How to process credit cards

10 minutes

As a business owner, your job is to satisfy your customers so they'll keep coming back. There are many ways to do this, of course. You can offer more and better products than the competition, superior customer service, generous warranties, and have an up-to-date, easy-to-navigate website.

If, however, you don't accept credit cards online, in-person, or through an app, customers may not frequent your business. In 2018, 23% of consumers paid for transactions with a credit card. In 2020, credit card payments rose to 27%.

The cost of doing business

COVID-19 undoubtedly played a role in the higher number of customers using credit cards, digital wallets, and other online payment options. Businesses that accept credit card payments, online or otherwise, can provide the convenience consumers demand.

Even when the pandemic subsides, the convenience of digital shopping will attract consumers. Why count out exact change when you can hand over a plastic rectangle?

However, credit card processing is not free. Any retail business that accepts credit card payments has fees to pay.

How credit card processing works

There are seven parties involved when a customer swipes their credit card:

  • You, the merchant
  • The customer or cardholder
  • The issuing bank that provides the customer's card
  • The acquiring bank that accepts credit card payments and processes them for your merchant account
  • Card association businesses like VISA and American Express that set the rates for interchanges and qualifications for establishing credit
  • Payment processor businesses like Stax or Square connect merchants to card networks
  • Merchant service providers, which can be businesses that also provide payment processing services.

These businesses work together seamlessly to provide immediate credit card payments.

7 easy steps for credit card processing

Credit card payments follow a simple process. Here’s how it works from start to finish:

1. Make a purchase

A customer pays you with a credit card. They can then use a credit card to pay for the item in the store, online, by phone, or by mail.

2. Swipe, dip, or fill out the transaction information

You swipe or dip the credit card using a secure credit card reader. Alternatively, you can manually enter the transaction information using a virtual terminal.

For example, in eCommerce transactions, the cardholder – or customer – types in the payment details in the payment form on the website.

3. Transmit the data and authorize

Once you enter the credit card information, it’s then encrypted and transmitted from the terminal, POS system, or secure payment gateway to the processing network for approval.

Based on the validity of the card, availability of funds, and the amount of transaction, the credit card issuer will then approve or decline the transaction.

4. Respond to processor and merchant

If the transaction gets approved, the processor and you receive a response for authorization.

5. Complete the transaction

You finish the transaction by issuing a receipt to your customer. For eCommerce orders, you then prepare to ship the items to your customer.

6. Submit a batch closure

Complete the credit card payment process with a batch closure. This closes out the transactions processed on that day. The processor’s bank then collects funds from the credit card issuers.

7. Deposit the funds into your business account

The processor’s acquiring bank then deposits the funds into your business account, which typically takes around 48 hours.

The essential players in the world of credit card payments

Let's look at some of the players in the world of credit card transactions a little more closely.

Card associations

A card association (or card network) dictates who can be issued credit cards and facilitates credit card transactions. There are usually two types:

Independent card associations

Independent card associations like Discover or American Express can issue cards directly to customers. The associations themselves process most transactions.

Partnering card associations

Partnering card associations, like VISA or Mastercard, rely on issuing and acquiring banks to provide cards to qualifying customers.

Payment processors

Payment processors mediate between you, your merchant service provider, and the banks. You'll need to find ones with fair rates for their various fees, as there's a fee for just about every part of the process.

Startup fees, transaction fees, chargeback fees, termination fees, and leasing deals for credit card payment processing equipment like card readers can add up quickly.

You might have heard of companies like Stax, and this is what they do. Stax, in particular, has a reputation for being among the more reliable, inexpensive payment processing companies.

Their monthly fee is higher than other payment processing institutions, but they make up for this with low costs for individual transactions.

Square, on the other hand, has no monthly fee but has a more expensive transaction fee.

You'll need to decide whether upfront or back-end costs are more economical.

Merchant service providers

It's easy to confuse merchant service providers with payment processors. They're also known as Independent Sales Organizations because they sell credit card processing products, including merchant accounts and card readers.

Unlike payment processors, merchant service providers work directly with you and your business. Merchant services are their specialty.

Payment gateways

You need to get credit and debit information to your payment service provider to accept credit card payments. 

Payment processing requires specific software to transfer information from the cardholder to your payment processing company. This communication is done through a payment gateway.

Merchant accounts

Unfortunately, you can't use any bank account to accept credit card payments. As a business owner, you'll need to set up a merchant account with your bank. Merchant accounts are a type of business bank account that provides a way to accept credit cards.

Merchant account -providers

To set up and manage your merchant account, you need a merchant account provider. This provider is usually the same company that is your merchant services provider because it behooves these companies to offer as many services as possible.

When choosing your provider, be aware that there are different structures for their transaction fees:


A tiered provider will charge different rates depending on the level of risk. These tiers are qualified, mid-qualified, and non-qualified.

Interchange plus

With an interchange plus provider, you pay the interchange fees to your provider for handling the transaction, as well as a markup cost.

Flat rate

All transaction fees charged by a flat rate provider are the same, no matter the type of transaction. Payment aggregators like PayPal and Square mainly use this model.

Acquiring bank alternatives (payment aggregators)

Instead of setting up a merchant account with an acquiring bank, you can also turn to "payment aggregators." These are institutions like PayPal, Stripe, and Square. If you use Shopify, it acts as a payment aggregator.

Shopify and Stripe are the same company, but Stripe is just a payment aggregator that can interact with online shops, while Shopify is an eCommerce platform with a payment system called Shopify Payments.

