For most businesses, accepting credit card payments is a necessity. Credit card acceptance opens up a vast customer base: 4.3 billion Visa cards were circulating worldwide in 2023. Businesses that accept credit cards can also tap into advanced data analytics that can help inform business decisions while taking advantage of advanced fraud detection and prevention tools that credit card processors provide.

Below, we’ll cover the key details of accepting credit card payments as a small business, including the types of card payments and best practices for setting up and maintaining payment processing systems.

What’s in this article?

• Types of credit card payments
  
• How credit card processing works
  
• How to accept credit cards as a small business
  
• Credit card payment best practices for small businesses
  

Types of credit card payments

Not all credit card payments use the same payment mechanism. As technology advances, customers have more options for using credit cards.

Swiped transactions (magnetic stripe)

This method involves swiping a card through a card reader that reads the magnetic stripe on the back of the card. This type of transaction, used in point-of-sale (POS) systems, has become less popular because of security concerns.

• Data transmission: The magnetic stripe contains data that includes the cardholder’s name, the account number, the card expiration date, and a security code. When a customer swipes their card, the reader captures this data to initiate the transaction process.

• Security aspects: Swiped transactions are considered less secure because of the static nature of the data on the magnetic stripe, which makes it susceptible to cloning and fraud.

Dipped transactions (EMV chip cards)

EMV (Europay, Mastercard, and Visa) chip cards are dipped into a reader. The chip communicates with the terminal to authenticate the transaction. This transaction type is standard in many regions, especially where there are stringent security measures for card-present transactions.

• Data transmission: The chip generates a unique transaction code for each payment.

• Security aspects: The dynamic encryption makes it difficult for fraudulent actors to replicate the card’s data, which greatly reduces counterfeit card fraud.

Tapped transactions (contactless)

Contactless transactions use near-field communication (NFC) or radio frequency identification (RFID) technology, which allows the card to be tapped on a reader without direct contact. This transaction type is popular in environments that prioritize speed and convenience, such as retail and public transportation.

• Data transmission: Similar to EMV transactions, contactless payments transmit data via encrypted signals, providing a unique code for each transaction.

• Security aspects: Contactless transactions provide a high level of security through encryption and by generating a unique code for each transaction.

Digital wallet transactions

Digital wallets (e.g., Apple Pay, Google Wallet) store credit card information on a mobile device, letting customers make payments through the device using NFC technology. This type of transaction is increasingly popular in online and in-store transactions for its convenience.

• Data transmission: When a payment is initiated, the digital wallet creates a tokenized transaction, substituting sensitive card details with a unique digital identifier.

• Security aspects: Digital wallet transactions achieve a high level of security through tokenization and biometric verification (e.g., fingerprint, facial recognition) on the user’s device.

Online and card-not-present (CNP) transactions

Card-not-present transactions refer to online or phone purchases in which the card is not physically presented to the business. This type of transaction is used for all ecommerce, telephone orders, and any remote payment scenarios in which the business cannot physically verify the card or cardholder.

• Data transmission: The customer enters their card details manually, and these are transmitted to the business for processing.

• Security aspects: CNP transactions carry a higher risk of fraud because the card and cardholder are not physically present. Advanced security measures such as two-factor authentication and Secure Sockets Layer (SSL) encryption are recommended.

How credit card processing works

Credit card processing is facilitated by a network of financial entities and technologies that work together to authorize and settle payments. The process is outlined below.

• Initiation: When a customer makes a credit card purchase, the transaction is initiated through a physical card swipe, dip, or tap or via digital means (e.g., entering card details online). The business’s POS system or online payment gateway captures the transaction details, including the card information and purchase amount.

• Authorization: The transaction details are sent to the business’s payment processor, which routes the information to the card’s issuing bank via the relevant card network (e.g., Visa, Mastercard). The issuing bank receives the transaction request and performs several checks, verifying the card’s validity, available funds, and any fraud risks. If the transaction is approved, the issuing bank sends an authorization code back through the network to the business, indicating the funds are available and have been earmarked for this transaction.

• Batching: At the end of the business day, the business sends all approved transactions in one batch to their payment processor. Batching is the process of compiling all the day’s transactions for simultaneous processing.

