Despite the proliferation of new payment options, credit card transactions still reign supreme: 79% of the US population own at least one credit card. An MIT study indicated customers are willing to spend up to 100% more when paying by credit card.
Many small business owners can make it easier for consumers to pay by linking up with a credit card processor. Yes, these payment processors charge transaction fees, but they may be offset with the larger transaction amounts that often come along with accepting credit cards.
How do credit card payments work?
When a customer swipes, inserts, or taps their credit card at your physical payment terminal, your payment processor exchanges a series of messages with a customer’s financial institution, which chooses whether to approve the payment.
A payment processor is the conduit between the merchant (you) and the credit card company. In exchange for providing this service, the payment processor takes a cut from your credit card sales—usually between 2% and 3%—and may also charge a small flat fee for each transaction.
If the payment is approved, the funds transfer to your payment service provider. After one to two business days, the balance (minus fees) transfers to your business checking bank account, and the money is yours. Credit card companies also typically charge merchants fees of 2.4% to 2.9% of a purchase, plus an additional flat fee for each transaction. They also charge feeds for credit card chargebacks, which vary depending on the company.
How to accept credit card payments
Before you can accept credit cards, you must set up a bank account. Small business checking accounts will allow you to receive your income from credit card companies. From there, getting set up to receive payments depends on where the commerce is happening: at a brick-and-mortar shop, online, or on the move.
How to accept in-store credit card payments
In-store payments take place inside a traditional retail store, restaurant, or office. If your business operates in a physical location, you will need the following services and equipment in order to accept credit card payments.
- Payment processor. This is a vendor that actually processes transactions when your client pays with a credit card. Examples include Stripe and Square. You can also register with a merchant account provider like Payment Depot or Stax. These services are like payment processors, but their regulations permit them to serve high-risk businesses (like telemarketing) or companies that need to process a vast number of transactions in a single day. Due to their more complex nature, merchant accounts can be overkill for most small business owners. You can also forego payment processors and merchant accounts by conducting business via Shopify Payments. The platform does not require you to use payment processors or merchant accounts to get paid.
- Point-of-sale system. This is a hardware and software package for merchants that offers physical and computing tools required to complete payment transactions. The software component tracks your sales, monitors your inventory, and keeps you current on tax remittances. The hardware component can include mobile card readers, fixed card readers, and bar code scanners. These packages are sold by payment service providers like Shopify, PayPal, Square, Clover, Toast, and QuickBooks. You typically purchase the hardware and pay a monthly fee for the software services.
- Payment terminals. A payment terminal is a physical device that can process credit and debit card transactions. Some merchants get their payment terminals as part of a point-of-sale (POS) system. If your POS service does not provide a payment terminal, you can purchase one a la carte. You’ll use this device to handle all physical credit card payments, including those with magnetic strips, EMV chips, and tap-to-pay RFID chips.
How to accept online credit card payments
Online credit card payments, also called ecommerce payments, cover financial transactions made over the internet. The transactions on your Shopify ecommerce site count as online credit card payments.
The online payment system functions in largely the same way as the brick-and-mortar payment system. Payment processors still transmit financial information, and customers’ banks and credit card companies either approve a transaction or reject it. As a seller, you can still expect money from these sales to hit your bank account in one to two business days.
To implement this type of transaction, you will need the following:
- Payment processor. Once again, you will need a payment processor or payment service provider, and you can turn to the same vendors you’d use for brick-and-mortar sales.
- Payment gateway. Online purchases run through a payment gateway. This functions much like a point-of-sale payment terminal, but is a piece of software specifically designed to handle payments over the internet. POS software subscriptions, including Shopify’s core offerings, offer payment gateway services.
How to accept mobile credit payments
Mobile credit payments are handy if you move business from one location to another. If you sell food at different farmers markets, or t-shirts at different concert venues, you will want to set up a mobile payment system.
Mobile credit card payments work essentially the same way as brick-and-mortar or online payments. Here’s what you’ll need:
- Point-of-sale app. People routinely use mobile payment apps like Apple Pay, Google Pay, PayPal, and Venmo for personal payments to transfer money to friends. These services also work for retail sales. For retail-only, there are options from Square, Clover, and the Shopify app, which offer industry-leading functionality.
- Point-of-sale hardware. To accept credit card payments on the go, you’ll need a device that can process credit card chips and tap-to-pay transactions from a mobile device. Think of this hardware as the portable equivalent of the payment terminals in retail stores. These card readers link to your tablet, smartphone, or computer, and let you process payments on the spot. For Shopify users, there is the Shopify Tap & Chip Card Reader for iOS devices, which can run transactions via chip inserts or tap to pay.
Credit cards vs. debit cards: What’s the difference for merchants?
Merchants can charge both credit cards and debit cards using the same point-of-sale software and hardware. Debit card transactions draw money directly from a customer’s bank account. Large banks may only charge a rate of 0.05% plus 21¢ per debit card transaction. Your payment processor may add an additional fee on top of this, but as a merchant, you will still come away paying less than you would for a credit card transaction.
Credit cards let consumers spend more money than they actually have in their bank accounts, and this leads to higher purchase volumes for retailers. Many merchants welcome credit card payments because the high shopping cart totals offset the extra fees charged by credit card companies.
By accepting credit cards, your small business will meet the demands of many customers who enjoy the convenience of paying with a card. Shoppers routinely choose cards over cash when making their biggest purchases. Yes, you will pay fees on each credit card purchase, but you may benefit from the larger purchase amounts that come along with credit card payments.
Accepting credit card payments FAQ
How do I receive payment from a credit card?
You will need to have a business checking bank account and a payment processing account. You can opt for traditional payment processors like Stripe and Square or an all-in-one payments system like Shopify Payments. If you sell goods and services in person, you will also need hardware (like a card reader) that lets you process credit card transactions and tap-to-pay transactions from a mobile device. Once your hardware and payment services are set up, customers can start paying you via credit card. Depending upon the vendors you choose, the money from those transactions usually hits your bank account in two to four business days.
How do I accept a credit card payment manually?
To manually accept a credit card payment, you will need a credit card reader, like the Shopify Tap & Chip Card Reader for iOS devices. Such a device connects to your computer, tablet, or smartphone via Bluetooth. It allows secure, encrypted payments that run through a payment processor and eventually to your bank account.
How do I accept a credit card payment without a physical card?
Your customer doesn’t need to present a physical card in order for you to accept credit card payments. Using your payment service provider, you can set up card-not-present (CNP) payments that run through a web browser. You can then manually enter credit card information rather than tapping or inserting a plastic card. You can also accept in-app mobile payments that run on platforms like Apple Pay and Google Pay and link to users’ credit cards. Customers simply pay your business from their accounts, which link to their credit cards as a payment source.
How do I accept a credit card payment without a reader?
If you lack a physical card reader, you would be able to manually enter a customer’s card information into your payment provider’s software app. You can also have customers pay using in-app mobile payments via a platform (like Apple Pay) that is linked to their credit card. These payments then turn up in your sellers account. Or, you can process their payments through a web browser. These transactions are called card-not-present (CNP) payments.