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Originally Posted On: How to accept credit card payments: A small business guide | QuickBooks (intuit.com)
Our own 2020 QuickBooks State of Payments report found that one in five small businesses around the globe don’t accept credit cards.
Here’s the thing: It’s time for that to change. When it comes to accepting payments, credit cards have become an expectation of consumers. Small businesses that fail to keep up risk damaging their customer relationships and even losing out on sales.
But even so, many business owners think of credit card payments as a daunting task. The good news is it doesn’t need to be! We’re sharing everything you need to know about credit card processing.
Credit card processing is the entire sequence of steps involved in accepting credit card payments from your customers.
The process seems pretty simple on the surface: you swipe the card or enter the card details and then you get your money. But there’s actually quite a bit of complexity involved in credit card transactions. Here’s the gist of how it works:
- The card or payment information is entered
- That information is sent to the payment processor for authorization
- The payment processor sends the information to the customer’s bank
- The customer’s bank either approves or denies the payment
- If the payment is denied, the card is declined
- If the payment is approved, it’s sent back to the payment processor
- The payment processor sends the approval back to you
- You complete the transaction, and the money is deposited into your merchant account
See? There’s a lot going on under the surface—and all of this happens in a matter of seconds.
Here’s the biggest reason: Because they’re the most common type of customer payment.
Credit cards were the most prevalent payment method in the United States in 2020, with 38% of point-of-sale (POS) payments being made by credit card.
Most customers will expect that your business is able to accept credit cards, and cash-only businesses could lose out on those customers altogether. Only 41% of Americans say they regularly carry cash. And those that do typically only have $25 in their wallets at a time.
Benefits of accepting credit card payments
Still not convinced that credit card payments are the right fit for your small business? Let’s dig into a few other benefits for you and your customers.
Convenience for customers
Paying with a card offers a far more streamlined experience than needing to dig change out of their pockets or fill out a check. That’s important because convenience is top of mind for many modern consumers—especially as younger generations join the ranks and painless online shopping experiences become the standard.
If you look at just online shopping in particular, 18% of online shoppers will abandon their shopping cart because the checkout process was too complex, and another 7% will leave if there aren’t enough payment options available.
Credit cards streamline the payment experience, which is a delicate time in the customer journey. Just think: the easier you make it to spend money with you, the more likely your customers are to do so.
Increased sales and higher profits
As long as a customer has their credit card in their back pocket, they’re able to make a purchase. That increased purchasing power can boost your sales. And more sales equals greater profits.
However, it’s not only the quantity of sales that gives your business a boost—it’s the value of each of those sales.
Plenty of research proves that customers actually spend more when they’re paying with credit cards. One study found that customers were willing to spend as much as 83% more when paying with a credit card than when paying with cash.
While it might not mean great things for your own budget as a shopper, it can be a positive for your business’s bottom line.
Faster payments and improved cash flow
There are plenty of challenges associated with being a small business owner, but cash flow usually tops the list.
Our own research here at QuickBooks found that 62% of small businesses have experienced a cash flow issue at some point during their company’s history.
Accepting credit card payments can actually improve your cash flow, because you’ll get the money you’re owed promptly—especially when compared with checks, which can take a while (sometimes up to five business days) to clear.
Credit card payment processing times can vary, but merchants usually have the money within one to three days. Not having to wait on the money that’s rightfully yours makes it that much easier to know what you have, manage your business’s cash flow, and (hopefully) stay in the black.
Improved organization and time savings
Finally, credit card payments aren’t only streamlined for customers—they can reduce hassles for you as the business owner as well.
That’s especially true when your credit card processor is linked to your accounting software. It not only makes it easy to accept card payments with a single swipe or scan, but it also automatically logs those transactions.
That means you have up-to-date financial reports, with almost no manual effort required.
It’s hard to refute those benefits, and accepting credit cards is a smart move for any type of small business.
But that brings you to the next hurdle: How do you accept them? We’re breaking it down for you in four simple steps.
