Today, customers expect flexibility and convenience when paying. Small business payment processors play a key role in delivering that value to consumers. They make it simple for small businesses like yours to accept payments, both in-store and online.
In this article, we’ll dive into why you need a small business payment processor.
We’ll examine the benefits of utilizing a payment processor. Plus, we’ll explore how payment processing works and the associated fees.
Finally, we’ll review the best business payment processors on the market, discuss how to compare them, and outline the setup process.
What Is a Payment Processor?
A payment processor or merchant processor is an entity that enables transactions for ACH and credit or debit cards. They may offer additional payment-related services.
The payment processor is the mediator between your business (the merchant) and financial institutions. Processors authorize transactions and ensure that the money is transferred to your bank account.
These organizations also oversee PCI (Payment Card Industry) compliance. These rules govern processing and storing payment information. Some of these additional services include tools for tracking and managing payments, as well as chargeback management.
Benefits of a Payment Processor for Small Businesses
Using a payment processor can provide advantages to small businesses, such as:
- Acceptance of more payment types: You’ll be able to accept major card brands, digital wallets, and online payments. This makes shopping convenient for consumers.
- Streamlined transactions: Payment processing is fast and efficient. Many of the backend steps are automated, streamlining financial operations.
- Enhanced security: With a reputable small business payment processor, your company will have protection against fraud.
- Cash flow boosts and stability: Electronic payments can fund in as little as one day. You have faster access to payments versus traditional checks.
- Reducing late payments: By offering easy digital payment options with credit cards, you can decrease late payments.
- Data analysis insights: Your payment processing data can provide valuable insights into buying trends and customer behavior. It can also be useful in developing business strategies.
How Small Business Payment Processing Works
Along with learning what small business payment processors are, it’s important to understand the steps involved.
Here is a breakdown:
- A customer initiates a transaction with a credit or debit card at a point of sale (POS) or online.
- The system securely captures the customer’s card details.
- The card details then move to the payment processor. It sends them to the card-issuing bank for authorization.
- The bank verifies the information and checks for available funds. If they are there, the bank returns an authorization code to the payment processor.
- Post-authorization, transactions are batched for processing. This typically takes place at the end of each business day.
- The payment processor transfers funds from the card-issuing bank to the merchant’s account.
- The merchant’s bank credits the merchant’s accounts with the transaction amount minus any processing fees.
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How Payment Processors Collect Fees
Every processed payment incurs a fee. There are several different kinds to know about, including:
- Processing fees: These charges come from the payment processor for their services. These can be a percentage of each transaction or other costs associated with a business using equipment. They range from 1.5% to 3.5%.
- Assessment fees: Visa, Mastercard, Discover, and American Express charge these fees for the ability to accept these cards.
- Interchange fees: The merchant bank pays the cardholder’s bank to cover issuing cards, handling transactions, and fraud protection. They vary depending on the card brand, type of card, and how you accept payments (card-not-present or swiped at a POS).
- Payment gateway fees: A business could owe these if it uses a payment gateway.
Your contract may have additional hidden fees. That’s why it’s crucial to understand all the costs you will incur. Then, you can determine your effective rate. This is the total fees you pay divided by the total amount you processed that month.
A good, effective rate is typically 4% or less.
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Top Small Business Payment Processors
Let’s review payment processors that specialize in supporting small businesses.
Stripe
Stripe is a reputable payment processor that specializes in ecommerce. The pricing is a flat rate, and there are no subscription fees.
Some key features include:
- AI tools for improving authorization rates and decreasing fraud
- Reliable performance even during peak usage
- 100+ payment method options
PayPal
PayPal offers payment processing services with merchant accounts and payment gateways. One differentiator is that customers can use their PayPal account as well as debit or credit cards.
Additional features include:
- Fraud detection technology
- Chargeback protection and dispute resolution
- Support for payments in many currencies
Square
Square also has flat-rate pricing. Several POS hardware solutions and customizations are available for the retail and restaurant industries.
Other features include:
- Sales and inventory analytics
- Buy now, pay later
- Next business day funding
- Offline payment acceptance should you lose your Wi-Fi connection
Payment Depot
Payment Depot’s fee structure is interchange-plus (interchange fee and per-transaction rate). The process for setup requires underwriting. Your rate will vary depending on many factors.
