Credit Card Payment Processing

What is a Merchant Account?

A merchant account is a type of bank account that allows businesses to accept payments via credit and debit cards. It is a fundamental part of the payment processing system, facilitating the transfer of funds from your customer’s card to your business's account.

In simple terms, a merchant account acts as a middleman, temporarily holding the funds from card payments before they are deposited into your business's regular bank account. It is necessary for businesses that want to process card payments securely and efficiently.

Why Do You Need a Merchant Account for Your New Store?

1. Accept Credit/Debit Cards: Without a merchant account, you can't process payments from customers using credit or debit cards, which are widely used today. This means you'll miss out on a large portion of potential sales.

2. Secure Payment Processing: A merchant account provides secure payment processing, ensuring that both you and your customers are protected from fraud. It complies with PCI DSS (Payment Card Industry Data Security Standard) to keep transactions safe.

3. Convenience and Efficiency: A merchant account allows you to streamline your sales and transaction processes, making it easier to accept payments at the POS (Point of Sale) terminal, via online sales, or through mobile payments.

4. Flexibility in Payment Methods: With a merchant account, you can accept a variety of payment methods, including credit cards, debit cards, mobile wallets (like Apple Pay or Google Pay), and even installment payments, if offered.

What is the Process for Credit Card Payment Processing with Your Point of Sale (POS) Software?

The process of credit card payment processing involves several steps:

1. Customer Makes a Payment:

   • The customer swipes, dips, or taps their credit card (or uses another method like mobile wallets) at the POS terminal.

   • If it's an online transaction, they enter their card details on the payment gateway page.

2. Authorization Request:

   • The POS system sends an authorization request to the merchant account provider (usually a payment processor like Stripe, Square, or your bank) to verify that the customer has sufficient funds or credit.

3. Verification and Approval:

   • The payment processor sends the request to the customer’s bank (the issuing bank) for approval. The bank checks if the customer’s card is valid and if there are enough funds available.

   • If everything checks out, the payment is approved, and the customer’s bank sends an approval code back to the POS system.

4. Authorization and Hold:

   • The approved amount is held by the issuing bank, and a transaction confirmation is sent to your POS system.

   • A receipt is generated for the customer, and the transaction is processed in the system.

5. Funds Transfer:

   • After the authorization, the payment processor completes the transaction and transfers the funds from the issuing bank to your merchant account. This can take a few hours to a couple of days, depending on the processor and type of transaction.

6. Settlement:

   • At the end of the business day (or according to your settings), the processor settles all approved transactions, transferring the funds from your merchant account into your business’s bank account. This process is called a settlement.

How Do I Get My Money, When, and What Are the Costs?

1. Getting Your Money:

   • Once the payment is processed, your merchant account will hold the funds temporarily. After the transaction is settled, the funds are transferred from your merchant account to your business bank account.

   • Typically, this happens 1-3 business days after the transaction is processed, though some payment processors may offer next-day deposits for an extra fee.

2. Costs Associated with Merchant Accounts: Merchant accounts come with a few types of fees. These vary depending on the provider, but common fees include:

   • Setup Fee: Some providers charge a one-time fee for setting up the merchant account, although many are waived or included in the service.

     • Cost: Typically $0 - $500.

   • Transaction Fees: This is the fee you pay each time a customer makes a payment. It usually includes a percentage of the transaction amount, plus a fixed fee per transaction.

     • Cost: Typically 1.5% - 3.5% of the transaction amount + $0.10 - $0.25 per transaction.

   • Monthly Fees: Some providers charge a monthly fee for using their services.

     • Cost: Typically $10 - $50 per month, depending on the service plan.

   • Chargeback Fees: If a customer disputes a charge, the payment processor may charge you a fee.

     • Cost: Typically $20 - $40 per chargeback.

   • Early Termination Fees: If you cancel your contract with the merchant account provider before the agreed-upon term, you might face a penalty.

     • Cost: $100 - $500.

   • PCI Compliance Fees: You may need to pay for compliance with PCI DSS standards.

     • Cost: Typically $10 - $50 per month.

3. Other Potential Costs:

   • Payment Gateway Fees: If you’re processing payments online, you may need to use a payment gateway, which could have additional fees for each transaction.

   • Hardware Costs: If you need POS hardware (e.g., card readers, terminals, receipt printers), these can add to your startup costs.

How Can I Save Money on Merchant Account Fees?

1. Compare Payment Processors:

   • Shop Around: Different payment processors offer different pricing models and fee structures. For example, some processors may charge flat fees, while others charge based on volume or transaction type.

   • Negotiate: If you're processing large volumes, you might be able to negotiate better rates with the payment processor.

2. Choose the Right Pricing Model:

   • Interchange Plus: This is a transparent pricing model where you pay the cost of the card transaction (interchange fees) plus a fixed markup. This may be a better option for businesses with high volumes of transactions.

   • Flat-Rate Pricing: This pricing model charges a single, predictable fee per transaction, making it easier for small businesses to budget.

3. Consider a POS with Integrated Payment Processing:

   • Some POS systems, like Square or Shopify POS, offer integrated payment processing at low or no fees. These options can help save money on third-party payment processors and often include free or low-cost hardware.

4. Avoid Chargebacks:

   • Chargebacks can be costly, so it's important to handle transactions securely, provide clear receipts, and resolve customer issues quickly to avoid disputes.

5. Batching Transactions:

   • Some providers charge transaction fees each time an individual sale is processed. Batching transactions (settling multiple transactions in one go) may help you save on fees.

6. Keep Your Monthly Fees Low:

   • Choose a provider with no or low monthly fees, and avoid unnecessary features you don’t need. Many POS systems have plans with no monthly fees for smaller operations.

7. Choose Low-Cost Hardware:

   • Some POS systems come with free or low-cost card readers and other hardware. For example, Square and SumUp offer free card readers with their payment processing services.

Conclusion

Having a merchant account is crucial for processing credit and debit card payments at your new store. It allows you to accept customer payments securely and ensures funds are transferred to your business account. The payment processing process involves authorization, verification, and settlement of funds, with fees like transaction costs, monthly fees, and chargebacks potentially impacting your bottom line. By comparing providers, choosing the right pricing model, and optimizing your setup, you can save on costs and maximize your store's profitability.