A payment processor is a provider used by businesses to manage the back-end logistics of accepting card payments. It transfers card data from wherever customers tap, swipe or enter their card data to the payment networks – such as Visa, Mastercard, American Express and Discover – and to the banks involved in the transaction.
If your business wants to accept card payments, a payment processor is a must. Some companies, like Square, combine payment processing with it POS systems and hardware. Others, like Payment Depot, focus on payments. The best option largely depends on your company’s sales volume and payment method.
This is how payment processing works
When a business accepts card payments, a payment processor works behind the scenes to complete those transactions and transfer money from the customer’s card account to the merchant’s account. This is what the process looks like:
A customer gives his card information to the dealer. This can be done at a terminal in a store, an online payment site, or other means. The information is transmitted through the payment gateway, a payment processing portal that is sometimes bundled with payment processing services.
The payment gateway sends the information to a payment processor, which initiates the transaction by sending the information to the card network such as Mastercard or Visa for approval.
The card network informs the payment processor whether the payment request is approved.
The dealer completes the transaction with the customer.
Once the transaction is complete, the payment processor informs the bank that issued the loyalty card (the issuing bank) to send money to the merchant’s bank (the acquiring bank).
The trader gets access to the funds from the sale. This can be done immediately or within a few business days, depending on the payment provider and the type of account to which the money is being sent.
The cost of card transactions
Building, maintaining and operating the networks through which data and money flow costs money. The companies that do this work – card issuers, networks, and payment processors – bill merchants for the use of these networks and services.
The fees for each transaction are collected from the merchant’s sales by the payment processor, who takes part of them and forwards the rest to the various intermediaries. The total fee, the so-called dealer discount rate, is generally 2 to 3% of the total purchase and includes:
Interchange fees make up the majority (about three quarters) of the total fees associated with a card transaction. Card networks set the tariffs and the fees go to the issuing bank. For example, if the customer uses a Citi Mastercard credit card, the interbank fee is set by Mastercard and goes to Citi. The fee for each transaction depends on a variety of factors including the type of card used, the industry the merchant operates in, and whether the card was used in person or online. Because of the many variables, there are more than 700 interchange rates, and the differences can only be a fraction of a percentage.
Exam fees and fees are paid to the card network such as American Express or Discover. The amount owed is a percentage of gross sales for the month, with some variations for international sales, whether a transaction was paid for with a debit or credit card, and other factors.
Processor / Acquirer Fees Compensate the payment processor.
What to watch out for with payment processors
Consider these questions before you decide on a payment service provider.
Does the pricing structure make sense for your company?
The best pricing structure for your business depends on the industry, sales volume, and the tradeoffs you want to make. There are three common price types:
Interchange-plus prices consists of the exchange rate plus a defined surcharge. The markup can be a percentage, a fixed amount, or both. For example, you can pay the exchange rate plus 15 cents for all transactions.
To use: This pricing can often be cheaper than flat-rate or graduated prices, especially for companies with large sales volumes.
Disadvantage: With hundreds of interchange rates, traders are likely to experience fluctuations in their costs as interchange rates can vary from one transaction to the next.
Flat rates consists of a single rate for all transactions accepted in a certain way, regardless of the specific interbank rate. For example, you pay 2.3% plus 15 cents for personal transactions and 3% plus 30 cents for online transactions.
To use: Flat rate prices are simple and predictable.
Disadvantage: The total cost can be higher than the cost of transferring traffic, especially for companies with high sales volumes.
Tiered pricing combines elements of interchange plus and flat rate prices. The exchange rates are divided into some large groups. Payment processors assign different costs to each tier. For example, you could pay 1.7% plus 25 cents for debit cards and 3% plus 30 cents for a high-end reward card.
To use: Costs are more predictable than interbank costs, and tariffs can be more competitive than flat rates for certain types of transactions.
