How to Accept Credit Cards

Whether you’re starting a business from scratch, taking over an existing company, or adding credit card processing to your established business for the first time, you’ll need to know how to accept credit cards securely and at a low cost.

There are tons of articles out there on credit card processing fees (we’ve written a bunch ourselves!) but less information that provides a clear explanation of how to accept credit cards in the first place and the options available. We’re going to clear that up in this article by going over the various methods for accepting cards and how it all works.

Looking for more in-depth information about rates and fees and the players involved? Check out our comprehensive guide to credit card processing.

Benefits to Accepting Credit Cards

Some businesses wonder if accepting credit cards is really worth it. Only you can make that decision for your business, but here are some numbers to keep in mind.

A 2017 TSYS Consumer Payments study found that both debit and credit ownership and usage had increased. 77% of consumers have at least 1 debit card, while 48% have at least one credit card. (23% have two or more debit cards and 52% have two or more credit cards.) Additionally, credit and debit have both increased as the preferred methods of payment, with credit becoming especially popular for online transactions.

According to a 2016 Federal Reserve study, 58% of respondents report using credit cards for convenience (defined in the study as used without carrying a balance.)

That’s a lot of people that have cards and use them. Some reports indicate the consumers spend more when they use plastic, as well. Taking cards may literally boost your bottom line, even after factoring in card-acceptance costs.

Merchant Accounts

A “merchant account” is the name for an account you open for the purposes of accepting credit cards. The term can be a little confusing, as it’s not a bank account that you directly access. Rather, it functions essentially as a line of credit and has rates and fees, restrictions, and limits.

When you apply for a merchant account, you’ll disclose your average transaction size and average (or expected) monthly volume. You’ll have some wiggle room to exceed those numbers, but if you’re starting to accept much larger sums than originally disclosed, it’s a good idea to talk with your processor so they don’t suspect fraud.

Traditional processing companies issue merchant accounts in your business’ name, but newer “aggregators” (like Square and Stripe) don’t. Instead, they essentially “sublet” their own merchant account to you. There are pros and cons to each method, as we’ll discuss.

Dedicated Merchant Account or Aggregator?

The primary benefit to using an aggregator is a faster set-up time. Since aggregators don’t have a lengthy upfront underwriting process, you can apply for an account and begin taking cards the same day.

However, that speed does come with drawbacks. In some cases, the aggregator will later realize that you’re in an industry it doesn’t support or realize that your business can’t use their services. In those cases, the processor will close your account, sometimes with little warning. (We’ve heard from some businesses that Stripe gave them 5 days to find another processor, but your actual warning time could be longer or shorter.)

This is less likely to be an issue with a traditional processor and your own dedicated merchant account, as the processor will do its due diligence at the time you apply and not issue you an account if you don’t meet its criteria. While that process takes a little longer (typically a few days) it also means a more “stable” processing solution.

Contrary to popular belief, dedicated merchant accounts are not automatically more expensive. We’ll address this a little later in a section on costs.

Card Acceptance Basics

In order to take credit cards, your business will need to choose a credit card processing company to handle your transactions. That company will set pricing, program your credit card machine, deposit funds, withdraw your processing fees, and act as your daily point of contact. This company may or may not be the “backend” processor that actually handles the transaction, but for the purposes of accepting cards, your day to day ‘processor’ is the important consideration.

When you accept a card, the processor’s system will check with the cardholder’s bank to ensure that the transaction is valid and that the cardholder has the funds available for the purchase. Later, you’ll “batch” the payments, meaning you’ll submit all of the day’s credit and debit transactions to your processor.

Batching can often be done automatically at the end of the business day or at other intervals you specify. The processor will then, well, process the transactions, and you’ll receive the funds. You’ll receive either the full amount or the amount minus processing fees, depending on the “discount method” your processor uses. Let’s take a look at the available discount methods: daily and monthly.

Daily Discount vs. Monthly Discount

In processing, “discount” refers to the fees you pay to take cards. Processors offer “daily discounting,” where your fees are deducted each day for that day’s transactions, or “monthly discounting,” where your fees for the month’s transactions are deducted once a month.

