How to Accept Credit Card Payments for your Small Business

Why accept credit cards?

Banks, credit card companies, and financial media outlets will tell you that you should definitely accept credit cards as a small business. There is a fair amount of data—and probably your own lived experience—to back up the notion that businesses that accept credit cards are poised to make more money.

Think about your own shopping—there have probably been situations where you had no cash on you or not enough cash to buy all the items you wanted. Furthermore, obtaining cash itself can often be inconvenient, costly, or impossible.  

Years of studies and polls back up the claim that credit card users make more purchases and spend more per transaction. The average credit card transaction was $95 in 2013, compared to the average $39 value of a cash transaction, according to a study by San Francisco Fed.

Another economic phenomenon surrounding credit card use is so-called “payment coupling.” Payment coupling is the association between purchase decision-making and the actual separation of a customer from their money. A landmark 2008 study found that credit cards ease the “painful” part of shopping, i.e., seeing your wallet or bank account get reduced.

“The conceptual underpinning of our research is that payment modes differ in transparency or the vividness with which individuals can feel the outflow of money, with cash being the most transparent payment mode,” the American Psychological Association study posits. “We argue that the more transparent the payment outflow, the greater the aversion to spending or higher the ‘pain of paying,’ leading to less transparent payment modes such as credit cards and gift cards (vs. cash) being more easily spent or treated as play or ‘monopoly money.’ Further, to the extent that the transparency of paying underlies differences in spending behavior, altering the salience of parting with money should attenuate the difference across payment modes.”

Why you might not be able to accept credit cards.

There can be a few reasons why it could be very difficult—or even impossible—to accept credit cards. Unless you want to use a manual credit card imprinter, you need a reliable internet connection to accept credit cards. Your brick-and-mortar store might also be located where cash is common—retailers in urban or very rural areas might serve customers who are accustomed to carrying around a good amount of cash.

Why you might not want to accept credit cards.

The biggest reason not to accept credit card payments, for many business owners, is the small fee charged to conduct every credit card transaction. These fees add up—which is why some businesses are still cash-only, especially in areas where customers carry a lot of cash. It’s also possible that your business is set in its ways and doesn’t have a culture of adapting to new practices.

How credit card processing works.

When a customer uses a credit card to make a purchase at your business, the transaction initiates a complex process involving several parties. First, the credit card terminal collects the card information and sends it to your merchant bank’s processor. The processor then forwards this data to the cardholder’s issuing bank via the appropriate credit card network (such as Visa or MasterCard) to request transaction authorization.

The issuing bank checks the cardholder’s account for sufficient funds and any potential fraud alerts before approving or declining the transaction. This approval (or denial) is then sent back through the network to your merchant processor and finally to your terminal or point-of-sale system, where the result is displayed. If the transaction is approved, the funds are later transferred from the cardholder’s account to your merchant account, minus any processing fees.

This whole process, while intricate, happens almost instantaneously, allowing for a seamless transaction experience for both the business and the customer.

How can I accept credit card payments for my small business?

To start accepting credit card payments for your small business, you’ll need to follow a few essential steps:

• Open a merchant account: A merchant account is a type of bank account that allows your business to accept credit and debit card transactions. You can open a merchant account through most banks or through a payment processing company.
• Choose a credit card processing system: There are various types available, ranging from traditional countertop credit card terminals to mobile and online payment processors. The right system for you will depend on the nature of your business, the volume of transactions you process, and your budget.
• Set up the necessary equipment: This may involve installing software, setting up hardware, or both. If you’re not tech-savvy, many providers offer support services to help with setup.
• Educate yourself and your staff on how to use the system efficiently and securely: This includes understanding how to process transactions, issue refunds, and handle any potential disputes. Ensuring that your team is knowledgeable about these processes will enhance the customer experience and help your business run smoothly.

