Back in the day, you could usually get away with using a single cash register to log and store money for processing payments. Today, things are far more complicated. People tend not to carry cash and prefer using a card or an online service. As a small business, you absolutely need to be able to accept one or both of these types of payments.
Without getting too complicated, this post will focus on how your small business can accept a credit card payment. While online payments are the future, for now, you can get away with accepting credit card payments.
How the Payment Process Works
How credit card payments work is probably something you haven’t thought too much about, yet they happen often. Most businesses nowadays are set up to accept credit card payments.
The first step occurs when someone inputs, swipes, or taps their credit card on a payment processor. While it’s true you can use something like a credit card authorization form; it helps to process payments with a payment processor. The information is processed and transmitted to your merchant account. For online payments, a customer’s credit card information is processed through a payment gateway.
Before hitting your merchant account, the payment processor will check if the customer has sufficient funds in their bank account. It’ll also check if the customer has reached their credit limit or if there’s potential fraud afoot.
Once the payment is checked, it will be either accepted or denied. If approved, the payment processor will deduct the fees from the customer’s bank account and deposit them into your merchant account. Funds will take some time to show up in your bank account, so don’t be surprised if you don’t see a new balance immediately.
Earlier it was mentioned you could use a merchant account to accept payments, but you can also use a payment service provider.
A merchant account is the traditional way to accept credit card payments. They work like bank accounts where funds can be deposited or transferred.
There are plenty of merchant accounts out there to choose from, but you should be wary about the additional fees that get tacked on. There are tons of hidden fees like processing and setup fees that can be a pain to deal with.
Payment service providers tend to be easier to work with. There are far fewer of them than traditional merchant accounts, but the major benefit is they are all-encompassing payment processing systems. The merchant accounts are included in the product, so the user doesn’t have to open a separate one.
There are two major unavoidable fees you’ll have to deal with: interchange rates and markup fees.
An interchange rate is a fee the four major credit card companies charge for using their products. The rate varies between online and in-person interactions. Online interactions are more expensive because of the higher chance of fraud.
A markup fee is the money your payment processor makes on each purchase. These rates vary depending on the potential risk of fraud, your specific payment processor, and its payment plan.
How It All Works
Let’s focus on the two major ways transactions are conducted: in-person and online.
An in-person purchase requires you to have a merchant account and a credit card terminal or point of sale system. From there, it’s a pretty simple process. A customer uses their credit card on the terminal, and the payment process happens.
For online purchases, you’ll need to have a merchant account that allows for online payments and a payment gateway. Next, a customer will input their credit card information, hit the payment button, and the payment process occurs.
Credit card payments aren’t too tough to deal with, but they can be confusing at first. The hardest part is getting them set up, especially if you’re unfamiliar with how credit card payments work. It’s also annoying having to deal with all the additional fees.
Still, it’s a necessary thing you’ll need to know how to operate as a small business owner. More people use card payments than ever before, so you need to know how they work.