Accepting credit card payments is a standard practice these days. Yet, you’ll still find many small businesses across the U.S. that are cash only establishments.
More than half, actually. 55 percent of small businesses in the U.S. don’t accept credit card payments – that’s 15 million businesses! And those businesses are missing out on $100 million dollars, about $7,000 per company simply because they don’t accept plastic as a form of payment.
Are you missing out on sales because your business doesn’t accept credit cards? If so, here’s everything you need to know about accepting credit card payments at your small business.
Credit Card Basics
One reason business owners shy away from accepting credit card payments is because they simply don’t understand how it works. We can’t say we blame them. Understanding credit card processing and payment processing isn’t that easy. But, just like anything else, when you break it down into smaller parts, it becomes more digestible.
On the consumer end of it, you have the four major card networks – Visa, Mastercard, Discover, and American Express. Each one operates on their own network with their own fees. Some of the card networks also issue their own cards (ex. American Express) while others work with issuing banks such as Wells Fargo, Bank of America, and many others to issue credit cards on their behalf.
On the merchant side of it, you have the acquiring banks, acquirer, or processor as it’s commonly called. When a merchant selects a merchant service provider, they are essentially selecting a processor.
When a customer pays for an item with a credit or debit card, the processor (acquirer) communicates with the issuing bank and card networks to provide the approval or decline response for the transaction.
We know if seems like an awful lot of helping hands involved just to make a simple credit card payment, but it’s imperative that sensitive payment information is protected and secured.
Speaking of security, you may have heard about a little something called PCI compliance. PCI is short for Payment Card Industry and it was developed by the major card networks out of necessity. During the internet boom of the late 1990’s to the early 2000’s, cybercriminals were on a rampage and found ways to hack into payment networks for illegal gain.
In order to combat this fraudulent activity and protect the consumer’s payment data, the card networks formed a council to create a universal Data Security Standard (DSS). PCI-DSS is the security standard all businesses that accept credit cards must comply with. Failure to do so can result in hefty fines.
In order to make sure your business is PCI compliant, select merchant service providers that deploy PCI validated payment applications (software) and hardware. For a software or hardware solution to be validated, it must be evaluated by a Qualified Security Assessor (QSA) appointed by the PCI Security Standards Council. The accessor will examine the entire solution from top to bottom to ensure that it meets data security standards for its classification as software or hardware. If the solution passes the test, they’ll receive the PCI validation stamp of approval for payment security.
It Starts with a Merchant Account
Now that you have an understanding of how credit card communication works, let’s talk about what you’ll need in order to start accepting credit card payments at your business.
If you own a business — or are just starting a business — and you want to accept the most common form of payment (credit cards), you’ll need to set up a merchant account. A merchant account is what enables a business to accept, process, and ultimately receive the funds collected from credit card and debit card payments via online or in-store methods (swipe, EMV, or NFC such as Apple Pay).
Merchant accounts can be obtained from your local bank, a third-party Merchant Service Provider (MSP), or an Independent Sales Organization (ISO). Collectively speaking, you may often hear them referred to as processors. An MSP, ISO, or processor are terms used to describe companies who provide businesses with the products and services needed to accept credit cards and other forms of electronic payments.
When a customer comes into the store and makes a purchase, in the process of completing the transaction, the credit card processor will move funds from the cardholder’s account — depositing them into the business’ merchant account. Seems simple enough, right?
How to Select a Merchant Service Provider
We mentioned that merchant accounts can be obtained from your local bank or a third-party provider such as an ISO and MSP. We suggest going with an ISO or MSP because when it comes to credit cards, you need a ‘service provider.’
Your business doesn’t have banker’s hours – it’s not 9-5. Also, you don’t just need a bank to help you run your business. You need business management tools and solutions that will help you run a more efficient business.
That’s exactly what ISOs and MSPs provide. In addition to merchant accounts, they can offer an entire ecosystem of small business solutions (we’ll talk about these later) and 24/7/365 customer support, not just 9-5.
Besides 24/7 customer support and knowing how that support is delivered (ex. phone, chat, email, online documentation, etc…), here are a few other things to consider as you go through the vetting process.
Is the Payment System PCI Compliant?
In a time when data breaches are becoming more and more common, it’s important that you choose a payment provider that is using industry best practices and PCI validated payment applications.
What Type of Fraud Protection is Offered?
Make sure you can enter additional card information at the point of purchase such as the security code (CVV) or cardholder’s zip code (AVS). Some MSPs also offer fraud protection services or insurance on certain types of fraudulent activity.
What Other Services does the Provider Offer?
