A Small Business' Ultimate Guide to Payment Processing

Florence Carpenter

With millions of new businesses opening every day, setting yourself apart from the competition is becoming increasingly difficult. One way to make sure that your small business can thrive in a sea of established brands is to make each aspect of your customer experience as seamless as possible, especially when it comes to small business payment processing.

WHAT ARE PAYMENT PROCESSORS?

Every business needs to be paid — in cash, kind, or credit. While cash used to be king, this statement is not so true anymore. Many modern customers prefer the ease of use that credit cards and other forms of cashless transactions provide.

Payment processors act as the middlemen between merchants who authorize payment transactions for credit cards and cashless transactions and the financial institutions that enable them. 

WHY DOES YOUR SMALL BUSINESS NEED PAYMENT PROCESSING?

In a 2017 study by the U.S. Bank, they revealed that 50% of people carry cash less than half the time. With the rise of a cashless economy, this number will likely get higher in the years to come.

However, choosing the right payment processor for your small business is not as easy as people think. While there are preferred practices, no solution is ever one-size-fits-all. That said, before you can choose the best payment method for your small business, you have to understand how they work.

HOW DOES PAYMENT PROCESSING WORK?

There are four different parties involved in a single payment process: the merchant, payment processors, card network, and issuing financial institutions. 

MERCHANT

Merchants are the businesses that accept payments from customers in exchange for goods and services. Small businesses fall under this category.

PAYMENT PROCESSOR

Payment processors are the tools used by businesses to accept payments from customers and route them toward your company account. They can come in the form of credit card terminals, QR codes, or even online forms.

ISSUING FINANCIAL INSTITUTION

Traditionally, credit and debit cards were bank-issued. However, with the rise of e-wallets, many customers are now using applications and digital cards on their mobile phones instead of just physical cards.

CARD NETWORK

For customers that still use physical cards, credit card company networks like Visa, Mastercard, or American Express facilitate transactions between businesses and the financial institutions that issued them.

After understanding the ecosystem of payment processors, you can now determine which is the best payment processor for your small business.

HOW TO DECIDE WHICH PAYMENT PROCESSOR IS THE BEST FOR YOUR SMALL BUSINESS

There are several factors that small businesses must consider when choosing the right payment processing partner. To find the best one for your small business, you must decide on the following:

  • Aggregators versus Merchant Accounts
  • Integrated versus Non-Integrated Payment Terminals
  • Payment Processing Fees

If you’re not sure which is which, keep reading!

AGGREGATORS VERSUS MERCHANT ACCOUNTS

There are two main types of payment processors: aggregators and merchant account providers. In this next section, we’ll walk you through their similarities and differences.

AGGREGATORS

Aggregators are payment providers that allow several merchants to receive payments through a shared account. They are often simplified payment processing providers that charge a flat fee per transaction. 

PROS
  • Straightforward accounting
  • Quick & easy account set-up
  • Fewer background checks 
CONS
  • Higher processing payment rates
  • Longer wait times to get your money 
  • Higher risk of fraud

Recommended for small businesses that process smaller transaction volumes, aggregators have more manageable fee tracking and a relatively lenient application process. 

However, one of the caveats with aggregators is that they can hold your payments from anywhere between a few days to a few months, which can be difficult for many small businesses.

MERCHANT ACCOUNTS

Merchant Accounts are payment processors by merchant banks called acquirers. These merchant banks are responsible for settling and depositing money into your bank account. 

Often customized to your business needs, acquirers can provide everything — from the terminal that processes the transaction to specialized rates depending on your business. Businesses with higher sales volumes are recommended to use this kind of payment processor.

PROS
  • Lower interchange costs
  • Personalized service
  • Faster depositing of funds
CONS
  • Complicated application period
  • Complex accounting

Many small businesses often struggle with cash flow, and one of the primary advantages of merchant accounts is that you can gain access to your funds usually within 1-2 business days. 

Ideally, a good number of small businesses would like to get a merchant account. However, most of them do not get qualified for this right off the bat. Because of this, small businesses often start with more aggregator-type payment processing and then transition to a merchant account as their business scale. 

INTEGRATED VERSUS NON-INTEGRATED PAYMENT TERMINALS

While many companies have been increasingly moving their services online, plenty of small businesses still rely on physical stores to sell their products or services. 

With these, two kinds of terminals can accept cashless payments for both in-store and online payments: integrated and non-integrated payment terminals. 

So, how do you know which type is right for your small business? Read below to see their differences:

INTEGRATED PAYMENT TERMINALS

Integrated payment terminals are often very easy to use because they are designed to work with your existing POS software. For in-store purchases, the process is simple. It involves scanning the item, selecting the payment method, and then waiting for the payment processing terminal to confirm the payment automatically with the POS.

If payments are processed online through integrated payment terminals, the customer only needs to check out their cart, enter their delivery and payment details, and complete the order.

NON-INTEGRATED PAYMENT TERMINALS

When companies use a non-integrated payment terminal, there are additional steps that you need to take to complete the sale.

When a customer buys in-store, the main difference is that upon scanning the item and selecting the payment method, you have to manually key in the amount in the terminal and mark the sale as completed on the POS.

For online and non-integrated terminal transactions, a customer would need to input their payment details on a third party payment site before their order is confirmed.