Daily discounting means that you’ll receive your deposits from transactions with the fees already deducted. Some businesses prefer that, as it means they only see the net payment for the sale. However, many businesses find it harder to reconcile and a pain to have fees deducted so frequently.

Monthly discounting means that you’ll receive the full transaction amount for each sale, and once a month the processor will deduct your total processing fees for the month. Most businesses find this easier to reconcile and it’s the method we suggest at CardFellow. However, some businesses, especially very small or seasonal companies, find it challenging to have fees deducted in one lump sum.

Many processors give you a choice of daily or monthly discounting, but some do not. Aggregators like Square impose daily discounting automatically.

Receiving Your Funds

Regardless of the discount method you choose, your processor will deposit your funds directly into your bank account in the timeframe specified when you sign up. 2-3 day funding times are common, though you may be able to secure next-day funding if that’s your preference.

Some processors charge extra for next-day funding while others offer it complimentary. If you opt for next-day funding, be sure to confirm with your processor by what time you need to batch transactions in order to receive funds the next day, and be clear on any associated costs.

Credit, Debit, or Both

You can choose to accept credit cards, debit cards, or both. For most businesses, if you plan to accept cards, it makes sense to accept all cards – credit and debit. However, if you have a reason for wanting to just take one or the other, that’s allowed through the Visa or Mastercard limited acceptance programs.

The primary reason some businesses consider only accepting debit is cost. In many cases, debit will be cheaper to accept than credit. However, you may find that some customers prefer to pay by credit and are put off by a debit-only requirement. We suggest accepting both credit and debit cards to reduce friction at the time of payment and allow customers to use their preferred method.

How to Accept Credit Cards

Once you’ve decided if you’ll accept credit, debit, or both, you’ll next want to determine how you’ll be taking cards. If you’re running a brick-and-mortar business, your payment acceptance will be different than if you have an online store. Both will be different than a dentist who invoices clients, or a gym that keeps cards on file to charge for monthly memberships.

Accept Credit Cards Online

Online credit card processing transactions are known as “card-not-present” because the card is not physically swiped or dipped. Online transactions can include traditional ecommerce setups with a shopping cart or “buy” button, clicking a payment link in an electronic invoice, or storing cards on file to charge for monthly memberships or for future services.

You’ll first need to determine how you’ll take online payments. For a traditional ecommerce store, you’ll need a payment gateway that is compatible with your website platform and a compatible shopping cart in addition to a credit card processor. Electronic invoicing and storing cards will also require gateways and a processor, as well as either an invoicing option or a card storage vault.

Gateways and Shopping Carts

There are two “types” of gateways – universal and proprietary. You can use a universal gateway with many different credit card processors while you can only use a proprietary gateway with a limited selection of processors.

At CardFellow, we suggest universal gateways as it makes things easier if you need to switch processors in the future. Universal gateways include Authorize.Net, USAePay, ePN, NMI, and more. Proprietary gateways include those offered by companies like Stripe.

There’s also a middle ground, where gateways can only be used on one processor’s platform but multiple processing companies operate on that platform and can therefore support it. The First Data (now Fiserv) Payeezy gateway and TSYS’ Multipass are two examples. While you can only use those on the Fiserv or TSYS platform, many companies operate on those platforms.

Invoicing

Electronic invoicing allows you to send an invoice to your clients online and include a payment link that they can click to provide card details to pay their invoice. Some processors have built-in invoicing capabilities, while others do not. There are also third-party electronic invoicing services, so you can take advantage of that option even if your processor doesn’t offer invoicing.

Card Storage Vaults

If you plan to keep cards on file, it’s vital that you do so in a secure manner. Don’t simply record credit card details and lock them in a drawer or save them to an Excel file. Instead, work with a processor that offers a secure card storage vault, allowing you the best of both worlds: convenience to charge cards easily in the future and security from the processor handling sensitive card details.

Card storage vaults can be used to initiate one-time future payments, functioning simply as a way to keep cards “on file” or can be set up with recurring billing to charge a card a particular amount on a regular schedule. You’ll be able to set the amount and the charge schedule, which can be adjusted as necessary.

Fortunately, most processors offer secure card storage vaults these days, so it’s a simple matter of confirming it during your processor search. We’ll touch on this more in a later section on finding a processor.

