Payment Processing for Small Business: How It Works and What It Costs

What happens when a customer pays by card

The card details travel from your terminal or website to a processor, then to the card network and the customer's bank for approval. Funds settle to your account in a day or two.

A card payment involves several parties:

1. You and your point of sale or website capture the card details.
2. The payment processor securely passes the request on.
3. The card network routes it to the customer's bank.
4. The issuing bank approves or declines in seconds.
5. Settlement. Approved sales are batched and deposited into your merchant bank account, usually within one to two business days, less fees.

Many small businesses use a payment service provider that bundles the account, terminal and processing into one product with a simple flat rate. Others have a dedicated merchant account with a separate processor and a bank. The first is easier to start. The second can be cheaper at higher volume.

The fees you will pay

Expect a percentage of each sale plus a small fixed fee per transaction, plus possible monthly, gateway, statement, chargeback and equipment fees.

Fees come in layers:

• Interchange. Paid to the card-issuing bank. It varies by card type and how the card is accepted.
• Network assessments. Small fees charged by the card brands.
• Processor markup. What your provider adds.
• Monthly or annual fees. Account, statement or software charges.
• Chargeback fees. Charged when a customer disputes a transaction.
• Hardware. Terminals and readers, bought or leased.

Card-not-present sales, such as online or keyed-in payments, usually cost more than swiped or chip-read ones because of higher fraud risk. Ask for a clear fee schedule in writing. For deeper reading on related costs, see how to accept credit card payments.

Pricing models: flat rate, interchange-plus and tiered

Flat rate is simple, interchange-plus is transparent and usually cheaper at volume, and tiered pricing is often confusing and costly.

Here is an illustrative comparison. At $30,000 a month of card sales, a difference of 0.5 percentage points in the effective rate is $150 a month, or $1,800 a year. Compare using your own volume and average ticket size. Always calculate the effective rate: total fees divided by total card sales.

Hardware and ways to take payment

Choose among countertop terminals, mobile readers, integrated point-of-sale systems, online checkout, payment links and invoicing, depending on how you sell.

Match the setup to your business:

• Retail or restaurant counter. An integrated point-of-sale system with inventory and reporting.
• Mobile service business or market stall. A pocket card reader linked to a phone or tablet.
• Online store. A checkout integrated with your website platform.
• Service invoices. Pay-now links or card-on-file billing. See how to send an invoice that gets paid faster.
• Recurring billing. Stored payment methods and automatic charges for memberships and subscriptions.

Check that your system accepts chip, tap and mobile wallets, because customers expect them. If you plan to build a website to sell, see how to build a website and compare website builders for their built-in options.

Contract terms to read before you sign

Look for early termination fees, long auto-renewing contracts, equipment leases, holds on funds and minimum monthly processing fees.

The rate is only part of the deal. Read the agreement for:

1. Contract length and renewal. Multi-year terms that renew automatically can be hard to leave.
2. Early termination fee. Some contracts charge hundreds of dollars or more to cancel.
3. Equipment leases. Terminal leases can cost far more than buying a reader outright.
4. Reserve or hold policies. Some providers may hold a portion of funds, especially for new or higher-risk businesses.
5. Minimum monthly fees. Charged if your volume is low.
6. Rate changes. Can the provider raise fees with notice?

Ask whether you own the terminal and the customer data. Talk to other business owners in your area and check reviews for complaints about frozen funds. This is general information; review any contract carefully and consider legal advice for long commitments.

Security, chargebacks and your cash flow

Protect card data with compliant tools, respond to disputes quickly and plan for settlement timing, which affects the cash you can use.

Use a processor that keeps card data off your systems and meets the payment card industry security standards. Do not write down or store full card numbers. Train staff on fraud signs and require identification when a transaction looks unusual.

Chargebacks happen when a customer disputes a charge. Keep signed receipts, delivery confirmations and customer communications, and answer disputes by the deadline. A high chargeback rate can lead to higher fees or termination.

Settlement timing matters for cash. If sales settle in two days and payroll is due tomorrow, you need a buffer. Card sales also form part of the revenue that funders review in your bank statements. Merchant cash flow patterns can help a funding application, as in our guide to revenue-based financing, where repayment rises and falls with sales. For general planning, see cash flow management.