1. Determine how you want to accept credit cards
Will you accept credit cards over the phone? Or only at the POS? Will you accept all types of credit cards? Or only major credit cards like Visa and Mastercard, for example?
Specifics aside, you’ll need to make sure that you have a credit card reader or terminal for your POS system. Look for a mobile card reader that’s able to accept payments from a mobile device or digital wallet, as those payment methods are also increasing in popularity. QuickBooks has a free mobile card reader available.
2. Choose a service provider
To accept credit card payments, you’ll need a credit card processor. Remember, the processor essentially serves as the messenger between your credit card terminal and yours and your customers’ banks.
Many different payment processor options are available, and we’ll dig into how to choose the right one for your small business in a later section.
3. Open a merchant account
All credit card payments get deposited into a merchant account. This is a specific type of business bank account that allows you to accept credit and debit card payments from your customers. Credit card payments can’t just be deposited into your standard business checking account—they need to go to a merchant account.
Fortunately, opening one is fairly straightforward. You can start by seeing if your existing bank offers merchant accounts. As a merchant account provider, they’ll be able to walk you through the process, but be aware that their rates and processing fees aren’t always competitive.
Many payment processors also offer merchant services and merchant accounts as well. For example, you can get a merchant account directly through QuickBooks.
4. Start processing credit card payments
You have the right equipment, got set up with a credit card payment processor, and opened a merchant account. You’re ready to start processing cards!
There are a number of different ways you can accept credit cards from your customers, including:
- In person
- Over the phone
We’ll cover the details of each of these methods in the next section.
As far as what’s happening behind the scenes, the nuts and bolts of processing credit card payments is the same across the board.
However, there are a number of different ways a customer can get their payment information to you. Maybe they’ll insert their card into your card reader. Or perhaps they’ll scan a digital wallet. Or maybe you need to take down their information over the phone.
Each of these methods has its own nuances, so let’s go into a little more depth on each of them.
What you’ll need:
- Payment gateway
- Payment processor
- Merchant account
How it works: Your customer types in their card details (card number, expiration date, security code, etc.) or opts to use a digital wallet (like Apple Pay, as one example) that securely stores all of the card information.
Online shopping continues to become more and more prevalent. In fact, e-commerce made up 21.3% of total retail sales in 2020. Credit cards are one of the most popular payment methods online, ranking only behind mobile wallets.
When accepting credit card payments online, you’ll need to add one more thing to your toolkit: a payment gateway. Gateways are what accept the payment information online, encrypt it, and then submit it to the payment processor. Fortunately, many solutions today roll both a payment gateway, processor, and merchant account into one.
2. In person
What you’ll need:
- Card reader
- Payment processor
- Merchant account
How it works: Your customer will swipe, insert, or tap their card over the card reader, or they’ll scan their mobile phone using the card reader to process a mobile payment.
If you have a brick-and-mortar storefront or accept payments on the go—like at a farmer’s market, for example—then you’ll want to be able to accept card payments in person.
You’ll need a card reader to process those credit card transactions. Again, look for a mobile card reader that also accepts digital wallets and contactless payments. Most card readers integrate directly with POS and payment systems to keep things easy for you and your customer.
3. Over the phone
What you’ll need:
- Payment processor (with a virtual terminal)
- Merchant account
How it works: The customer reads you their card information over the phone, and you key it into your virtual terminal.
Some businesses need to accept credit card payments over the phone. Rest assured that it’s completely legal to do so, provided you maintain payment card industry (PCI) compliance when collecting and storing those card details.
To key in a customer’s credit card information, you’ll need to access the virtual terminal of your payment processor.
A virtual terminal essentially turns your computer, phone, or iPad or other tablet into a cash register and enables you to manually enter card details—like when you don’t have your card reader with you or you’re taking a payment over the phone.
One important thing to keep in mind: Resist repeating card information back to your customers. You don’t want somebody to overhear that and steal those payment details.
What’s “best” for one small business might not be the right choice for another. You’ll need to look into the different credit card processors available and do some research to find one that seems like the best fit for your business.