Accept Credit Cards In Person

Also called “card-present” transactions, taking cards in a brick-and-mortar location involves swiping (for magstripe cards), dipping (for EMV chips) or tapping (for NFC / smart devices.) You can accept cards using a traditional countertop terminal, a POS system, or a “virtual terminal.”

Countertop Terminals and POS Systems

These days, even the smallest businesses can usually find a basic countertop credit card machine within their budget. Chip-capable machines start around $300 to purchase.

POS systems have also come down in price, in part due to the popularity of tablet-based systems that can be customized with only the accessories you need and want. That said, some POS systems, especially full bundles with cash drawers, customer-facing displays, and barcode scanners, can still run you $1,000 or more per system.

Terminals and POS systems will need to connect via phone line, wifi, or mobile network, depending on the specific machine’s connection capabilities and your connection preference.

CardFellow maintains a helpful credit card equipment directory with comprehensive descriptions and reviews of the various machines available.

Virtual Terminals

A “virtual terminal” is a secure web portal where you can enter card details to process a transaction. Virtual terminals are popular with businesses that don’t need dedicated processing equipment, such as dental practices or doctors’ offices, as well as businesses that accept cards over the phone, such as contractors. They’re also a good fit for many B2B companies.

A computer with an internet connection functions as your virtual terminal, and most processors offer the option. However, there are two ways to input card data with a virtual terminal, and only one is “card-present.” The two methods are swiping/dipping cards using a compatible reader or keying in the card details by hand.

If you use a USB or Bluetooth card reader to swipe or dip the card, it will be considered a card-present transaction. If you manually key in the card information, it will be considered a card-not-present transaction. (This is true even if your customer is physically present and hands you their card.)

Card-present processing costs are typically lower than card-not-present, so if it’s possible to swipe/dip cards, it’s a good idea to do so. USB or Bluetooth readers are low costs and compatible with most computers.

Accept Credit Cards with a Smartphone

Businesses taking cards on the go can benefit from mobile processing solutions. Most processors these days offer a payment app with an optional card reader that connects to your smartphone or tablet through the headphone jack or Bluetooth.

You can either hand-key the card details into the app or use the card reader to swipe/dip cards. Keep in mind that swiping/dipping cards is both faster and will cost less than manually entering card details.

As with other types of equipment, mobile card readers can be universal or proprietary. You’ll still need an account with a processing company before you can use the app or reader to take payments, as it needs to be connected to both the processor’s system and the bank account where you’ll receive your deposits.

While the app itself is usually free, you’ll still pay processing fees for each transaction. Some solutions have a monthly fee while others do not.

Accepting cards with a smartphone is usually a quick process. Once you have an account with a processing company, you’ll download the compatible app onto your phone or tablet and can begin taking cards.

Accept Credit Cards Over the Phone

Contractors and other businesses that have customers call in to pay will need to use a virtual terminal to capture card details. Virtual terminals let you securely enter card details into a web interface you access through your computer. When you open a merchant account with a processor, you’ll let them know that you need a virtual terminal and they will provide you with the details needed to log in to that portal to process cards.

Rates, Fees, and Contracts

When it comes to processing, many businesses find rates and fees to be confusing and frustrating. We’re not going to into all the details of rates and fees in this article, as the topic is large enough for its own posts. However, let’s go over the basics of what’s involved in the processing costs to give you an idea of how it works and what to look for.

Factors that Affect Cost

There are a number of factors that affect the total cost of processing, but a major one is how you accept cards. For cost purposes, there are only two categories: card-present, and card-not-present. A card-present transaction must be swiped, dipped, or tapped. Anything else (invoicing, online shopping cart checkouts, keyed cards taken over the phone or in person) is card-not-present, even if the card is physically with your customer at your business.

If you have a choice between swiping cards or keying in the card details, swiping is the more secure and lower cost option.

Interchange, Assessments, and Markup

There are three components of processing fees: interchange, assessments, and markup. Interchange, the largest component of cost, goes to the banks that issue cards. Assessments, a much smaller component, go to the credit card networks. Markup goes to your processor. Markup is the only component that you can negotiate. Interchange and assessments are not in your processor’s control, and they’re the same for every processor.

