you more than a higher rate, or visa versa depending on your business.
Process with peace of mind
Your payment processor is a significant part of your day-to-day operations, and can make your life much easier if you choose well. In addition to convenience, a credit card processor can offer you better dividends and increase the number of customers you see due to accessibility of payment.
So, what is the best credit card processor for your business? It depends on your size, budget, and needs. The most important consideration is that you do the math on varied percentage + markup fees so that you don’t fall into the trap of choosing the simpler (but more expensive) option. We hope this guide helps you choose a credit card processor that helps you do what you do best—run your business well.
Divvy offers financial solutions for businesses of all shapes and sizes, including expense reports, credit cards, bill pay, reimbursements, and more. See what we can do for you with a Divvy demo.