Disadvantage: The total cost may be higher than the cost of Interchange-Plus, especially for certain transactions that pose a higher risk to processors, such as: B. Online Payments.
Other pricing details to consider:
Some payment processors have published prices on their websites. Others only offer quote-based pricing.
A single payment processor can offer a variety of tariffs based on subscription level, industry, or sales volume.
Many payment processors charge higher fees for online transactions to address the increased risk of fraud.
Terminals can increase your overall costs. Some companies allow you to use your own tablet or phone while others have proprietary devices. Some companies allow you to buy the equipment directly or through a payment plan, while others lease the equipment.
Where do you do business?
Do your customers pay online? At a cash register? Are you taking your business with you on the road? Some payment processors like Stripe are primarily designed for e-commerce. Others, like Square, have multiple personal business hardware options. Although the differences here are more in the payment gateway than in the payment processing itself, this can be an important decision factor.
What is your branch?
Some payment processors do not provide services to businesses due to the regulatory or financial risk associated with accepting certain payments. Some of the industries that are sometimes excluded from payment processors in the terms of service include those with:
High rates of fraudulent card transactions, e.g. B. at gas stations.
High chargeback rates like infomercial or telemarketing sales.
Sales regulated by federal or state law, such as firearms or marijuana.
If your business is in such an industry, your payment processor choices may be more limited.
Payment service provider vs. merchant acquirer
The final step in the transaction process is payment. There are two types of accounts to choose from: a merchant account (provided by a merchant acquirer) or an account with a payment service provider.
When money changes hands during a card transaction, it goes from the customer’s bank (the issuing bank) to a merchant account, a bank account where the company that made the sale can access the funds received. It may take a few days for the funds to become available to the company’s account holder, although some financial institutions allow early access.
Hundreds of banks offer merchant accounts, from large banks like Chase to institutions that specialize in merchant account services like Payment Depot. Businesses of all sizes can open a merchant account, but larger companies often find this type of account to be the most cost-effective and scalable.
Payment service provider accounts
If you’re using a payment service account, like Square or toast, You are not the direct owner of a merchant account. Instead, the payment service provider maintains its own merchant account, which collects the payments for your company and many others. Your funds are transferred to a subsidiary account that you maintain with the payment service provider.
Many popular payment service providers offer features that you may not get with a merchant account, such as: B. Instant access to funds. However, since the payment service provider is ultimately the owner of the merchant account, you give up certain aspects of control. For example, if a payment service provider thinks your business is too risky, your account access may be interrupted.
How likely is it that you will switch payment processor?
Some payment processors offer no-contract relationships with no cancellation fees, while others don’t. With some services, you will own your customer data if you choose another provider in the future. with others you will not. That could mean that if you switch, for example, you have to start a new loyalty program from scratch.
Top payment processing company
Square: Good all-in-one solution
Place’s The payment processing services included in the point-of-sale system are characterized by their easy-to-understand pricing. It charges 2.5% plus 10 cents per transaction for personal transactions and 2.9% plus 30 cents for online transactions. Prices for restaurants or the free version of Square vary slightly.
Payment Depot: Good for cost-effective payment processing
Payment deposit compares its pricing structure to a Costco membership. Users pay a monthly membership fee that starts at $ 79. When a transaction takes place, Payment Depot charges a flat fee – there is no surcharge on the exchange rate. The flat fee ranges from 15 cents per transaction for the cheapest monthly plan to 7 cents for the most expensive monthly plan. Payment Depot works with a large number of terminals or point-of-sale systems.
Stripe: Good for online business
If you do most or all of your business online, it is useful to have a processor who specializes in ecommerce transactions. Stripes features a highly customizable option that also doubles as a payment gateway and merchant account. It’s also easy to use: you can customize a Stripe Checkout template and add it to your website. Stripe Checkout includes online-friendly features like real-time card validation and automatic address completion. It charges 2.9% plus 30 cents per transaction for online payments.