So why is there so much variation from one processor to another? Within the “markup” component, processors can add any number of fees at their discretion, and can use percentage-based markups, per-transaction fees, monthly fees, statement fees, and more.

Additionally, depending on the pricing model, processors can lump interchange, assessments, and markup together, making it difficult to see what you’re paying in unavoidable wholesale cost and what you’re paying to the processor as their profit.

Pricing Models

The pricing model determines how you’re actually charged for processing. There are two “main” pricing models, with variations on each. The main pricing models are interchange plus (also called cost plus, pass-through, or true pass-through) and tiered (also called bundled pricing.)

Interchange Plus

On an interchange plus pricing model, the processor will charge you the actual cost of interchange and assessments plus a small markup. This model is the most transparent, as it allows you to see the non-negotiable wholesale cost separate from the markup that the processor charges over cost.

Variations on interchange plus include “membership” or “subscription” pricing, such as the services provided by companies like Payment Depot and Fattmerchant. Such offers feature zero percentage markup and instead impose a high annual fee and a higher per-transaction fee.

Bundled Pricing

Tiered or bundled pricing models are more opaque and more expensive. Instead of showing you the wholesale cost and markup separately, the processor lumps all fees together and charges you a rate it sets. Processors using tiered pricing will create “tiers” with different rates. It’s common to see three tiers, but a processor can use more or fewer if they like. On a three-tier model, you’ll see “qualified,” “mid-qualified,” and “non-qualified” rates. The qualified rate will be the lowest while the non-qualified rate will be the highest. From there, the processor will decide which of your transactions it wants to charge according to which tier. It’s completely at the processor’s discretion, and they can change your qualifications at any time, resulting in a shell game of shifting costs.

Note: In recent years, Visa has begun using the term “non-qualified” for some of its downgrade charges. That makes it a little more difficult to determine from a glance if a non-qualified charge indicates tiered pricing. However, any time you see “non-qualified” (or any variation, such as “nqual” or nonqual” it’s worth looking into further, as it indicates that you’re paying more.

Variations on bundled pricing include “flat rate” pricing, such as Square and Stripe. Flat rate is a form of bundled pricing since all fees are lumped together, but it doesn’t typically include the shifting of rates. Rather than qualified / mid-qualified / non-qualified, the “tiers” are often simply “swiped” and “keyed.” This makes it easier to determine your pricing, but is still usually an expensive pricing model.

At CardFellow, we’ve written extensively about rates and fees to help you make sense of your statement and understand what you’re paying. Check our blog for a collection of helpful articles about credit card processing rates.

Markup Fees

As noted above, there are many possible markup fees that processors can charge. Interchange and assessments are not markups, but any other fees are. Those most common markup fees include:

• Percentage markups and per-transaction fees
  You’ll commonly see these listed together, such as 0.15% + 10 cents or 0% + $0.30. That means that for every transaction, you’ll pay the processor 0.15% of the total plus 10 cents. (This is on top of the costs of interchange and assessments.)
  Other names for these two fees include volume markup, interchange markup, authorization fees, and capture fees.
• PIN Debit volume markup and transaction fees
  These are the same concept as the above percentage markups/per-transaction fees, but apply to PIN debit transactions, not credit or signature debit.
• Batch Fee
  Applies every time a set of transactions is “batched” or sent for processing.
• Monthly or annual fee
  The processor’s monthly or yearly charge for having an account with them.

Additionally, many processors impose “per-occurrence” fees that they charge only in certain situations. For example, a processor may impose a $15 chargeback fee, but it will only apply if you receive a chargeback. Examples of per-occurrence fees include:

• Voice AVS
• Retrieval fees
• Chargeback fees
• ACH reject fees
• Security suite fees
• PCI non-compliance fees
• Data breach fees

This is not a complete list of all possible markup fees. You may also be charged additional fees at the processor’s discretion.

Get more info on credit card processing fees.

Contracts

You’ll sign a contract with the credit card processor spelling out the terms for processing. Contracts in processing are not an inherently bad thing; however, many contracts come with hefty cancellation fees, which you’ll want to avoid. There’s no reason to accept a cancellation fee in your contract, as many processors offer no termination fee processing. (In fact, we require it from processors that place quotes through CardFellow.) Remember, contracts are fine, cancellation fees are the problem.

