Understanding Credit Card Payment Processing for Small Business Owners

There are over 609 million credit cards in circulation today, with an estimated 21.7 billion credit card transactions taking place each year. Credit cards make up a considerable segment of consumer transactions each year. If you want to compete in today’s economy you need to accept one or more forms of credit card payment, or that’s money that is literally walking away from your business. Unfortunately for many small and medium size businesses credit card processing companies are notorious for nickel and diming small business accounts to death, making it extremely difficult to compete in today’s credit based economy.


In order to make sure you aren’t getting killed at the transaction terminal, and to keep the majority of your profits in your pocket you first need to understand exactly how credit card payment processing works. By understanding the steps and average costs associated with credit card processing you will be better prepared to negotiate fair terms for payment processing that will allow your business to cash in on credit card transactions without turning around and giving away the lions share of your profit to an overly greedy credit card processor or bank.


The first thing to understand about credit card processing is how the process works. When a consumer makes a purchase using a credit card they are essentially writing a promissory note, much like the concept of checking. However unlike checking, this electronic promissory involves a third party – the card issuing bank. Credit cards are issued by banks to consumers whom the bank feels will pay back the credit line with interest. In fact, banks bank on consumers charging up considerable amounts in credit card purchases and taking a long time to pay off the balances resulting in more and more interest for the bank.


A credit card payment processing company acts as an intermediary between you and the bank. The credit card processor is a sort of facilitator that manages each stage associated with approving and reimbursing a merchant for a transaction. So when a consumer makes a credit card purchase the first thing that happens is an inquiry travels from the payment gateway through what is known as a credit card interchange and ultimately to the issuing bank. The issuing bank either approves or denies the transaction and the information travels right back to the terminal at which the inquiry was made. This all happens rather instantaneously. Theoretically you could perform all these actions by phone, but it would take multiple phone calls at a matter of minutes apiece to perform each transaction making each sale you ring into your cash register take the better part twenty minutes – not a very efficient way to do business. Because you want instant confirmation, you pay the credit card processing company a fee to handle this process for you on the spot.


The amount of the transaction gets held essentially in escrow by the processing company while the transaction is completed. Once a given period of transactions has completed (say at the end of the business day) the merchant (you) batches out essentially requesting all the credit card funds be transferred into their bank account. This also contributes to the processing fees.


Because small businesses can’t guarantee a high volume of transactions like major corporations, credit card processors have long penalized them for the perceived lack of business. These penalties came in the form of higher rates and nasty monthly minimums. A monthly minimum basically stated that if a small business merchant did not process enough transactions to cover a predetermined amount in fees the card processor could collect the difference directly from the merchant. In other words, they wanted you to pay them to take your money! Incorrigible. However, thanks to advances in technology and the internet, credit card processing has evolved. While many old guard credit card processing companies still try and charge for things like monthly minimums and equipment rentals, small businesses now have a better option.


If you are looking for a way to get back some of those profits and still maintain the ability to accept credit cards there are companies out there that do not charge monthly minimums or rental amounts on equipment. These small business friendly credit card processors understand that revenue for small businesses often fluctuates with the seasons and that just because you don’t generate hundreds of thousands of dollars in transactions per day it doesn’t mean you are not a valuable customer. Working with a small business friendly credit card payment processing company like practical ecommerce is a better way for small businesses to accept credit cards and still maintain the lions share of your profits. In short, don’t settle for getting killed at the terminal anymore. If your credit card payment processing company doesn’t act like they want or value your business switch to someone who not only values but understands what it’s like to be a small business competing for customers today.

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