If you decide to accept credit card payments, there are a few ways to do so. You’ll want to think about how your business operates and is structured. Shopping with a credit card is common these days because there are so many ways to conduct credit card transactions—in recent years, revenue-minded payment processors have been aggressive in making the process as simple as possible. With a little bit of planning and research, you can find a credit card payment system that works for you.

Types of businesses that can accept credit cards.

Virtually any type of business can accept credit cards, from retail stores and restaurants to service providers and online businesses. Here are a few examples:

• Retail stores: Whether it’s a clothing store, a bookstore, or a hardware shop, retail businesses benefit greatly from accepting credit cards due to the ease and security it offers to customers.
• Restaurants and cafés: With the rise of dining out culture, accepting credit cards can streamline the payment process and improve the dining experience for guests.
• Service providers: Professionals like consultants, freelancers, and contractors can accept credit cards, making it easier to receive payments for services rendered, especially for larger projects.
• E-commerce sites: Online businesses are perhaps the most in need of accepting credit card payments, as it allows them to accept transactions from customers worldwide.
• Healthcare practices: Dental, medical, and other healthcare services are increasingly accepting credit card payments for treatments and consultations, providing flexibility and convenience for patients.
• Subscription-based businesses: For businesses that offer products or services on a subscription basis, credit card payments allow for recurring billing, ensuring a steady cash flow.

No matter the industry, accepting credit cards can help businesses increase sales, improve cash flow, and provide a better customer experience.

Different ways businesses accept credit cards.

Depending on how you operate your business, there are probably several options for accepting credit cards. If you run an online-only business, for example, you might find that credit cards are the easiest way to accept payment. You might have some choice here, too—many brick-and-mortar businesses have switched to mobile payment providers instead of the traditional credit card processors.

In-person credit card payments.

If you want to set up traditional in-person credit card transactions like you would find at a typical restaurant or retailer, you need to buy a point-of-sale (POS) system. This set of hardware and software will enable you to accept credit cards. These systems include credit card readers that communicate to your merchant account.

Mobile payments

Mobile payments, also called payment service providers (PSP), require less investment than a standard merchant account. Common examples include Square and Stripe. Many PSPs now combine a merchant account with a POS system, which is why they’ve become very popular among small businesses. As PSPs disrupt the POS field, you should look at your options’ terms and fees to make the best choice. Typically, PSPs are easy to use and inexpensive to set up, but a traditional merchant account system might be more negotiable and cheaper to use as your business ages and expands.

Online credit card payments.

For e-commerce operations, accepting credit cards is fundamental—there’s likely no other easy way to accept payment. Fortunately, however, no hardware is required. The website you use for your store, like Etsy, might also enable easy-to-use credit card payments. Many PSPs and e-commerce gateways, like PayPal or Shopify, offer apps or widgets that you can put onto a website. Many even allow you to sell items through social media.

Over-the-phone payments.

Accepting credit card payments over the phone is a convenient option for businesses that conduct sales remotely or want to provide an additional payment method to their customers. This method typically requires a virtual terminal, which allows you to enter credit card information manually into an online system. Virtual terminals are offered by most merchant service providers and payment gateways, and they can be accessed through a computer or mobile device with an internet connection. This payment option is particularly useful for service providers, such as consultants or businesses that take orders via phone. It’s essential to ensure that all over-the-phone transactions comply with PCI DSS (Payment Card Industry Data Security Standard) guidelines to protect your customers’ credit card information and reduce the risk of fraud.

Benefits of accepting credit card payments.

