The Ultimate Guide for Small Business Credit Card Processing

Updated on January 19, 2022

the ultimate guide for small business credit card processing

Credit Card Processing (Short Overview)

Credit card processing is highly important to every business today. Evidence shows that providing the convenience of credit transactions accelerates business growth by over 40% (Merchant Warehouse, 2014).  Again, only 10% of today’s customers in the US rely on cash. So installing a credit card payment solution is a must-have.

At its core, we can say that credit card processing means making your business accept payments by card machine. But it goes beyond that.

Installing the right credit card payment solutions will speed up and automate payments, reduce manual processes, accelerate cash flow, empower your staff and drive more revenue.

But then choosing an upgraded payment processing system comes with confusing terms and fees. There’s also the possibility of getting rejected due to poor personal credit. Sure you can always fix the latter with the proper IRS forms to clear your financial records.

But beyond that upgrade, you need to maximize the benefits of your chosen credit card processor. This is why many small businesses admit that the most confusion on their financial statements comes from credit card processing.

Even as there are benefits, there are risks to consider. For instance, you must take note of security risks for buyers and chargeback risks for sellers. But again newer credit card technologies have better credit card risk management solutions.

Therefore, we have created this guide to help you understand the world of card payments by machines. Here you will learn to determine the best credit card processing solutions for small businesses. You will also learn how to choose the right card terminals suitable for your budget. That way, you can maximize the benefits of credit card processing, implement the right credit card processing strategies and keep your costs as low as possible.

Credit Card Processing Solutions; Terms & Basics

Credit card processing involves numerous terms, concepts, and parties.  So understanding these elements gives you an idea of how payment processing works.

Merchant Account

A “merchant account” is parallel to your personal bank account. But instead, it holds the financials for your business. This is where you can review, accept, and process all your credit transactions. You will open this merchant account under a Credit Card company. This allows them to easily intervene if fraud or any disputes occur.

Point of Sale (POS) System

A Point of Sale System is the equipment that you use to conduct transactions for your business. For instance, all of your sales may go through a cash register, credit card reader, and receipt printer. Or, you may have a more advanced POS system that tracks inventory or generates sales reports. These tools for purchase make up your POS System.

Payment Gateway

A Payment Gateway is a secure online portal where buyers enter their private payment information. After the gateway receives the information, it then processes it to complete the sale.

Types of merchant account and payment processing solutions

As a merchant, your ideal credit card processing solution must best fit the mold of your business. To decide, you must consider factors such as security or cost.

 But you shouldn’t consider these variables in a void. Instead, they depend on whether you’re a brick and mortar establishment; an online marketplace; or involved in –or open to– mobile commerce. In short, how you process payments relies on who you are as a company. And will influence the payment solution you choose.

Brick and Mortar Establishments:

Brick and mortar brands may opt to have a traditional processing solution. So you might combine a simple POS System (such as a cash register and receipt printer) with a credit card reader. The credit card reader connects to your merchant account and registers every purchase and sale.

So here you can enter credit card information and streamline payment processing. And from there, your bank account can process all payments from this single funnel.

Online Marketplaces:

Online credit card processing requires a payment gateway. Here, the payment gateway substitutes the credit card reader. So, it would serve as the tool that forwards all buyer information to your merchant account.

As the technology behind your check-out page, payment gateways offer optimal functionality when paired with a web shopping cart.

But here’s where price comes in. Online transactions unfortunately run a higher risk of identity fraud. This is because there’s no room for any personal verification between the buyer and the seller. Due to the security risk, web-based credit card solutions may be a more costly option.

Mobile Commerce:

Mobile commerce is an integrated credit card processing solution. So here, buyers can conduct mobile payments via online transactions or in-store technologies. In other words, customers can either use Wi-Fi to access an online marketplace on their cell. Or they can download simple smartphone applications to replace credit card swipes.

Mobile commerce solutions may come with other integrated solutions that appeal to merchants. A good example is invoicing software paired with virtual payment gateways.

It is popular for B2B companies to consolidate two or more processing solutions. But then, this depends on how you define your business identity.

Each credit card processing solution has its unique way to transfer payment information to a merchant account. From there, we process it into our bank accounts. When the natural flow of payments is already in place, the only question that remains is what route do you choose to take to get there. And, in the end, each business must travel down the path that is best paved for its model.

Credit Card Processing Rates & Fees


Many businesses find it challenging to understand credit card processing rates and fees.  To navigate your processing fees, you need to know:

  • The ‘who’s’ (parties involved)
  • The ‘how’s’ (the different payment processes that influence the costs)
  • The ‘what’s’ (the rates that define each transaction type)

The “Whos”

It’s important to understand whom you’re dealing with when it comes to credit card rates and fees. Becoming familiar with the characters involved will help you better grasp the story.

Credit Card Associations:

The credit card associations are the major players in the payment processing world. They set the stage and they direct the industry. Think Visa, MasterCard, and American Express.

Credit Card Issuing Banks:

Credit card issuing banks supply the financial value to the credit card associations. This means if they don’t create and issue their own cards like AmEx and a few other associations do.  Think Chase, Citi, and Wells Fargo.

Credit Card Processors/Acquiring Banks:

Acquirers liaise between vendors and credit card associations. They ease transactions by sending the necessary information to the credit card associations and by authorizing merchant requests. Anyone transaction may need any number of acquirers. For instance, a business may encounter separate acquirers for financial statements, IT support, and money issuing.