MSPs and ISOs not only provide merchant service accounts, but many of them provide other business management tools. Find out if they offer payroll solutions or financing options like cash advances or loans. If you’re going to use them for processing, you might as well put some of your other tools in the same shed.
How Much Flexibility does the Provider Offer?
If you’re only running a brick and mortar store today but you aspire to have an online store up and transacting within the next year, can the service provider process ecommerce payments as well, and vice versa? We’ll get into more detail about this a little later.
What About Interchange Fees?
If you want to accept credit cards at your business, there are going to be fees. You’re paying for a service that the card networks and other aforementioned parties are providing you. Thus, there is a fee for the service rendered. Just like you pay your cell phone provider, cable provider, or Netflix bill every month.
Make sure the company is transparent about their fees and that you’re actually receiving the services from those fees. Some fees, such as interchange are on a per transaction basis.
Two of most the popular pricing structures you’ll come across in a statement is Interchange Plus and Tiered Pricing. Each one has its pros and cons. The main fact every business owner needs to know how to accept credit card payments is that each card used in your establishment has its own wholesale rate. The wholesale rate or interchange fee is the rate the card brands charge to use their network. This fee is non-negotiable no matter what provider you choose and the transaction fee is applied to every single credit or debit card purchase.
Interchange Plus is the markup that MSPs and ISOs add to the wholesale rate set by the card networks. For example, it may cost 1 percent to process a credit card at a wholesale rate. But the merchant service provider might add 35 percent and $0.20 to process that transaction.
If a customer comes in with a $100 purchase and your rate is 1.35 percent plus $0.20 per transaction, from that $100 transaction you’ll see $98.45 deposited into your merchant account: ($100 – 1.35%) – $0.20) = $98.45.
Most business owners feel more comfortable when they know the exact percentage and the dollar amount they’ll be charged for each transaction. Also, keep in mind that fees may increase or decrease based transaction volume and dollar amount being processed.
Miscellaneous fees are debited monthly, or annually. Some of the most common miscellaneous fees you’ll come across are statement fees, service charge fees, customer support fees, batch fees, and PCI compliance fees.
Statement fees are fees that ISO and MSP charge to deliver your statement through paper mail or electronically. These fees are minimal and only a few dollars so they won’t break the bank.
Service charge fees and customer support fees are what the service provider will charge for their service. Whether they use a per incident model, meaning you would only pay a flat fee per troubleshooting event or a recurring monthly fee, it takes manpower to support your business and someone has to help pay for that.
A batch is the total dollar amount of credit card and debit card charges in a single business day. It’s deposited into the business owner’s merchant account, usually within 24-48 hours. Some processors will charge $0.10 to $0.30 to complete the batch out.
Payment Card Industry (PCI) compliance is a set of security standards designed to ensure that all companies know how to accept credit card payments, store or transmit credit card information to maintain a secure environment. Many credit card processing companies will issue a PCI questionnaire and some companies will charge a PCI compliance monthly fee to ensure your business is meeting the industry standard.
Besides recurring miscellaneous fees, you may also incur incidental fees such as retrieval fees, chargebacks, and ACH Reject fees.
The retrieval fee is the first part of the potential chargeback process. Before a chargeback is officially ruled, the bank will give the merchant a chance to provide supporting documentation showing the legitimacy of the charge. The fee associated with the retrieval process can range from $10 to $25 per occurrence.
The second part of the process is the official ruling of a chargeback. If the merchant fails to provide supporting documentation or loses the ruling, then a chargeback is issued. A chargeback pulls the money from the merchant account, placing it back into the cardholder’s account.
Then the merchant receives a chargeback fee. The fee is usually $25. For every chargeback, a small business owner can lose the money from the transaction, the product, and up to $50 in fees. Because of this potential loss, merchants will typically use a basic identity verification process. To do this, ask for the customer’s ID and match it with the credit card they are using. A few seconds could save hundreds, if not thousands, of dollars.
Now that you know how to accept credit card payments, it’s time to receive the money. If a merchant service provider attempts to debit a business owner’s bank account and it lacks insufficient funds, then the merchant will be charged an ACH reject fee. If a merchant service provider attempts to deposit funds into the business’ bank account and it’s closed or blocked then they’ll also receive an ACH Reject fee. A standard ACH Reject fee is $25.
Before I Select an MSP, What Else do I Need to Know?
One of the main things you want to decide on is how you want to accept credit card payments. For example, will it be online, in-store, from a mobile device, or all of the above?
Some processors are hardcoded to certain hardware and others may not have the integration capability needed for POS software or ecommerce platforms. Before you settle on a merchant account provider, make certain it can integrate with all the payment platforms you need to run your business.