More features to consider:
- Solutions for in-person, online, and mobile payments
- Sales trend tracking
- Refund management
- Robust financial reporting
Clover
Clover is the payment processing solution from Fiserv. Its design is best suited for restaurants, retail, and service-based companies. The rates are fixed but vary depending on whether the service is in-person or online.
Features of note:
- Customization for inventory management
- Countertop and handheld POS terminals
- Quick and flexible funding
- Many ways to pay: tap, dip, and swipe
Shopify
Shopify is very ecommerce-centric. However, it does have POS capabilities. Payment processing is one part of the broader platform with tools for small businesses. The rates are interchange plus an additional flat fee. The flat fee is higher for online versus in-person transactions.
Features that are worth checking out include:
- Lots of payment options and currencies accepted
- Payment data encryption
- Order and payment tracking
How to Compare Payment Processors
When evaluating different payment processors, you’ll want to compare a range of features and capabilities. Depending on your needs, some may be more crucial than others.
Here’s a good list of comparison criteria:
Fees and Costs
Be sure to understand all the different fee types associated with each processor. Read the fine print to ensure there are no surprise costs.
Most processors generally have competitive rates. However, one significant difference is between tiered pricing and flat pricing.
Tiered pricing splits transactions into different levels based the payment type and the mode of payment. The fees vary per level. The three levels are:
- Qualified: Lowest fees because the transactions are considered low risk. Typically, they’re made by standard debit cards and non-reward credit cards.
- Mid-qualified: Slightly higher fees because there’s more risk for the processor. Examples include payments made by rewards credit cards or transactions where the card info is manually typed in, but address verification is used.
- Non-qualified: Incurs the highest fees due to high risk. This includes when the payment card is not present at the point of sale or when card info is typed in without additional security measures.
On the other hand, flat fees are extremely straightforward. As you might expect, flat pricing charges the same percentage fee for all transactions.
Payment Methods
The most common methods include ACH, debit, and credit cards. However, digital wallets and contactless pay processing are both growing in popularity.
Hardware Requirements
Payments hardware is not universally the same. It should be able to accept EMV chip cards and connect to your secure network. Each payment processor may have their own specific rules, which could factor into costs.
Additionally, some software enables you to take Tap to Pay on your mobile device. Instead of purchasing new hardware, you may be able to collect payments with the phone you already have in your pocket.
Integration with Invoicing Software
To streamline payments for your small business, choose a processor that integrates you’re your invoicing software. It creates a seamless workflow and reduces duplicative work.
With a connected ecosystem, you’ll have more payment options, simplify processes, and track your cash flow.
For example, Invoice Simple integrates seamlessly with Stripe and PayPal. Your invoices can all include a ‘Pay Now’ button for customers to check out securely and quickly.
Additional Services
As mentioned in the review of payment processors for small businesses, there are additional services that offer significant value.
To start, Fraud prevention is particularly useful. This is especially if most of your transactions occur online. Next, chargeback management is also a big help. Dealing with chargebacks on your own can be complex and time-consuming.
Finally, data analysis of your transactions can provide in-depth insights to inform your business decisions. These add-ons may be included in your agreement or incur additional costs.
Support and Service
You’ll likely need this throughout your contract. Look at how available support is: 24/7 versus fixed times. Also, check the channels available: phone, live chat, and email.
Read the processor’s reviews to see how current customers rate the company.
How to Set Up Payment Processing in Your Business
You’ve learned what small business payment processors are and do. Now, it’s time to move forward with setting things up.
Take these actions to begin accepting card payments:
- Review and compare processor options. Determine which solution best serves your needs today and in the future.
- Open a merchant account. First, you’ll need to apply for one. The provider will request documentation and information about your business for approval.
- Receive approval and select a payment gateway.
- Connect your merchant account and business bank account.
- Integrate payment processing with your invoicing software, website, and any other platform.
- Choose the hardware you’ll need for in-person sales.
- Ensure all setup occurs on secure networks and that you comply with PCI rules.
- Test transactions and identify any issues.
- Start accepting cards.
RELATED ARTICLE — How to Accept Multiple Payment Methods and Offer a Seamless Customer Payment Experience
Top Takeaways for Small Business Payment Processors
- Select payment processing services that are convenient for your customers and operations.
- Scrutinize fees to understand the total you’ll pay each month.
- Compare flat and tiered pricing to determine which option will best protect your margins.
- Consider additional services like fraud protection and chargeback management.
- Review all the regulatory compliance requirements.
- Be sure your payment processor can integrate with your existing platforms.
