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Published September 8, 2023
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Credit Card Processing For Small Business

Credit card processing lets customers make card purchases via communication between merchants, issuing and acquiring banks, and credit card networks.

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When running a successful business, credit card processing is a merchant’s best friend because it makes it easy for customers to buy products, which business owners want to encourage. When customers use their credit card to make a purchase, credit card processing initiates. 

What is credit card processing? 

Credit card processing is a complex financial system that lets a customer make a credit card purchase. The process involves several quick digital transmissions between the business accepting the charge, merchant service providers and credit card companies

Business owners must pay fees to facilitate these communications, which are necessary to transfer funds, authorise transactions and settle payments. 

Key players in credit card processing 

For successful credit card processing to take place, several key players are involved.

  • A cardholding customer who wants to make the purchase and has sufficient funds in their credit card account 
  • The issuing bank that provided the credit card to the customer 
  • The business merchant that wants to accept the customer’s credit card 
  • The merchant’s payment terminal required for payment processing, which can include hardware, software, EFTPOS and point-of-sale systems 
  • The acquiring bank used by the merchant that processes card payments
  • The credit card network, such as Visa or Mastercard, facilitates communication between the credit card issuer and the merchant’s acquiring bank.

How does credit card processing work? 

A lot goes on behind the scenes when it comes to credit card processing, but first, there needs to be the right hardware, such as an EFTPOS system, with payment software installed. Fees also need to be paid by the merchant to the credit card networks, the acquiring bank and the customer’s issuing bank to facilitate the process. 

With those elements sorted, credit card processing involves two main steps: 

  • Authorisation, which is the process of approving the customer’s credit card payment
  • Settlement, which refers to the merchant receiving their money.


The authorisation process kicks off once the customer taps or inserts their credit card into the payment terminal. This sends the card number and other details to the issuing bank to confirm the funds. Then, the bank sends an ‘approved’ or ‘card declined’ notice to the acquirer to authorise the payment. 


Next, the settlement process begins with the issuing bank sending the funds to the acquiring bank. The customer will see the transaction reflected as a charge on their following credit card statement. The business will receive the payment. 

As part of credit card reconciliation, a business will send credit card transactions at the end of each day or another time to their acquiring bank. This ensures the funds are going into their account, minus any merchant fees. 

» MORE: Why do you need receipts for corporate credit cards? 

Credit card processing fees 

With so many steps and organisations involved in credit card processing, fees are incurred by the merchant. According to the Reserve Bank of Australia, the average cost has decreased over the years. Still, more and more people use credit cards in-store and online (which incur higher merchant fees). So, the total cost for the merchant processing large numbers of credit card payments continues to add up.

Merchant service fees

Then, there are merchant service fees to consider, which the merchant bank levies. These include: 

  • Interchange fees to cover the expenses payable to the customer’s credit card issuer, such as Mastercard or Visa.
  • Scheme fees to cover the costs of processing credit card transactions.
  • An acquirer margin to cover the credit card processing costs incurred by the merchant’s bank. 

Merchant service fees are not standardised and vary depending on the payment method you decide to use, but average costs range from less than 0.5% to 1.5% of the purchase amount.

These merchant fees can vary depending on the kind of business receiving the payment and the card network, such as Visa, Mastercard, or American Express, the type of credit card, and whether it’s a point-of-sale transaction, online or contactless. 

These fees are passed on to customers as a surcharge on each purchase, but some merchants have levied excessive surcharges in the past. So, the Australian Competition and Consumer Commission banned this practice to prevent merchants from applying surcharges on customer transactions higher than the merchant fee.

» MORE: Common credit card fees and charges (and how to avoid them)

Set-up and ongoing costs

Then, there are set-up and ongoing costs to consider. You can expect to pay anything from $29 to $150 monthly in fees. 

The total cost depends on the plan, the type of hardware and software, and the number of outlets you need. You can get a payment terminal fixed to the sales counter or a portable one you can use anywhere in the store — or you can opt for both. The more options you go for, the more the expenses add up. 

Other monthly fees for merchants include sales, return/refund, participation, chargeback fees when a customer disputes a transaction, online participation and terminal fees. 

These extra costs range from a percentage of the transaction amount to $2 per month for the participation fee to $27.50 for the terminal fee. 

Compliance fees 

On top of those fees, businesses must be Payment Card Industry Data Security Standard compliant (PCI compliant). The five largest card networks set this standard to protect banks and consumers from costly data breaches. If you process credit card payments, you need to prove your business is PCI compliant, meaning that any credit card processing takes place securely. 

There are fees involved in becoming PCI compliant, and if you don’t get on board, you risk being held liable for any costs arising from data breaches.

» MORE: Red flags of credit card scams and fraud

What to consider before setting up credit card processing

Choosing suitable payment options means considering what works best for you and how you want to run your business. 

For example, will your business be in-store, online or both, and what type of payments do you want to accept? Once you know the answer to those questions, you can investigate what’s on offer, such as payment terminals and software needed for credit card processing. 

For instance, if you’re operating a retail store, you will need an EFTPOS terminal and possibly several outlets, which can be fixed or portable, depending on the size of your store. On the other hand, if your store is on the smaller side or you need to take payments on the road, you might opt for mobile payment solutions. 

If you plan to accept online card payments, apps and payment gateways such as Square or Shopify could be the answer. And if you’re starting up your business, an app like PayPal could be all you need to take care of any payments until you’re more established.

These days, consumers expect to have a choice of payment methods, such as Apple Pay or Google Pay, so it’s helpful to be ready to accept virtual cards, contactless cards and mobile payments via a smartphone. 

Other important things to consider are whether you want a payment terminal with point-of-sale integration, which means faster processing of payments, streamlined reconciliations and fewer errors. There are additional ongoing costs associated with integrated systems.


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