These businesses aim to be all-in-one credit card processing solutions.

The benefits of payment aggregators include:

  • No need to set up a merchant account to accept payment from credit cards
  • No hidden fees and easy-to-understand flat fees
  • You don't need to make a long-term contract
  • Sign-up is simple

However, there are downsides:

  • Even minor suspicious activity can lead to account holds
  • Slow processing of funds
  • Transaction limits

Payment aggregators are better for low-volume, low-risk businesses.

Ways to accept credit card payments online and in person

Your customers' credit card information has to get to your processor somehow. Here are  three ways that can happen:

Point-of-sale system

When you choose your point-of-sale (POS) system, choose wisely. This system will handle everything from reading bar codes to issuing refunds and has to be easy enough for your employees to use every day.

The POS you choose needs to integrate with your payment processing partner if they're not providing your card reader equipment.

Look for reasonable hardware and software costs, familiarity with your business type, responsive service and support, expandability, and a solid reputation.

Credit card payments online

When your business handles purchases online, you'll also need to accept credit cards online. If you have a merchant account already, you're already set. Otherwise, Square, Stax, and PayPal can allow you to accept credit card payments online.

One of the benefits of selling through an outside eCommerce website like Shopify is that accepting online payment doesn't even require a PayPal button on your website. Credit card payments are handled automatically by the platform.

Mobile credit card payments

To offer customers anytime, anywhere service, a mobile credit card POS system is an excellent option.

For craft vendors at fairs, street performers, anyone who wants to ring up a customer when a cash register isn't handy, merchant services providers like Square offer a credit card reader that works with mobile devices.

What about debit card payments?

The process for debit cards is not different, at least for the customer. As the merchant, you will have to pay a fee for debit card payments, just as you would with credit cards.

The only difference is that the customer's issuing bank checks there are sufficient funds in the customer's bank account.

The two different methods for debit card transactions are:

PIN transactions

The customer enters their personal identification number (PIN) for these transactions, which routes the transaction through the PIN network, incurring transaction fees from the network operators.

Signature debit transactions

As an alternative to PIN transactions, you can offer signature debit transactions. The customer signs your credit card reader pad just as they would with a credit card.

As a general rule, PIN transactions incur lower percentage fees and higher transaction fees, making them a better choice for large sales.

Getting the best credit card payment rates as a small business owner

So let's say you've decided on your merchant account, merchant service provider, credit card processing system, payment processing company, and POS. You want to start accepting credit card payments. Before you sign up for all these services, know this: You can negotiate your rates.

Credit card processing fees aren't set in stone. Credit card processors want to do business, and they would rather lower a couple of prices if it means they get to process more credit card payments and earn some money.

When making your credit card processing choice, get quotes from multiple vendors.

Cheapest processing

If you're a small business trying to get ahead and you want the cheapest options, you might consider these providers:


You've read this name already, and for a good reason. With Square, you get low prices:

  • In-person credit card payments: 2.6% + 10 cents for every transaction
  • E-Commerce: 2.9% + 30 cents
  • Card-not-present: 3.5% + 15 cents

You also get a mobile-friendly card reader option for in-person payments.


Stax is excellent if your business has high-volume sales, even if each sale is for a small amount of money.

  • Flat fee subscription: 99$ per month starting price
  • In-person payments: Interchange fees + 8 cents
  • Keyed-in transactions: Interchange fees + 15 cents

Stax also offers customers custom branding and excellent 24/7 support.


If you're a brick-and-mortar retailer, there are better options. But if your business operates exclusively through web hosting services, Stripe may be up your alley.

  • Online payments: 2.9% + 30 cents
  • In-person: 2.7% + 5 cents

Stripe offers flat rate pricing and no subscription fees. However, they don't work with high-risk merchants.


Just about every online shop uses PayPal, so you can have confidence that you're working with a stable, reputable company.

  • Online purchases: 2.9% + 30 cents
  • Keyed-in transactions: 3.5% + 15 cents
  • Swipe/chip transaction: 2.7%

PayPal does offer a card reader for brick-and-mortar shops.  What they don't provide is 24/7 phone support.

Credit card processing mistakes to avoid

Just because you can accept credit cards, that doesn't mean you can process them. Make sure not to:

  • Run your personal card through your merchant account
  • Let other people or businesses use your card reader for their transactions
  • Gives cash refunds for credit card sales
  • Allow cashback on a credit card

These practices could terminate your account.

Beware of fraud

Unfortunately, where there's money involved, there are scammers. Avoid scammers by identifying their methods. To minimize risk, be on the lookout for the following:

"Free" merchant accounts

You might see ads for "free merchant account!" on Google. Unfortunately, there's no such thing. If you want a merchant account to accept credit card payments, you're going to have to pay something, even if it's just interchange fees.

Rates that are too good to be true

When you're searching for credit card processors and find one that promises low rates on its website, those rates may be a bait-and-switch technique. If a processor advertises a 1% interchange fee, remember that VISA charges 1.51%, so there's no way that rate is possible.

"Free" credit card machines

If a processing company offers you free machines, you're going to pay for them somehow. Usually, this is done by charging higher rates to cover the costs. Business owners who see the word "free" get excited, but that word should make you wary.

Processing credit cards... for free!

Credit card processing is never free. Your business will have to pay for it, but you can find companies that process credit card payments for less money than others if you do your research.


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