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Published: Jun 20, 2023 15 min read

As a business owner, you're always on the lookout for ways to increase your sales. In today's highly digital world, many customers prefer to pay by credit card, and if you can't accept cards, there's a good chance your company is missing out on sales. Read on to learn how to accept credit card payments and how to select a credit card processor.

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How do credit card payments work?

If you've accepted credit card payments in the past, it probably seemed simple enough. Your customer swipes or dips their credit card or enters the card number online, and the sale gets approved. But there's actually a lot going on in the background that allows the transaction to be approved or denied in a matter of seconds. The credit card processor acts as the go-between for:

  • The credit card reader
  • The credit card network or card association
  • The bank that issued the credit card

In the seconds between the initial swipe and receiving an approval or denial message, sensitive financial information is communicated between the reader, the network and the bank. Once the payment request is originated, the merchant requests payment authorization from their payment processor. That processor submits the request to the issuing bank through the card association.

The issuing bank determines whether or not to approve the payment authorization, taking into account the card verification value (also called CVV or CVV2, it’s that three-digit security code on the back of the card), AVS validation (an address verification system), and the expiration date.

Transactions can be declined for several reasons, including past due payments, insufficient funds, or closed accounts. If approved, that status is sent back along the same path, going through the card association, merchant bank and then, finally, to the merchant.

Each of these financial institutions charges its own fees, and the processor ultimately passes these fees along to you. Fees for online sales and manually entered credit cards are usually higher than the rate for in-person transactions. Payment processors have different ways of charging customers, but they always cover the actual cost of processing the card plus a margin so that the processor also makes a profit. Some popular pricing models include:

  • Subscription-based: You pay a fixed monthly fee to the credit card processing company and then pay a low per-transaction fee to cover the amount the credit card networks and banks charge the processor. This is offered by a relatively few amount of companies.
  • Flat rate: Every merchant pays the same fixed fee per transaction type — in-person swipe, over the internet, or entered manually — which is most often a percentage of the purchase amount plus a set fee. Flat rates combine the network’s interchange fee (from Visa or Mastercard, for instance) and your payment processor’s markup into one single fee.
  • Interchange plus: You pay the processor the interchange rate plus a set margin. The interchange rate is the actual cost of processing the card, which varies by credit card type, whether the payment is completed online or in-person and the industry your business is in.

5 ways to accept credit card payments

There are different ways of accepting credit cards from your customers depending on how and where they're making the payment. Read on to learn how to accept credit cards online, in mobile situations, by phone, in person and without a merchant account.

1. How to accept credit card payments online

To take credit card payments online, you'll either need to use a PSP (payment service provider) or a combination of a payment gateway and a merchant service account. Most PSPs, like Square and Stripe, integrate seamlessly with major e-commerce sites. Some even let you use their platform to create an online store with built-in credit card processing.

If you don't use a PSP, you'll need to apply for both a payment gateway and a merchant service account with a traditional bank. The best payment gateways are secure connections that transmit information about the transaction and your customer's credit card info to the banking network for approval or denial.

2. How to accept mobile credit card payments

You'll need a mobile credit card reader that connects to your phone or tablet to accept mobile credit card payments. The best mobile POS systems let you accept credit cards wherever your customers are. Mobile card readers typically plug into your device's headphone jack, but if your phone doesn't have a jack, you can use a card reader that connects via Bluetooth. Most PSPs offer mobile card readers at a low cost or even for free when you use their services.

3. How to accept credit card payments over the phone

You'll need to use your computer as a virtual terminal to accept credit card payments on the phone. Most PSPs offer virtual terminal services, letting you enter credit card payments through a website without needing point-of-sale (POS) software or a card reader. Once you've created an account with a credit card processing company, you'll need to log into its virtual terminal site. You can enter your customer's credit card information from there for immediate processing.

4. How to accept credit card payments in person

You'll need a credit card reader to accept in-person payments. Many PSPs manufacture their own card readers that you can use with their payment processing services and POS systems. There are several different styles of credit card readers, including:

  • Magstripe readers that only swipe credit cards and must be used with another device like a smartphone, tablet or laptop
  • Swipe, dip and tap readers that accept physical cards and contactless payments
  • All-in-one handheld terminals that combine swipe, dip and tap readers with other features like touchscreen displays, receipt printers and barcode scanners
  • Countertop readers, which are hardwired and must stay in one spot

In addition to a card reader, you should have some sort of accompanying POS software or an app to manage your sales. Some of the best credit card processing companies offer these free when you use their services. If not, you'll need to purchase the software or pay for it monthly.

5. How to accept credit card payments without a merchant account

In the past, a business owner who wanted to accept credit cards had to open a merchant account with a bank, which can be costly and time-consuming. Today, you have more options than just merchant accounts. PSPs let you accept a wide range of payment types, including:

  • Credit cards
  • Debit cards
  • Digital wallets
  • PayPal and Venmo

Unlike opening a merchant service account, opening an account with a PSP is usually a quick process that lets you start accepting credit cards immediately.

