What you need to know about accepting credit card payments

For many retailers, credit card payments are the way to do business. According to a survey from Forbes, less than 10% of Americans use cash as their primary method of payment, and the percentage of payments made using a credit card is only increasing. The days of customers rummaging through their bags and pockets, searching for that stray bill are quickly disappearing. Even for small businesses, it’s all about the tap, dip, swipe, or click.

With the rise of digital payments and contactless payments over the past four years, customers expect the convenience of paying with credit cards, whether shopping in-person or across the web. By making sure your business is set up to accept credit card payments, you can skip the frustration of missed sales. 

How do credit cards work?

People swipe credit cards every day. But how do those little plastic rectangles actually work? After someone whips out their credit card, several things happen within an instant. If it all goes well, the transaction settles, and the customer’s payment eventually deposits into your account. Several institutions make this possible:

• Issuing bank: The bank that issued your customer’s credit card.
• Acquiring bank: Your bank, which is responsible for acquiring the funds.
• Card network: The facilitator that communicates between the two banks, usually Mastercard, Visa, Discover, etc.

Now that you know the parties involved and their roles, here’s a quick explainer of all the actions that take place after a customer makes a payment:

1. After the customer swipes or taps, your point-of-sale device or online payment processor captures the credit card information.
2. This credit card information is shared with the card network.
3. The card network then sends the transaction to the issuing bank.
4. If the customer has enough credit, the issuing bank will approve the transaction.
5. After the transaction is approved, the issuing bank sends funds to the acquiring bank.
6. The acquiring bank receives the funds in a few days, a process known as settling. 

What’s the difference between a debit card and a credit card?

You might hear these two phrases used interchangeably, but they’re different payment methods that take money from different places. A debit card “debits” money directly from a customer’s bank account. Functionally, it’s like paying with cash. When the transaction is complete, the end result is the same as if one had withdrawn cash from the ATM and spent it. 

Meanwhile, a credit card draws upon a customer’s line of credit. It’s similar to taking out a small loan. The credit card company pays you, and the customer is billed at a later date. Both payment methods are common, but customers may prefer credit cards because of the protections and rewards that debit cards don’t offer.

What do you need to accept credit card payments?

Credit cards can make paying easy for your customers, but you need certain tools to be able to take them. Depending on whether you sell online or offline, it will be a combination of software and hardware. 

1. Payment service provider: Also known as a PSP, it handles your transactions and deposits funds into your account. Organizations like PayPal or Square are popular ones.
2. Merchant account: Most businesses have this already, and it’s a separate bank account that allows you to deposit credit card payments.
3. Payment gateway: This transmits the cardholder’s information from your website to your payment service provider. It applies specifically to online selling. 
4. Hardware/software: Depending on whether you sell online, in a physical store, or just on the go, you’ll need different tech.
   1. Online payments: For an e-commerce business, there’s no option except to take credit cards. Ensure you have a secure website with a payment gateway established. Some PSPs have a fully integrated backend, which makes it easier to set up online payments. 
   2. In-store payments: For brick-and-mortar selling, you need a point-of-sale solution, or POS. Depending on your business model, this may be a handheld card-reader device or a countertop terminal. 
   3. Mobile payments: Examples of this are Apple Pay or Google Wallet. These digital-payment forms allow people to pay in person with their smartphones. 

What fees should you know about?

When you accept credit card payments, be aware of the fees involved. Smaller businesses sometimes won’t take credit card payments because these fees can eat into their profit margins. Or they might require a minimum for paying with a credit card. Larger businesses that process many transactions are able to negotiate lower fees with institutions and, therefore, are more likely to take credit cards. Here are a few of the fees you can expect below. Keep in mind that these fees vary from credit card to credit card. 

• Interchange fees: This is paid to the issuing bank by the acquiring bank. The fee is usually a small percentage of the total transaction value, and it compensates the issuing bank for its operating costs. 
• Assessment fees: This is paid to the card network to cover the cost of merchants operating on its system. It may also be referred to as an association fee.
• Payment processing fees: Whatever payment processor you choose will charge a range of fees for facilitating the transaction. There are fees for each transaction, monthly service fees for account maintenance, the fees you might pay for POS hardware if you sell in person, and the fees you might pay for your payment gateway if you sell online. 
• Chargeback fees: A customer might dispute a transaction with their credit card, meaning that the funds are removed from the merchant’s account and returned to the issuing bank. The merchant’s acquiring bank passes on the cost for this, sometimes up to $50 per charge-back.

What best practices should you follow for protecting data?

Accepting credit card payments can add more complexity to how you manage your business, but there are common tips to follow that make it safe for you and your customers. Here’s some advice you should remember when accepting credit card payments so you can process them safely.

• Keep data encrypted: Your software should use end-to-end encryption (E2EE) and tokenization methods to keep cardholder data secure at all times. Encryption ensures that no third parties can access cardholder data as it travels between networks.
• Use approved equipment and update software regularly: Ensure that any POS devices or payment gateways you use to accept credit cards are compliant with PCI DSS (Payment Card Industry Data Security Standard). This standard was created by the largest credit card companies to protect consumers.
• Use multifactor authentication: Also called MFA, this prevents fraudulent online transactions by prompting the customer to enter an additional security code or respond to a message sent to their cell or email. 

What tools are best for accepting credit cards?

There’s a wide market of different software and hardware brands that will empower you to accept credit cards. Evaluate your options carefully to decide what works for your particular needs. Remember what’s best for another business may not be best for you. Here are some trusted options:

• Square: It’s popular for its user-friendly interface, which makes it easier for those who aren’t tech-savvy. Square also gives merchants a free card reader for in-person selling and facilitates online payments.
• Clover: This tool is known for its comprehensive features and flexibility. You can manage employees, launch customer loyalty programs, and review analytics. You can also choose your own payment processor, allowing you more control over transaction fees.
• Shopify: This is a top choice for online sellers but has also become a major in-store player for its POS hardware. It also uses integrated payment processing through Shopify Payments, so no need for a third-party payment processor. 
• Stripe: This brand is most popular with developers as it’s highly customizable. It’s also a top choice for accepting international payments as it supports a wide range of payment methods and currencies.

By accepting credit card payments, you can give customers a seamless and secure way to purchase your goods and services. That convenience means better relationships and more sales for you. With more and more payments being made by credit card, you can keep up with customers’ expectations. By researching different tools and processes, owners can land on the right credit card strategy for their business.