Credit Card Processing: Worth the Added Cost

Small Business
Credit Card Processing: Worth the Added Cost

As cash and check use decline in America, shoppers are turning to credit cards for both offline and online purchases. It’s true that, as a small-business owner, you’ll lose a small portion of every payment to credit card processing fees if you accept credit, debit and prepaid cards, and there’s no question it’s painful to watch any of your hard-earned money get siphoned away. But accepting credit cards adds convenience that can make the difference in whether someone buys from you or a competitor. Here’s what you need to keep in mind as you consider implementing credit card processing.

Overview of credit card processing

First, know that credit card processing isn’t a one-size-fits-all service. Your needs and options will vary depending on whether your business sells offline, online or both.

  • If you have a brick-and-mortar store such as a clothing boutique, or if you’re a service provider like a florist, you need a physical point-of-sale device. Options include traditional credit card machines that can be leased or bought, or newer technologies such as mobile credit card processing devices that plug into tablets and smartphones.
  • If you have an online-only business, you only need online credit card processing in the form of an online payment gateway, which allows customers to pay with a card through your website. Countless providers offer this service and integrate it seamlessly with your existing website. Alternatively, you can use a third-party option such as PayPal.
  • If you sell both offline and online — say you have a stationary boutique that sells goods in a physical shop and on your website — you can sign up for separate processing services for both types of sales. However, it might be more efficient to work with a provider that can handle both types of payments so your systems are integrated.

On to one of the most pressing questions: How much will it cost to accept credit cards? Regardless of which service you choose, expect to pay a percentage-based credit card processing fee on every card transaction, usually in the range of 0.4% to 3% per transaction. The reason for such a wide range is that the rate for swipes is always much lower than the rate for manually keyed-in credit cards. (This happens if someone calls or mails in a credit card payment and you have to type in the card number.)

Regardless of which service you choose, expect to pay a percentage-based credit card processing fee on every card transaction, usually in the range of 0.4% to 3% per transaction.

Some companies also charge a flat credit card processing fee per transaction, usually between 10 cents and 30 cents. Be aware that some processors also charge monthly fees, annual fees, setup fees, compliance fees and other costly fees, so it’s important to compare all fees when choosing your processor, as they can add up and eat into your profits.

The ups and downs of credit card processing

There are compelling reasons to offer credit card processing at your business, but there are drawbacks.

Pros of accepting credit cards

  • As fewer people carry cash, shoppers are more likely to do business with you if you accept credit and debit cards — especially online.
  • Along the same lines, accepting cards can give you a competitive edge. For example, if you’re selling goods at a farmer’s market and a competitor with similar products accepts cash only, you might get more business by offering the convenience of card payments.
  • You’ll spend less time and effort depositing cash and checks at the bank since credit card payments deposit automatically in your account.
  • Some credit card processing programs link with your accounting software, streamlining your accounting efforts.
  • Newer options such as Square and Shopify come with valuable features, including inventory tracking  tools and the ability to create custom loyalty and gift card programs.

Cons of accepting credit cards

  • You’ll pay a percentage-based fee on every purchase and, depending on your processor, possibly a flat transaction fee per purchase.
  • You might get hit with other credit card processing fees, such as setup fees, monthly fees (sometimes with a minimum), annual fees, terminal leasing fees and compliance fees.
  • With cash you’re paid instantly, but with credit cards, you might have to wait a few business days for payment to hit your account.

Credit Card Processors: Worth the Added CostNerdWallet verdict

Failing to get on board with credit card processing can cost you business, especially on the Internet, where consumers expect to be able to pay with plastic. We recommend that all businesses accept credit and debit cards in some form. While you do lose a small percentage of every payment to credit card processing fees, the idea is that the added convenience of credit card acceptance will result in more transactions (and more revenue) than before.

A plethora of credit card processors are available in all shapes and sizes, and trying to determine the best option for your business can be overwhelming. Rather than defaulting to the provider with the lowest credit card processing fees, it’s worth taking the time to thoroughly compare all fees and features of a few options so you can properly evaluate providers. Additionally, don’t hesitate to reach out to those companies with questions or to try to negotiate rates.

How to start accepting credit cards

As noted above, your needs will vary depending on whether you sell your products or services online, in-person or both. Take care to choose only what you need so you don’t spend more money than necessary. For example, if you only sell goods offline, don’t get suckered into paying for e-commerce features.

  • If you sell goods online only, begin searching and comparing e-commerce payment processors online. You’ll have to decide whether you want a payment gateway added to your website, or if you prefer to utilize a third-party service such as PayPal for credit card payments. If you currently have no e-commerce capabilities on your site, you might want a provider that can set up a shopping cart along with the payment gateway (a shopping cart is a separate feature that allows people to add items to a virtual basket). Compare costs and features closely.
  • If you have a brick-and-mortar operation, particularly one with several checkout counters, you might want traditional credit card terminals, though it can be expensive to lease them (look into the cost of buying vs. leasing). Smaller businesses such as bake shops or salons might want to explore newer point-of-sale options such as Square and Shopify, which have credit card readers that plug into tablets and offer extra features such as loyalty programs and inventory tracking.
  • If you sell goods or services in person but change locations frequently — say you sell jewelry at artist markets or give chair massages at events — you’ll benefit most from a mobile credit card processing solution, since they allow you to accept payments on the go. Square and Shopify also offer these solutions, as do PayPal, QuickBooks and other payment companies.

You’ll find that some solutions for brick-and-mortar businesses require you to have a merchant account, which is simply a specialized bank account where your credit card payments are deposited after the fees. This account also allows you to accept other forms of electronic payment, such as ACH payments (bank transfers). For online purchases through your website, you might need a separate Internet merchant account. Some credit card processors provide these accounts for you, while others require you to open one elsewhere. You can also use a third-party service such as PayPal to serve as your merchant account. Not all providers require merchant accounts, so make sure to ask how you will receive the payments.

When researching credit card processing providers, keep in mind that although transaction fees are important, they aren’t everything. Consider all fees and benefits so you can accurately compare the long-term cost. And don’t forget that the fees and rates are often negotiable, so don’t be afraid to flex your negotiating muscles to try to get a better deal.

If you’re struggling to determine which credit card processing option is best for your business, consider asking other local businesses with similar operations what they use and whether they’re happy with their choices. A strong recommendation or cautionary tale might lead you in the right direction.

Additionally, don’t hesitate to call various credit card processing companies and ask how their products would or wouldn’t work for you. Many of these companies have sales reps who are there to lend you a hand during this process. Doing this can also give you a sense of whether their customer service is adequate. Here are a few questions you might want to ask to help you find the right solution:

  • What are the credit card processing fees for swipes and for keyed-in cards?
  • What other fees do I have to pay, including setup, monthly, annual and compliance fees?
  • If I’m getting a physical credit card terminal, what are the costs of leasing vs. buying the device?
  • Do I need a merchant account to get paid? If so, can I open one through you or do I need to get one elsewhere?
  • Does the credit card processing integrate with my accounting software?
  • Are there any other merchant benefits that come with your service, such as inventory tracking or loyalty programs?

When researching credit card processing providers, keep in mind that although transaction fees are important, they aren’t everything. Consider all fees and benefits so you can accurately compare the long-term cost. And don’t forget that the fees and rates are often negotiable, so don’t be afraid to flex your negotiating muscles to try to get a better deal.

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For more information about how to start a small business, visit NerdWallet’s Small Business Guide.

Emily Starbuck Crone is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @emstarbuck and on Google+.


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