Credit card payments are on the rise, whether they’re made in person, on a computer or on a mobile phone. In 2018, four million new consumers started using credit cards, and that same year they were used by 62% of U.S. households. What’s more, 36% of consumers say that credit cards are their preferred payment method, while 33% prefer debit and only 18% prefer cash.
Accepting credit card payments provides obvious benefits for consumers, from the convenience of not having to carry cash to better track-ability and the extra incentive of rewards points. But for small business owners, it’s not always obvious what these payments will mean for their business. Professional and consulting firms, home service businesses, retail, restaurants, and many other types of companies Kabbage works with say that accepting credit card payments is essential to serving their customers, building trust and encouraging repeat business. There are major benefits to unlock if you understand these payments and how they impact your bottom line.
However, small business owners need to navigate a few hurdles in order to accept credit card payments while providing customers with an intuitive, convenient and secure experience. Below we’ve answered some of the most common questions we receive from business owners about diving into the world of credit card payments.
What are the benefits of accepting credit card payments?
Getting paid faster
Credit card payments are great for customers, but what’s in it for business owners? For one thing, credit cards provide the flexibility to accept payment online, in stores or via an app. Often, credit card payments are received more quickly and easily because there’s no need to mail an invoice and wait for a check to arrive, or to track down cash in person. Additionally, since payments are processed electronically, it means less physical cash to manage, which can reduce the risk of cash being stolen and increase employee safety. Meanwhile, business owners have fewer billing processes to handle and greater visibility into their company’s cash flow.
Growing your customer base and your bottom line
Accepting credit card payments can also broaden your customer base. One survey found that 83% of businesses saw increased sales after accepting credit cards. In addition, research has found that customers tend to spend more with credit or debit cards. Beyond convenience, offering this option can encourage customers to trust your business, particularly when it comes to bigger transactions. More than 80% of customers report feeling safer after seeing trustworthy credit card logos prominently displayed at checkout.
It’s likely most of your competitors are already accepting credit cards, and even if they’re not, adding this capability can be an important way to differentiate your business. Making payments more accessible will mean more customers and, ultimately, more sales. But there are some important things to know before getting started.
What types of credit card fees should I expect?
There are some costs associated with accepting credit card payments. Most of this cost comes from processing fees, which a business owner must pay in order to accept credit card payments. Average processing fees accessible to small businesses range from 2-3% for cards swiped in-person, while payments accepted online or via invoice have a higher average processing fee of 3.5%. Typically, this is in addition to a flat cost per transaction and the cost of any necessary hardware. While the cost will differ depending on the payment provider you choose, there are a few common types of processing fees to be aware of.
These fees consist of 1) a percentage of each sale and 2) a flat fee per transaction. For example, a typical transaction fee would look something like 2.9% of the sale plus $0.30 per transaction. They are charged each time your business processes a credit card purchase. Transaction fees don’t all go to the company providing you services directly; they are split between the various entities that are involved in processing a credit card payment including:
- The issuing bank (your customer’s bank, which charges the receiving bank every time a customer uses their credit card)
- The credit card network (Visa, MasterCard, Discover, American Express, etc., which charges a fixed assessment fee for every transaction)
- The receiving bank (the bank that receives funds on your behalf and deposits them into your account), and
- The payment processor (the service between the issuing bank and receiving bank that handles issues like transactional disputes and cardholder verification. This can often be a merchant service provider or payment gateway, which we’ll talk more about later).
Monthly or Account Fees
Some providers charge monthly or annual account fees, or charge a monthly fee if you don’t meet a required minimum amount of charges processed each month. Other potential flat fees include fees for paper or online billing statements, payment gateway provider fees (which we’ll talk about in more detail below), or IRS reporting fees. Make sure to do your research or ask a potential payment provider which fees they charge and how often, and compare your options before choosing a service to work with.
Additional incidental fees may also be charged by your payment processor and vary based on the situation. Some providers charge cardholder dispute fees when a customer disputes a transaction. Other times, if you process a large refund or receive a large dispute, your processor may need to pull the funds from your account. If you don’t have enough available to cover the refund they may charge you a fee, similar to an overdraft fee. These fees depend on which provider you work with, so again, be sure to review all applicable fees during your vetting process.