Merchant Account Providers:

These companies manage credit card processing (e.g. sales, support, etc.), usually through the help of an acquiring bank. They can be either financial institutions, independent sales organizations, or double-duty acquirers; depending on the situation. Again, your merchant account is more or less your business’s personal bank account.

Payment Gateways:

Payment gateways are the secure payment forms used in online transactions. With payment gateways, processing fees are accrued as payments are wired from this portal to the acquiring bank.

The “Hows”

When interpreting credit card processing costs, it is useful to translate these expenses into simplified terms.

So, you can describe processing rates and fees as “taxes” levied on each transaction by the parties listed above. Oftentimes, rates combine a percentage of the sale and a flat fee per transaction. What you’re selling, where it’s sold, and how it’s purchased can influence your processing fees.

For all rates and fees, there can be two subcategories attributed:

  1. wholesale and
  2. markups.

Wholesale describes the universal, objective fees of your business’s transactions, paid to your issuing bank and your credit card association.

Markups describe the varying, subjective fees paid to your chosen payment processor.

The “Whats” (Rates)

Discount Rate:

The discount rate is defined by how the payment was transacted and what type of merchant account you have. It is the most basic expense of credit card processing. This rate covers the time and costs that it takes to process and deposit your credit and debit card payments from your business’s merchant account and into your personal bank account.

The discount rate is initially charged by merchant account providers, who calculate the cost from a certain portion of your total bill along with an additional fee per transaction. On top of this, merchant account providers charge a markup for use of their platforms.

Similarly, issuing banks, dues, and assessments contribute to extra, conditional costs charged by the credit card associations (such as 2.10% + .10). These extra costs are known as “interchange rates”.

Surcharge Rates:

Your qualified, mid-qualified, or non-qualified rates are determined by the type of card being processed. So, the different card types include credit cards, business cards, corporate cards, international cards, and reward cards.

At the time that a transaction is accepted through an approved credit card processing solution, then a qualified rate is charged. This rate is often the lowest and therefore the rate that is generally referred to when describing processing rates.

At the time that a transaction is accepted through a processing solution that does not qualify for the lowest processing rate, then a mid-qualified rate is charged. Examples include when a credit card number is keyed in as opposed to swiped, or when a company card is used as opposed to a personal card.

At the time that a transaction is accepted through a processing solution that neither qualifies for the lowest nor the non-qualified rate, then this rate is charged. Examples include lack of verification or unauthorized payments.

The “Whats” (Fees)

In the world of credit card processing fees, there are three spheres:

  • transactional,
  • flat, and
  • incidental.

Types of Transactional Fees: Debit Transactions and PIN Based Fees:

As for the discount rate, transactional fees are the most basic and primary as they are charged with each sale.

Transactional fees are determined by the risk of the transaction (i.e. they are higher in CNP transactions than they are in in-person, swiped payments). Because of the risk, transactional fees are therefore charged with or without payment approval.

These are the fees charged to the processing companies with each transaction conducted with a debit card. Processing debit cards can cost anywhere from 0.2% – 2.0% of the purchase (as opposed to the 1.5% – 4.0% of credit cards), plus an additional flat fee that ranges from $0.11 to $0.25 per sale (whereas the additional range for processing credit cards begins at $0.20).

The exact amount depends on the size of the issuing bank. And, typically, cards requiring a personal identification number (PIN) are fixed.

Types of Flat Fees:

Flat fees represent the costs of your (the merchant’s) purchases, such as signing up for a merchant account. Some are monthly and others are one-time charges. They include:

  • Application/Setup Fee: The initial charge to set up your merchant account. (This is a generally outdated fee).
  • Terminal Fee: The charge of in-store credit card purchases, applicable only for brick and mortar establishments.
  • Payment Gateway Fees: The charge of online credit card purchases, applicable for only e-commerce marketplaces.
  • Payment Card Industry (PCI) Fees: The charge for not complying with standards, or the standard fee for complying with regulations.
  • Annual Fees: These are fees charged every year to cover the basic use of a provider’s services. In my opinion, this is a bogus fee. Most of the better merchant account providers will not charge it.
  • Early Termination Fees: The charge for canceling a merchant account before the contracted end date.
  • Monthly Statement/Service Fees: The charge for call centers – such as customer service or account assistance.
  • Monthly Minimum Fees: The charge for businesses that do not achieve minimum monthly or yearly transaction amounts, which typically is expected to reach an annual total of $50,000. This is another fee that is not charged by some of the better providers like Dharma Merchant Services.
  • Statement Fees: The charge of printing & mailing bills, which can be avoided with electronic billing.
  • Online Reporting Fees: The charge of electronic billing, which is typically not charged or is packaged together with another fee.
  • IRS Report Fees: The charge of 1099-K (reporting purchases for tax purposes), typically from $2 to $5 depending on the provider.
  • Network Fees: The charge of certain card networks.

Types of Incidental Fees:

Incidental fees are conditional costs resulting from certain processing activities, such as chargebacks. They only occur under certain conditions, but the activity charged is important to prepare for. Unlike transaction fees based on a percentage of each payment and fixed fees based on a flat rate, incidental fees are not affected by the quantity or quality of the transaction. Some types of incidental fees include:

  • Internet Gateway Fees: Additional transactional fees charged for securing transactions conducted through online marketplaces.
  • Address Verification Service (AVS) Fees: Additional transactional fees charged for online mar