Accepting credit card payments can significantly benefit your small business by enhancing the customer experience and expanding your customer base. Here are some key advantages:

• Increased sales: Studies have shown that customers tend to spend more when using credit cards compared to cash. This can lead to higher average transaction values and increased overall sales.
• Improved cash flow: Credit card transactions are processed quickly, often resulting in funds being available faster than with checks. This can improve your business’s cash flow, allowing you to reinvest in your operations or settle debts more swiftly.
• Customer convenience: By offering more payment options, you cater to a wider range of customer preferences, making it easier for them to purchase your products or services. This convenience can improve customer satisfaction and loyalty.
• Competitive edge: In today’s digital age, businesses that do not accept credit cards may be at a disadvantage. Accepting credit cards can provide a competitive edge by aligning with consumer habits and expectations.
• Global market reach: Credit card acceptance is crucial for online businesses that aim to reach customers beyond their immediate geographic area. It enables businesses to easily accept payments from customers worldwide.
• Enhanced security: Credit card payments often come with security measures that can reduce the risk of fraud. Payment processors and merchants use encryption and other technologies to protect cardholder data.
• Streamlined accounting processes: Electronic transactions can simplify bookkeeping, making it easier to track sales and manage finances. Many payment processors integrate with accounting software, automating the reconciliation process.

By accepting credit card payments, small businesses can not only keep up with the evolving landscape of consumer preferences but also leverage these benefits to grow and thrive in a competitive market environment.

How much does it cost to accept a credit card?

The cost of accepting credit card payments can vary substantially based on several factors, including your merchant service provider, the type of transactions you process (in-person vs. online), your sales volume, and the nature of your business. Generally, the costs can be broken down into three main categories:

• Processing fees: These are charged each time a customer uses a credit card at your business. They typically consist of a percentage of the sale, usually between 1.5% to 3.5%, plus a fixed fee per transaction, often ranging from $0.10 to $0.30.
• Monthly fees: Some merchant account providers or payment processors charge a monthly fee for using their service. This can range from $10 to $30 per month, although some providers offer plans with no monthly fees.
• Equipment costs: If you need to purchase or lease equipment, such as a POS system or credit card terminals, there will be additional costs. These can range from a one-time fee of a few hundred dollars to ongoing leasing fees.

For businesses operating online, there may be additional fees for using e-commerce platforms or payment gateways, which can include setup fees, monthly subscription fees, and additional transaction fees.

It’s essential to carefully research and compare the terms and fees from different providers to find the solution that best fits your business’s needs and budget. Remember, the cheapest option upfront may not always be the most cost-effective in the long term, especially as your business grows and your transaction volume increases.

What’s the cheapest way to accept credit cards?

Finding the most cost-effective way to accept credit cards requires a careful consideration of your business’s specific needs, transaction volumes, and the types of customers you serve. Generally, the cheapest way to accept credit cards will vary based on the scale of your operations and the average transaction size. However, for many small businesses, payment service providers (PSPs) like Square, PayPal, or Stripe offer competitive rates with low upfront costs, making them an attractive option for businesses just starting to accept credit cards. These platforms typically charge a flat percentage plus a small per-transaction fee, with no long-term contracts or monthly fees, which can be ideal for businesses with fluctuating sales volumes.

For businesses with higher sales volumes or larger average transactions, negotiating a merchant account with a bank or dedicated payment processor might be more economical in the long run. These accounts often come with a monthly fee but offer lower transaction rates, which could result in significant savings over time.

Additionally, leveraging technology such as mobile payment solutions can also reduce costs by eliminating the need for expensive point-of-sale hardware. Ultimately, the cheapest way to accept credit cards is the one that aligns with your business model, provides the flexibility your operation requires, and offers the most value for the fees you pay.

The bottom line.

Choosing the right approach to accept credit card payments is critical for the success of your small business. It’s about finding the perfect balance between cost, convenience, and customer experience. Whether you opt for a traditional merchant account, a mobile payment service provider, or an online payment gateway, each has its own set of advantages tailored to different business needs and customer preferences. Remember that the goal is not just to facilitate transactions but to enhance the overall customer experience, thereby fostering loyalty and driving sales. Keep in mind the future scalability of your business as well, choosing a system that can grow with you. Ultimately, investing in the right credit card processing system is an investment in your business’s future.