All You Need to Know About Credit Card Processing

December 3, 2018

December 3, 2018



If you own a small business or are thinking about starting one you MUST familiarize yourself with credit card processing, as it is the way of the world! Find out everything you need to know in this article. Read it now!

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All You Need to Know About Credit Card Processing

 Nearly every business participates in credit card processing. And for small business owners, payment processing is one of the biggest costs of doing business. Being familiar with the inner workings of the credit card transaction process can help you save money and increase profits.

On the surface, the process seems simple; a customer swipes their card and a few seconds later, the purchase is complete. However, there’s more to every swipe than meets the eye. It involves multiple entities and transactions. In this guide, we’ll look at everything you need to know about card processing and share our top picks for card processing services for small business.


A Step-By-Step Guide on How Credit Card Processing Works

Credit card processing can be categorized into six steps. Each step involves transferring the payment information of a cardholder from one party to another. The main role of the process is to establish if the user has the necessary funds and authorization to complete the transaction. With EMV chip credit cards, transactions can take an average of 15 seconds to complete.

  1. The first step occurs when the cardholder dips or swipes their debit or credit card, or hands over their payment information to the merchant.
  2. Next, the merchant accepts the card and collects the relevant payment information. This can happen in two ways. The payment is accepted physically in what is referred to as card-present transactions, or the payment is accepted online in what is called a card-not-present transaction. In this case, instead of using a card reader, the merchant uses an online gateway to collect the payment from the consumer.
  3. The card processor will then collect that information and send it to the card network.
  4. The cardholder’s card will belong to one of the major credit card networks. Visa and MasterCard are the two most common card networks. Once the network receives the payment information from the processor, they then pass the details on to the cardholder’s bank.
  5. The cardholder’s bank will receive the payment request, and will verify whether the account has enough funds or credit to complete the transaction. The bank might also run through some additional security measures in order to verify whether the purchase is legitimate. If the customer’s account has enough funds and the transaction is verified as not fraudulent, they send a message back to the credit card processors through the card networks. A bank could deny a transaction when a credit limit has been reached, there are insufficient funds in the account, or the bank suspects that the transaction was made by a non-authorized user.
  6. In the last step, the bank’s message goes back through all the different systems. If the transaction was handled in person, the message corresponds with a message displayed on the card reader, such as “Approved” or “Denied”. If the transaction is cleared, the merchant is expected to provide the cardholder with the product or services that were promised in return for the payment.


At this point, the funds are yet to be released, which means that the transaction is not settled completely. This will occur in separate processes that could take up to a few days to complete, based on the card networks involved. In general, MasterCard and Visa transactions usually settle much faster than American Express.

When it comes to transaction settlement and releasing money from the cardholder’s bank account to the merchant’s account, the process typically involves the same parties as discussed above, with a very similar flow of communication.


Players Involved in Card Processing

Four key players are involved in the processing and settling of credit card:

  • Acquiring/Merchant Bank:

    This is essentially the bank in which a merchant or business holds their cash. Although the merchant’s bank can sometimes serve as a processor, an increasing number of business owners are turning to third party processors like PayPal and Square. The acquiring bank can outfit small business owners with equipment such as card readers to accept cards payments. They are largely responsible for depositing the funds into the business account once a sale transaction goes through. Nonetheless, their role has been on the decline as more businesses choose to use 3rd partyindependent sales organizations (ISOs). Some examples of merchant banks are Chase and Wells Fargo.

  • Credit Card Processors:

    These are the messengers that communicate between the merchant and the cardholder’s bank. They are responsible for securing the transaction’s data and ensuring that all transactions are within the rules outlined by the Payment Card Industry Data Security Standard (PCI DSS). Card processors charge a fee to the merchants in exchange for this service. The fee can be either a fixed charge or some form of percentage markup charged on top of the interchange fees that are passed on to the merchants at a cost. Some examples of card processors include Stripe, Square,

  • Card Associations/Card Network:

    The card networks usually work with credit card processors to transmit data between the issuing bank and the merchant. The card networks are also responsible for setting the assessment and interchange fees. Although the networks are the ones who set the fees, they usually don’t collect all of them. Interchange fees, which make up the largest cost incurred in credit processing, are passed on to the issuing bank. During the transaction, the networks will collect the nominal assessment fees, which are a small fraction of the interchange fees. In the U.S., the most common card networks are MasterCard, Visa, Discover, and American Express.

  • Issuing Bank/Consumer Bank:

    This is the cardholder’s bank, which gives them the credit card they use at your store. The most crucial role of the issuing bank is determining whether the customer has enough funds to complete a transaction and releasing the funds in order to settle the transaction. Based on the type of card that the issuing bank has given out (rewards, premium, etc.), the interchange fees set by the networks on these cards will be higher or lower. In general, the more the rewards a card gives the cardholder, the more expensive the interchange fee.