If you’d like to process credit cards in-store then you’ll need hardware. For in-store payments, you have four options:
Mobile Payments and Credit Card Readers
Mobile credit card readers will either plug into the headphone jack of a mobile device such as an iPhone, iPad, Android device, or connect using Bluetooth technology. The mobile reader works with an application you can download right onto your mobile device.
Once you download the app onto your phone or tablet, you’ll connect the card reader. The app can be used as a standalone payment acceptance device or it can be used as an extension of your point of sale software. If you’re using it as a standalone payment method, you’ll simply enter in the amount of the sale and take the payment using the credit card swiper.
If the mobile application is an extension of your POS software, you’ll be able to ring up inventory items just like you would at the register and process the sale using whatever payment option the customer prefers.
Standalone Credit Card Terminals
Brick and mortar stores can use a standard payment terminal like an Ingenico Ethernet card reader as a standalone payment device alongside a simple cash register.
The cash register can be used to ring up sales and take cash payments and the payment terminal can be used to processing credit card transactions.
A virtual terminal is similar to a standalone credit card terminal except that it’s web-based. From a PC or Mac, you can log into a website that is powered by an online payment gateway, connect a card reader via the USB port and swipe a credit or debit card at the point of purchase.
A Point of Sale System (POS)
We saved the best for last. A POS system is something all businesses should use. Besides being able to accept credit card payments, it also comes equipped with plenty of business management tools. It can help you manage inventory. It can keep track of employee hours, allow you to build customer profiles for marketing purposes, and it can provide you with an abundance of reports and analytics to help you make smarter, data-driven decisions about your business.
A point of sale system can come in many forms. It can be an all-in-one device with a monitor, printer, and barcode scanner all in one unit that sits atop a cash drawer, or it can be something a sleeker like an iPad POS system.
A point of sale system is by far the best way to go because it allows you to do so much more than just accept payments. However, every business is different and you should always choose the solution that works best for you.
Ecommerce stores can toss aside those payment terminals their storefronts use and exchange it for something called a payment gateway. This is the same type of online payment gateway that powers a virtual terminal.
Since you’re in an online environment and for simplistic purposes, a gateway can be considered the software version of a credit card terminal for an online credit card payment. It’s an invisible layer that hides behind the web form where customers input their card data. From the gateway, the card data is passed onto the acquirers and card networks for the approval or decline response – just as it would from a credit card terminal.
Once you’ve implemented your device of choice, it’s time to run a credit card test transaction. If the system responds with an error then the credit card processing is not fully functional. If it responds with “approved” or “declined” then the ability to process credit card payments is active and you are good to go!
Why Should I Accept Credit Card Payments at my Business
Now that you know how to accept credit card payments, here’s why you should.
Less Human Error and More Theft Prevention
When you accept cash payments, there’s always the risk of running into situations where a cashier gives back too much change, causing the register to be short. If your business is cash-only, this risk of this happening increases tenfold, causing significant headaches for you.
When you accept credit and debit cards, it reduces the chances of a cashier making a mistake. The frequency of cash transactions goes down, meaning less human errors. Busy hours become a breeze because the cashier only has to swipe the card and ask the customer if they would like a receipt.
Not only do you reduce the risk of innocent human error, but you also reduce the risk to not so innocent human error. When you’re dealing with cash, it’s easy for a dishonest employee to pilfer a few extra dollars when the cash drawer pops open during a sale.
With credit card transactions, employees have no access to cash during the course of the transaction – making it a lot harder to swipe.
Don’t forget the risk of taking in counterfeit money, keeping a large amount of cash-on-hand, and driving to the bank every day to make a deposit. Even though credit card acceptance comes with its own unique security concerns, let’s not forget security is also a concern with cash payments.
It Encourages More Sales
If a customer wants to buy a $200 item, but they only have $150 in cash, they have two options. They can leave the store or use their credit card. That’s an extra $50 spent, by just having the ability to process credit card payments.
More times than not, customers spend more money when they use a credit card. There have been numerous social science and economic research that validates the idea that consumers do in fact spend more using plastic as opposed to cash.
Think about the last time you went into a store with the intention to buy one thing. Then you saw this item you needed and that item and before you know it you had three or four extra items in your shopping cart. Luckily you had your credit card to make the purchase. The same goes for customers coming through your doors.
Before a small business owner decides to accept credit cards they should have all the facts and a good understanding of how to accept credit card payments. As outlined in this post, there’s a number of ways you can do it, but it’s up to you to find the best solutions for your business model. So the next time a potential customer comes in to make a huge purchase and wants to use their credit card — smile! You’ve just made a sale.