Not sure how to get started? We’ve pulled together some of the most common credit card processors here, so you can start to explore your options:
That’s by no means an exhaustive list, but those are some of the most popular and reliable processors out there—so they’re a great place to start your search.
With so many options available, how can you possibly figure out which credit card processor is the right choice for your small business? Here are some things to look out for:
1. Processing fees
One of the worst parts about accepting credit cards is dealing with the fees. One QuickBooks study found that 9 out of 10 small business owners around the world who accept credit cards agreed that the fees are exorbitant.
Unfortunately, these fees are the name of the game—but you at least want to know what you’re in for. In general, credit card processing or merchant services companies structure their fees in two different ways:
- Transaction fee: You’re charged for the service per each transaction.
- Best fit for businesses that aren’t doing a ton of credit card transactions.
- Monthly fee: You pay a flat-rate monthly fee for the service.
- Best fit for businesses that are doing a lot of credit card transactions.
Keep in mind that even if you do go with a service that charges a monthly fee, you will still need to pay some transaction fees—which we’ll explain in the next section.
2. Sales channels
It’s also worth considering where you plan to take credit card payments so that you can find a payment processor that fits well with that approach.
For example, do you want a mobile card reader to complete the majority of your sales at local art fairs? Or do you plan to do mostly e-commerce and want a payment processor that’s an expert in online payments and e-commerce platforms?
Consider where you plan to do most of your business so you can find a service that matches your business needs.
3. Payment methods
It seems like there’s a new payment method every day, and you need to determine which ones you plan to accept so that you can confirm that a payment processor checks those boxes.
First, think about what types of credit cards you’ll take. Visa and Mastercard are two of the largest credit card issuers, so they’ll be default options with nearly any payment processor. But if you plan to accept other cards like American Express, Discover, Chase, and Capital One, make sure that you confirm they’ll be accepted.
Outside of the type of credit card, it’s also important that you look into the other payment methods you plan to accommodate. If you want to accept mobile payments, contactless cards, and digital wallets, that’s important to know as you weed out different options.
Finally, much like any other purchase or investment you make, it’s worth checking out their reviews. What are other small business owners saying about their experience, customer service, and more?
Do a simple internet search for “[provider] credit card processor reviews,” and take a look at the results that come up. You’re bound to get some honest insights about what a service provider is like to work with.
Like we mentioned before, credit card processing fees are a big hang-up for business owners—and understandably so. Not only can they be costly, but they’re also somewhat confusing to grasp. That’s because there’s a lot of different fees that come into play.
Remember, you’ll need to pay a fee to your actual payment processor or merchant services provider. That’ll be either a transaction or a monthly fee. But regardless of your choice there, you’ll pay a couple of other fees on each transaction as well. These typical fees include:
- Interchange fee: Fee collected by the bank that issued the credit card.
- Price: Varies greatly depending on the issuer but is around 0.3% for debit cards and 1.8% for credit cards.
- Assessment fee: Fee collected by the credit card issuer/network (like Visa, for example).
- Price: Also varies greatly but can be in the range of 0.10% to 0.13%.
In terms of exactly how much you can expect to pay to process credit cards, that’s tough to put a number on. It hinges not only on the credit card network and the issuing bank, but also on things like:
- Your payment processor’s fee
- The type of credit card you need to process
- How you’re processing the card (keying it in, swiping it, etc.)
If you’re looking for a rough estimate, expect to pay somewhere between 1.5% and 2.9% for swiped transactions and 3.5% for online transactions. QuickBooks Payments does not charge monthly or setup fees, but charges 0.25 cents per transaction and:
- 2.4% for swiped card payments
- 2.9% for invoiced card payments
- 3.4% for keyed transactions
Whatever payment processor you work with should be able to give you an accurate breakdown of the fees you can expect, so don’t forget to ask if you need to.
There’s a lot that goes into accepting credit cards, but it’s a worthwhile step if you want to boost your sales, improve your customer experience, and maintain healthy cash flow.
Fortunately, QuickBooks Payments makes accepting credit card payments straightforward and painless—whether you want to accept them online, by phone, on the go, or even through recurring payments.