Guide to Credit Card Processing Fees and Costs

In every business transaction that involves credit or debit cards, the processing fees will bite into your profits. The processing fees for each purchase are usually somewhere around 2%. However, business do have some level of control in minimizing the costs be shopping around for payment processors. It’s possible to get some competitive rates with time, which can lead to significant savings in the long run.


Here are the average credit card processing fees:

  • Visa: 1.43% to 2.4%
  • MasterCard: 1.55% to 2.6%
  • American Express: 2.5% to 3.5%
  • Discover: 1.56% to 2.3%


In general, much of the charges that go into the processing fees will vary based on several factors:

The Discount Rate:

This is the percentage of a transaction that pays for the credit card processing fees. It includes all fees that are paid to the card networks and card issuers via the assessment fees and the interchange fees.

Although it’s comprised of finer components, you can think of it as follows:

Discount rate = Assessment fees + interchange fee


Interchange Fees:

The largest portion of the discount rate is taken up by the interchange fees, which are mainly collected by the card issuers. The fees are then presented as a percentage and extra fixed amount (usually not over $0.25). Different card networks charge different interchange rates, with American Express often being the most expensive. The type of card (debit or credit) in the transaction will also affect the fees. The type of credit card will also be important. For example, business credit cards tend to be the most expensive.

The nature of the card transaction, in terms of whether the card is swiped directly into a card reader or the card number is directly punched into the system, will also influence the fees charged. Online payments, mobile payments and card-not-present transactions are often higher. Fees on swiped transactions are usually the lowest.


Assessment fees:

This is a much smaller processing fee, which is directly paid to the card network. Assessment fees depend on factors that vary from network to network. Some networks charge higher rates for debit card and credit card usage, while other charge higher rates for greater transactional volume. Unique transactions might incur some incidental fees, such as when processing foreign transactions.


Merchant Service Provider fees:

The MSP who handles your payment processing will also charge a fee for the services. Some of these fees will be charged per transaction, just like the assessment and interchange fees. MSPs are constantly competing for your business. Their fees are based on the average amount involved in your typical transaction, the volume of transaction your business handles, and a host of other nuances. They will quote you different per-transaction prices.

It’s smart to take your time a shop around. Pay attention to the benefits you receive by doing business with a particular MSP. Although some will charge higher fees, the upkeep costs might be much lower.


Other Credit Card Processing Fees and Costs

The MSPs also charge their customers monthly fees and minimums. These costs will vary from provider to provider. However, there are some special differences that might explain certain price points. It’s important to look into what you get from one provider versus another.

Another cost to consider is the price of the equipment. If you intend to process credit card payments in person, then you’ll need to have at least one credit card reader. Merchants are typically presented with a wide set of choices. Your personal needs and preferences for the equipment should govern how much you want to spend.

Some MSPs like Chase Paymentech offer their customers a free credit card reader. However, we recommend that you don’t choose a payment processor based on this alone, since it only benefits you in the short-term.


Best credit card processing companies for small businesses:


This is one of the few payment processors who offer flat pricing, which makes it ideal for businesses that do over $32,000 in monthly credit card transaction. It comes with two plans to choose from, with the most basic costing $99 per month. All you pay for the transactions under their basic plan is 8¢ markup plus the direct cost of interchange fees. And since most processors will pass on the cost of interchange to the customer, FattMerchant’s cuts is just the 8¢ and the monthly charge.

They don’t charge you any additional fees on top of this. There are not statement fees, no batch fees, etc. The processor also offers an enterprise level plan meant for businesses doing over $500,000 in annual sales. The plan costs $199 and adds a per-transaction markup of 6¢ plus interchange.


Dharma Merchant Services

Out of the dozens of processors we reviewed, Dharma Merchant Services has some of the most competitive pricing. This company is ideal for small businesses that transact between $10,000 and $32,000 a month.


Although it’s cheaper than most options, it doesn’t skimp on the extra features that many small businesses find useful. These include an online management dashboard, a dedicated customer support line, and the ability to export settlement reports. They also offer solutions for storefronts, virtual processing, and restaurants.

Nonetheless, there’s one notable feature that absent: 24/7 customer support. Instead, they are only available from 8am to 5pm during regular business days. So, if 24/7 tech support is something important to you, you might want to consider another provider.

In all cases, Dharma Merchant Services is very transparent about the costs. It also has interchange pricing models, which are some of the fairest models around.


The ability to take payments on the go is also crucial for mobile businesses. There are some great credit card processing apps out that they combine the integrated credit card payments and feature-rich POS systems that can run on mobile devices. These apps serve as a great alternative to the traditional merchant accounts via card processors; though some have a merchant accounts to offer the best rates possible.

