Chances are, if you’re running a retail business, you accept some form of non-cash payment. According to the Pew Research Center, 41% of adults make no purchases using cash in a typical week. To keep up, business owners are obliged to use and understand the role of payment processors.
What is a payment processor?
A payment processor is a vendor that manages the logistics of accepting credit and debit card payment methods. Payment processors shuttle card data from whatever point customers enter their credit card details—card readers, checkout webpages, or even specialty hardware attached to a smartphone—and the various financial institutions that participate in the transaction.
Payment processors also play a vital role in securing online payments. Not only do they ensure customer bank accounts have adequate funds or that credit cards have adequate lines of credit, they also safeguard customers’ sensitive financial information, so it can’t be accessed by nefarious third parties.
How does a payment processor work?
The payment processor is the unseen actor that finalizes transactions when a business accepts card payments by moving funds from the customer account to merchant account—often in the blink of an eye. Here’s how that process works:
1. Buyer gives card information
A customer provides the merchant with their card information. This might be done at a card reader in a brick-and-mortar store, on a payment page on a website, via mobile hardware, or through some other payment method.
2. Payment infrastructure handles the request
The customer’s card information is then sent through a payment gateway to the payment processor. The processor then formally initiates the transaction by sending the information to the bank network (for debit) or card network (credit), such as Mastercard, Visa, or American Express, for authorization. The bank or card network then informs the payment processor as to whether the payment has been authorized or declined. If the payment is authorized, the merchant completes the transaction with the customer. If the payment is declined, the merchant informs the customer, and the customer may try an alternate payment method.
3. The money moves
Once the transaction is authorized and complete, the payment processor informs the bank or credit card company that issued the customer’s card (known as the “issuing bank”) that it must send the funds to the merchant’s bank (known as the “acquiring bank”). The funds are transmitted to the merchant’s account (set up by a merchant services provider), sometimes immediately or within a few business days, depending on the payment provider and the type of acquiring bank account. The merchant is then free to move those funds to their business’s own bank accounts.
Top 5 payment processing companies
There are a good number of payment processors on the market for any business owner to select from. Five of the top services include:
Square is one of the more popular payment processors on the market—you may recognize its signature white card terminals on the counter of your favorite coffee shop or the thumb-sized version plugged into someone’s smartphone. Its interface is clean, simple, and easy to understand, lending to its favorability. Square charges 2.6% plus 10¢ per in-person purchase, and 2.9% plus 30¢ per online transaction. Pricing may vary slightly between free and subscription models of Square’s software. The company provides one free card reader when you sign up for a plan; after that, hardware costs between $10 and $149.
2. Payment Depot
Payment Depot clients pay a monthly membership fee of $79. When a purchase is made, Payment Depot then charges an additional flat fee, with no markup on interchange rate. Flat fees range from 15¢ per transaction for the least expensive monthly plan with the fewest features to 7¢ for the most expensive plan. Payment Depot is also usable on a variety of hardware variety of hardware payment terminals or point-of-sale systems or point-of-sale systems.
Stripe is among the more highly customizable options for payment processors on the market. It’s specifically designed for web developers who can adjust the product’s APIs to best suit their business’s needs. With Stripe, you can accept credit cards, debit cards, and even some cryptocurrency payments in more than 130 different currencies. It charges 2.9% plus 30¢ per successful card transaction. Stripe also integrates into your Shopify store.
PayPal is a popular option for business owners looking for a low-volume payment processor—that is, a processor that doesn’t handle a lot of transactions on a daily basis. Its startup costs are low (no monthly fee, no minimum balance), and it’s used all over the world, in more than 200 countries and in 26 currencies. PayPal offers integrations directly with your ecommerce site. PayPal charges 2.9% plus 49¢ per transaction in the US for standard credit and debit card payments, 2.29% plus 9¢ per transaction in the US for QR code transactions, and 3.49% plus 49¢ per transaction in the US for all other commercial transactions, including Paypal Checkout.
5. Payline Data
Payline Data gives merchants the ability to accept payments online, in-store, and through a mobile app. The company also provides merchants with the opportunity for cash advances, access to customer insights, and a handy QuickBooks integration. Its customer service offerings are also well reviewed. Its contracts are month to month and the company charges interchange plus 0.4% and 10¢ per card-swipe transaction, and plus 0.75% and 20¢ per keyed-in transaction.
What to consider when choosing a payment processor
When choosing a payment processor, consider the fee structure and whether you will need to process payments in international currencies. As you vet payment processors, consider the following:
- Is there an initiation or startup fee? An annual fee after that?
- Are there fees per transaction, with a monthly subscription too?
- Will you need to purchase or lease credit card processing equipment, such as in-store terminals?
- Is there a gateway fee to connect to your merchant account?
- Will you be liable for fees in the event of a credit card chargeback?
- Will you have to pay a fee to verify customer addresses or billing ZIP codes?
- Will you need to pay a termination fee if you decide to stop using the processor?
- Will you need to accept payments from abroad?
If your business accepts card payments, you need a payment processor. But there’s no one-size-fits-all service. As evidenced above, there are many models and products to choose from, each tailored to fit the needs of a variety of businesses: from mom-and-pop corner stores to massive ecommerce retailers.