Many business owners will also need to pay to lease or buy a physical device if they want to accept credit card payments in person. There are many different hardware options you can consider. One of the first decisions you’ll need to make on hardware is whether you need a mobile device, which connects through your phone or tablet to accept cards on-the-go, or whether you’d like a larger terminal to use in a physical location. Prices can vary widely based on the type of device, number of devices you need and the functionality, anywhere from less than a hundred dollars to over a thousand dollars per device. Some card reader costs are bundled with a subscription for the provider’s point-of-sale services. As we describe later in this post, the type of terminal you use determines what kinds of credit card payments you can accept, from magnetic stripe or chip payments to mobile wallets. Other features worth considering are tipping capabilities, digital receipts, security features or sales analytics. You’ll also want to consider the quality of customer support you’ll receive
It may sound like a lot of fees, but processing credit card transactions is a necessary part of your business. Since accepting card payments can increase the number of customers who use your product or the amount they spend, these fees are often offset by that growth in revenue. Accepting card payments can also open the doors to customers who no longer have a checkbook, carry cash, or who want to manage all their payments online. The range in fee amounts and structures underscores the importance of choosing the right payments provider.
Do I need a payment gateway and a merchant account to accept credit card payments?
Merchant accounts and payment gateways are essential to accepting most online payments, but the role of each and the differences between them can be confusing. Here are the basics:
What is a payment processing or merchant account?
A merchant account gives small businesses the ability to accept card payments and is connected to the processor that obtains authorizations for the transactions. Merchant accounts receive the funds and then transfer them into your business bank account according to a predetermined payout schedule. When you partner with a provider such as a processor or payment facilitator, this type of account will be included in their services You may want to consider a processor who won’t charge extra fees.
What is a payment gateway?
This feature is necessary for ecommerce businesses who want to accept credit card payments online, on their own website, with a shopping cart. The payment gateway connects your online store with your merchant account and serves as a mediator for all the third parties involved, including your customer’s bank and your bank. Just like merchant accounts, there are fees associated with payment gateways. Some payment providers specialize in online payments and can handle this feature for you, as well as other services like secure payment processing and customer account storage.
What Are the Different Ways I Can Accept Card Payments?
Whether you do business in person or online, you’ll want to understand the various ways you can accept credit card payments and decide what’s best for your customers.
- Swipe: Swipe payments, which occur in person and use the card’s magnetic stripe, are the traditional way for customers to use their credit cards in stores. Most card reading equipment allows you to accept swiped payments.
- Chip: The chip feature in modern credit cards has become popular in recent years because chip payments are less vulnerable to fraud than magnetic stripe payments when processing in-person payments. If you want to offer this option to your customers, you’ll need an EMV chip card payment terminal. Note that if you accept in-person payments with chip cards and do not have an EMV chip card payment reader, you will be responsible for any fraudulent transactions that would have been caught with a chip reader.
- Mobile wallets and tap payments: One downside of chip cards is that the process can take longer than a swiped card. Mobile wallets and tapped cards offer a speedier alternative by using NFC (near field communication) to quickly translate payment information from a phone app or physical card. With mobile wallets, such as Apple Pay, customers can pay through an app connected to their credit cards. Tap-to-pay cards, where the customer just holds the card near the reader, is another NFC option that also avoids the need to insert a card into the reader. In order to accept these payment options, you’ll need a reader equipped with NFC.
- Electronic invoicing: If you are a mobile business or accept payments based on jobs completed, the ability to send invoices that can then be paid with a credit card is still crucial. Advances in the invoicing process have solved headaches like paperwork, handling checks, or taking credit card information over the phone. Electronic invoicing options ease the process by allowing businesses to send invoices from their computer or a mobile app, which can then enable customers to pay with their credit card. This makes the payment process faster and allows business owners to track an invoice at every step. There will be costs associated with this service — some providers will charge for sending the invoice itself, while others only charge you for the payments you process using the fee structures discussed above.
- New credit cards on e-Commerce: Accepting “new” credit cards, in this context, means requiring customers to input their card information during each checkout on an e-commerce site. It is a standard option and can be done through most payment gateways and services.
- Stored credit cards: A second option involves enabling repeat customers to store their credit card information for future use. Also known as a “card-on-file payment,” it offers a more seamless experience for repeat customers, who don’t have to re-type their information each time they pay. It also can enable automatic recurring orders and invites your customers to put their trust in your business. To offer a stored credit card option, you will need to work with a secure third-party platform as part of your payment gateway.
What’s the best option for your business?
Thinking about how to accept credit card payments — whether it’s the various fees, account set-up or security considerations — can be overwhelming. The process itself doesn’t need to be painful, but it’s important to choose a payment provider you trust. A good vendor should be transparent about all fees, explain exactly what’s required of your business, and help you address your company’s unique needs. Take the time to find a reliable partner for the long haul.