Here are the best credit card processing apps for small business:


Square Payments

Square has made its name with simple mobile processing anyone can use. Although the company is primarily catering to larger businesses these days, mobile and small businesses still make up a huge portion of their merchants. Their free app makes it easy for business owners to create an item library of products and services.

The app’s tax rate settings are easy to adjust, and you can pre-program different rates in case you operate in different locations. Additionally, Square offers invoicing, recurrent storing/invoicing of cards on file, and a free terminal for online-based transactions.

They charge 2.75% per a transaction (swiped) and invoicing will run you 2.9% plus $0.30, while the virtual browser terminal transactions will cost you $0.15 plus 3.5%.



This started out as an ecommerce platform, but it has expanded into a multi-channel solution for businesses. With their lite plan, you can get their Point of Sale app for as low as $9 a month or upgrade to their retail package, which is countertop friendly and comes with integrations for appointment bookings. However, if you don’t need a cash drawer of a receipt printer, the lite plan should get you through.


It has most of the features that small businesses need, and its remarkable integration with ecommerce tools is a great asset. It even allows invoicing. Another incredible feature is that it changes your pre-set tax rates based on GPS location, which eases the burden on your side considerably.


Best Payment Gateways for Small Businesses

A payment gateway is ideally the intermediary that connects your ecommerce shopping cart to your credit card payment processor. Below are two of the best online payment gateways for small businesses:



We consider PayPal the best payment gateway for small businesses because it features a payment plan to suit all possible online selling needs, from those of new startups to the power sellers. Each of their plans let you accept PayPal payments easily. This alone can significantly increase your conversion rates.

PayPal’s three all-in-one payment services include Payments Standard, Payments Advanced, and Payments Pro. Each of these rolls a payment gateways and credit card processing into one complete services, charged at a competitive rate of 2.9% and $0.30 a transaction.



When it comes to checkout security, Stripe is the best. The company always host the payment part of the checkout themselves, which means that payment information is directly entered into their secure servers and never touches the data in your store. This increases your security.

Stripe also has a surprising number of useful features, like support for over 100 currencies, Android Pay, ApplePay, and Bitcoin. Its mobile app is also terrific. Unsurprisingly, it has one of the simplest cost structure. It charges a flat rate of 2.9% and $0.30 per transaction for all its services. There are no monthly charges or add-ons for declined or recurring charges. The only fee you might encounter is their $15 chargeback fee.


The Best Credit Card Machines for Small Businesses

When shopping around for a credit card machine, you’ll never be hurtful of options. Nonetheless, you should definitely check out these companies:



It’s highly likely that you’ve used an Ingenico product before. Since they have a wide range of products, it’s difficult to recommend a specific product. Nonetheless, you can be sure that Ingenico’s products are user friendly, from the set up process to user experience. They generally have a highly rated customer service. The products can also function all over the globe.



Verifone has a remarkably modern and sleek interface in many of its credit card machines and is as user-friendly as Ingenico. Ingenico and Verifone have for a long time been the gold standard in the credit card terminal industry, and they still are. Verifone prides itself on its versatility and speed of its transactions. One of its most popular models is the VX520, which costs under $300 and it should handle most of the needs of small businesses.


Best High-Risk Credit Processors for Small Businesses

If your business in among the so-called high-risk merchants, it might be difficult to find a quality card-processing service. However, there’s still a good number of quality companies that offer high-risk merchant accounts. Below are two of the best high-risk merchant account providers for small businesses.



If you are an online-based business and you’re concerned about fraudulent purchases and chargebacks, Authorize.Net offers some interesting solutions. The company offers a proprietary Advanced Fraud Detection Suite at no extra cost to their customers. The service is aimed at preventing fraudulent and suspicious transactions from going through.

They charge a $25 monthly fee with a setup fee of $49 when getting started. After this, the per-transaction costs are comparable to what you pay with most online processors. For high-risk businesses, Authorize.Net can set you up with one of its resellers and manage the relationship on your behalf. While they handle the payment processing, another company will offer you support for the merchant account.



The transparency and multitude of features offered by eMerchantBroker makes them one of the best high-risk merchant account providers. Although they can get a bit pricey, they are the way to go especially if you process a high volume of credit card transactions.

The transaction costs can vary depending on the business. For example, a travelling agency with proper certifications is charged a fixed 3.95% plus a $0.25 fee per transaction. They also charge a $79 monthly fee. Another key feature is their chargeback shield, which will cost you $25 a month, along with a $49 per notification. This feature notifies you whenever a customer wants to file a chargeback against your business. For high volume business, this feature is godsend, albeit expensive, as it can save you lots of money and give you the peace of mind!

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