Special Situations

While the information discussed so far applies to most businesses that take cards, there are a few situations where special considerations will play a role. The most common are non-profit organizations, B2B companies, and businesses in industries that are considered “high risk.”

Non-Profits

For registered non-profit organizations, accepting credit cards can be done the same way as for-profit businesses, but being classed correctly can make a difference when it comes to fees. Non-profits are eligible for some lower cost interchange categories, which can result in lower overall costs.

Additionally, some processing companies offer preferential markups to non-profits. It’s important that you disclose that you’re a registered non-profit AND that you work with a processing company that ensures you receive the correct non-profit merchant category code (MCC.) That will ensure you’re paying as little as possible for your credit card processing solution.

B2B

Business to business transactions involve commercial credit cards, which have their own “categories” of interchange fees. When you accept a commercial card, you’ll qualify for better interchange rates if you’re providing extra information about the transaction, called “enhanced data” or “level 2 / level 3 data.”

While you’re technically able to accept cards without providing that data, it will cost you more. Some processors can help you save money on commercial cards while also streamlining the process of providing additional data. You’ll need a virtual terminal or credit card machine that is designed to easily pass along the enhanced data.

If you only accept commercial cards occasionally, it’s probably not worth your time to worry about enhanced data. However, if you’re regularly accepting corporate cards, the difference in costs will be significant.

Business to business transactions are different enough that it’s important to understand the ins and outs of enhanced data in order to make an informed decision. If you’re running a B2B company, be sure to check out our guide to B2B transactions: Level II and Level III Enhanced Data.

“High Risk” Businesses

Businesses generally considered “high risk” will have different challenges when it comes to taking credit cards. Processors have some discretion as to what they consider “high risk” but broadly speaking, they usually consider the following industries high risk:

• Adult entertainment
• Bail bonds
• Bitcoin and digital currency
• CBD / hemp
• Computer support
• Dating websites
• Debt collection and credit repair
• Firearms
• Gambling or fantasy sports
• Loan services
• Pharmaceuticals
• Software as a service
• Telemarketing
• Travel
• Vaping / e-cigarettes

The reasons these industries are considered high-risk vary, but the end result is that businesses in those industries may need to take special steps to secure processing. While the actual process (and equipment) for accepting credit cards in a high risk industry is the same, you’ll need to seek out a high risk processor. Some processors explicitly cater to high risk businesses. Be prepared to pay higher costs than you would if you were in a lower risk industry.

For full details, check out our article on high risk merchant accounts.

Choosing a Processor

With all this in mind, how do you choose a processor?

The easiest option is to use CardFellow’s free quote comparison service. After filling out a short profile with details about your processing needs, you’ll receive quotes from multiple processing companies to review in private. We don’t share your contact information with processors, so you won’t have to field sales calls, and there’s no obligation.

Even better, if you need help deciding on the right fit or understanding how the offers stack up, we’re on hand to walk you through the numbers and help you find the right solution. Processors in our marketplace can offer every type of processing method, from traditional brick and mortar swiping to virtual terminals to smartphone processing, so no matter what you’re looking for, we can provide guidance.

Ready to give it a try? Sign up here.

Decision Checklist

We’ve covered a lot of topics in this overview on accepting cards, so here’s a quick refresher for the questions you’ll need to ask yourself / decisions you’ll need to make. Keep this list handy when you’re considering your options.

• Is my business “specialty,” such as a non-profit, B2B, or high risk business?
• Will I accept both credit and debit cards?
• How will I take cards?

Card-Not-Present

• Through a website with a shopping cart
• Through invoices paid online
• Using a recurring billing system and card storage vault
• Over the phone / using a virtual terminal without a card reader

Card-Present

• With a countertop machine or POS system
• With a smartphone on the go
• Using a virtual terminal and card reader

• Do I want daily or monthly discounting?
• Am I getting interchange plus pricing?

With the answers to these questions, you’ll be better prepared to shop for a processor. You can also ask the experts at CardFellow for assistance.