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How long does it take for a credit card payment to process?

Once a customer pays with a credit card, the transaction needs to be processed by the issuing bank, and then funds will transfer to the processing company and finally be deposited in your bank account. The exact time it takes for a credit card payment to process depends on the card company and the issuing bank. However, credit card payments are typically processed within one to three business days.

What is the cheapest way to accept credit card payments?

The cheapest way to accept credit card payments isn't one-size-fits-all. Your company's monthly credit card sales volume is one of the biggest factors. If your monthly credit card sales are relatively low, look for PSPs that use interchange plus or fixed-rate pricing models and charge no monthly fees. That way, you'll only pay when you make a sale. Larger businesses often find a cheaper option in subscription-based plans or processing companies that offer volume-based discounts.

You'll also need to consider the costs of hardware and software. You might save money by choosing a company that charges higher transaction fees but provides a free card reader and free or low-cost POS software. The best way to find a cheap way of accepting credit card payments is to shop around and compare all the costs associated with different credit card processors.

What to think about when accepting credit card payments

You know your business needs to start accepting credit card payments, but you might not be sure how to choose the right credit card processor. Here are some top things to consider when choosing a processing company and accepting credit card payments.

Software and hardware costs

Before you start shopping around for a credit card processor, think about your business model, how you'll accept cards and what your company needs to succeed. The right hardware and software can be pricey, so it's important that you know exactly what you need before making a purchase.

For example, if you’re taking most of your payments online, you probably don't need a high-end credit card reader. But if you expect to take most of your payments in person, you should budget a little more for getting an advanced card reader and the best point-of-sale system and software.

If you're on a tight budget, look for companies that offer low-cost or even free card readers and POS systems. You don't have to spend a fortune to get started. Some companies will include software and hardware at no cost when you use their credit card processing services.

Payments processing fees

No matter which credit card processor you decide on, you'll have to pay credit card processing fees. It's important to consider the following:

  • The volume of credit card sales your company processes
  • The ways you take credit card payments from your customers

If you process a lot of credit cards, look for companies that offer volume discounts or consider a subscription-based service. If you only take credit cards occasionally, choose a company that only charges you when you make a sale.

Also take into account whether you take most of your payments in person, online or through manual entry. Most companies charge different processing fees depending on how you take payments, with card-present transactions costing less than online or keyed-in transactions. Many times processing companies only highlight their in-person rates, so be sure you look at each company's complete fee structure to get a clear idea of their price point.

Merchant service agreements

A merchant service agreement is a contract between you and the bank or PSP that will be processing your credit card transactions. Before you select a company to work with, be sure you understand all of the terms of the contract.

Find out if you'll be locked into a contract and if there are any early termination fees. How are chargebacks and returns handled? There's a lot of information in the merchant service agreement. By looking it over carefully, you can make sure you're choosing the right credit card processor for your company and avoid surprises down the line.

Debit vs credit card payments

Credit card readers and processors accept both credit and debit card payments, but it's important that you understand how the different card types impact your business. Debit cards draw funds directly from your customer's bank account, so banks generally consider them a lower-risk payment type than credit cards. If your processing company uses an interchange plus pricing model, you might pay lower fees for debit cards than credit cards. If you're paying a flat-rate fee, you'll likely pay the same amount regardless of the card type, but fees may change depending on how the payment is processed (in-person, or manually entered, for instance).

The processing time it takes for debit cards can also differ from credit card processing time. Be sure to clarify this point with any potential credit card processing companies you're considering, so you'll know when to expect your deposits.

Customer chargebacks

You may have wondered why we sign credit card receipts. Although it's a less common practice today than it was in the past, signing the receipt is a way to help merchants win chargeback disputes.

A chargeback occurs when a customer disputes a credit card payment and requests a refund. A customer might do this because they never received the good or service that was paid for, because someone else made the purchase fraudulently or because they're dissatisfied with the product or service they received.

Whatever the case, handling chargebacks can be a pain for you, and your credit card processor will typically charge you a fee when a customer disputes a transaction. There are several different ways that processors handle chargeback fees.

  • The processor charges you a chargeback fee regardless of whether you win or lose the dispute.
  • You only pay if you lose the dispute. If you win, the processor doesn't charge you.
  • The processor never charges you a chargeback fee, regardless of the outcome.

Before you choose a credit card processor, find out how they handle chargeback fees. If chargebacks are common in your business, look for a company that doesn't charge fees and deals with the customer's bank for you when a transaction is disputed.

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Summary of Money's how to accept credit card payments

Accepting credit cards is crucial for almost every type of business, but there's a lot to understand and many credit card processors to choose from. Before you start, clarify how your company will accept cards and what hardware and software features are most important to your business. Then, be sure to shop around. Compare the costs and features of different companies and understand all the service agreement terms before selecting a credit card processor. Choosing the right processing company can be a big step in helping your business thrive.