WHAT KIND OF PAYMENT PROCESSING TERMINAL IS RIGHT FOR YOUR BUSINESS?

There are many advantages to using an integrated payment terminal. For instance, it can help small businesses avoid having to deal with third-party platforms when trying to address accounting concerns and creates a better overall checkout experience.

However, it is not always for everyone. Some businesses do not always have the resources to invest in integrated payment terminals right away. Additionally, many countries still heavily rely on cash-based transactions. This is why a lot of retailers with multiple cashiers opt to share a few terminals across several counters to save on costs.

As it is significantly cheaper to set up, non-integrated payments are attractive for small businesses who are not yet established and do not have a physical store with a POS machine. 

The best payment processing service provider for your small business should be able to take into account both your customer’s purchasing habits and their various sales channels.

PAYMENT PROCESSING FEES

Payment processing is an incredibly useful tool for any business, but it does not come free. Before committing to a payment processor, it is important to canvas the various fees that you are likely to incur with each platform. 

HOW ARE PAYMENT PROCESSING FEES DETERMINED?

Payment processors have varying rates depending on their evaluation of your small business. Some of the factors that payment processors look at to determine your payment processing rates depend on the following:

  • The nature of your industry
  • The business and credit history
  • The expected sales volume

As a general rule of thumb, the more likely your business will have a high volume of transactions, the better the rate that they can offer your small business.

THE THREE TYPES OF PAYMENT PROCESSING FEES

Every payment processor will have three kinds of fees: flat fees, processing fees, and miscellaneous fees. These fees can either be one-time, event-triggered, or recurring payments. Here is how each one is different:

FLAT FEES

Flat fees are determined at the beginning of your contract. Many payment processors require these to maintain the operations of your payment channel.

These can come in the form of annual fees, monthly fees, and network fees. Occasionally, payment processors may also ask you to cover the cost of physical channels such as credit card terminals and QR code standees. 

Several flat fees are negotiable depending on the processor evaluation of how profitable your small business will be to them as a regular client. 

PROCESSING FEES

While flat fees are a little more predictable, processing fees require more calculation. Split among each party involved in the payment processing procedure, everyone from the payment processor to the financial institution will get a cut. Afterwards, the small business that authorized the transaction will receive the remaining amount.

MISCELLANEOUS FEES

Miscellaneous fees are fees charged by the payment processor that are triggered by events or transaction types.

An example of these fees are the one-time payments charged at the beginning of the engagement. This includes set-up fees, contract-related fees, and early contract cancellation fees. Additionally, this also includes payments that are routed differently from regular transactions, such as those with international fees and chargeback fees. 

WHAT ARE THE DIFFERENT TYPES OF PROCESSING FEES?

For every transaction, processing fees are determined by percentages. This percentage is composed of several fees: the interchange fee, card brand fee, and payment processor fee.

INTERCHANGE FEE

The different credit card types will have their corresponding fees. Credit cards have an average interchange fee of 1.8%, while debit cards charge around 0.3%.

CARD BRAND FEE

Card networks such as Visa, Mastercard, and American Express also charge a smaller fee of around 0.05% per transaction.

PAYMENT PROCESSOR FEE

In exchange for routing payments from the paying customer to the merchant, payment processors also charge a fee. The payment processor fee can range from 1.7% to 3.5% per credit card transaction.

WHAT FACTORS DETERMINE PROCESSING FEES?

There are three main factors that payment processing companies use to determine the fees for your small business: card type, payment type, and retailer type. 

Often, cards that have a higher credit limit will incur higher fees. On the other hand, most payment processors will charge fewer fees for more secured transaction types. For example, debit cards have a significantly lower processing fee than credit cards, which are more prone to fraud. 

Additionally, high volume retailers such as department stores, construction warehouses, and groceries, often have lower rates.

Now that you know how to choose and much you should expect to pay to invest in a payment processing platform, here are a few tips to help you choose the best one for your small business:

TIPS ON CHOOSING THE RIGHT PAYMENT PROCESSOR FOR YOUR SMALL BUSINESS

While everyone can agree that having a payment processor is essential to your growth, choosing the wrong one can be incredibly stressful and expensive. Here are a few tips to help you decide:

KNOW YOUR COMPANY NUMBERS 

By having a clear picture of your company transaction volumes, revenue, and channels, you can easily decide what features you need. Avoid purchasing payment processing plans that are not relevant to your business model, and negotiate for better rates with your service provider based on your numbers.

CANVAS PAYMENT PROCESSOR RATES & CONTRACT PERIODS

There are several payment processors available on the market today. Make sure to take the time to go through each one. 

Find out exactly how much you expect to spend during your contract with them by clarifying all the fees. Avoid hidden costs by asking the right questions, consulting the right people, and running your numbers, to get the best bang for your buck. 

CHECK PREVIOUS CLIENT REVIEWS

While many payment processing partners look great on paper, you need to be able to verify how good they are in practice, especially when it comes to customer support. 

IN A NUTSHELL

Finding the best payment processor for your small business isn’t easy, but it is an investment worth making. The right payment processing partner will not only give your customers a better payment experience, but it will also give you and your team peace of mind during all transactions. 

Comment below what you think is the best payment processor for your small business!

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