• Clearing and settlement: The payment processor forwards the batched transactions to the card networks, which route them to the respective issuing banks for settlement. During settlement, the issuing bank transfers the appropriate funds for each transaction to the business’s acquiring bank. The acquiring bank credits the funds to the business’s account minus any applicable fees. This process typically takes 1–3 business days, after which the business can access the funds.

• Fees and charges: Throughout this process, various fees are assessed by different entities involved in the transaction. These fees include interchange fees (paid to the issuing bank), assessment fees (paid to the card network), and processing fees (paid to the payment processor). The specific fee structure varies based on the business’s agreement with their payment processor, the type of card used (e.g., credit, debit, rewards card), and the nature of the transaction (e.g., in person, online).

• Security and compliance: Security protocols such as encryption and tokenization are used throughout the process to protect sensitive cardholder information. Compliance with the Payment Card Industry Data Security Standard (PCI DSS) is mandatory for all entities involved in credit card processing.

• Disputes and chargebacks: In cases in which the cardholder disputes a transaction or there is a possibility of fraud, a chargeback process might be initiated. This involves reversing the transaction and debiting the funds from the business’s account while the dispute is investigated. Businesses must respond to chargebacks with evidence to support the legitimacy of the transaction, or they risk losing the funds and incurring additional fees.

How to accept credit cards as a small business

Choose a payment services provider (PSP)

A PSP connects businesses, customers, financial institutions, and card networks to process online payments. When selecting a PSP, businesses should consider these factors:

• Market trends: Investigate trends in payment processing, including emerging technologies and customer payment preferences.

• Technical support: Examine the PSP’s level of technical support; 24/7 support, responsive customer service, and access to technical expertise can swiftly resolve issues and maintain business continuity.

• Customization and scalability: Evaluate whether the PSP allows for customization to fit your business needs and whether it can scale with your business, handling increased transaction volumes and expansion into new markets.

• Customer and expert opinions: Engage in forums, reach out to other businesses that use the PSPs, and seek expert advice.

• Available features: Examine each PSP’s features in detail. Do they have multicurrency support or reporting tools? Is the interface user-friendly? Can it integrate with your accounting software or customer relationship management (CRM) system?

Once you settle on a PSP, negotiate terms. Ask about reducing fees, especially if your business processes a high volume of transactions, and inquire about any hidden costs or potential for fee reductions over time.

Set up a merchant account

A merchant account is a specialized bank account that lets a business accept credit and debit card payments. It acts as an intermediary, holding funds from card transactions before transferring them to the business’s bank account. Some PSPs, such as Stripe, bundle the merchant account with their services, eliminating the need for businesses to establish their own merchant account. This can simplify the process and reduce administrative burdens. If you do need a merchant account, here are some points to consider:

• Business model alignment: Look for a provider that understands your business model. Finding a good fit can lead to more favorable terms and streamlined operations.

• Application preparation: When applying for a merchant account, prepare a comprehensive business case including your business plan, financial health, projected sales volumes, and fraud mitigation strategies. This demonstrates to merchant account providers that you’re a responsible partner and can help you obtain more favorable terms.

• Approval factors: Know what factors influence the approval of your application, such as credit history, industry type, and sales volume. Address potential red flags before they become issues.

• Future needs: Consider how changes in your business size or model might affect your merchant account needs and confirm there’s flexibility to adapt to these changes.

Integrate a payment gateway

A payment gateway is a technology that businesses use to accept debit or credit card purchases from customers. It facilitates the communication process between the business’s website and the acquiring bank and securely transmits sensitive payment information. When choosing a payment gateway, businesses should consider the following factors:

• Security features: Assess the payment gateway’s security features, including encryption and tokenization.

• Ease of integration: Consider the complexity of integrating the payment gateway with your systems. A simpler integration can reduce costs and minimize disruptions to your operations. Work closely with your web development team or an external expert to assess the technical integration, focusing on aspects such as application programming interface (API) connectivity, data encryption, and error-handling mechanisms.

• Unified commerce benefits: Look for PSPs with unified commerce solutions that can connect your in-store, mobile, and online sales channels. This creates a holistic view of customer interactions and enables better service and targeted marketing.

• User experience: Look for an intuitive and straightforward payment process that minimizes the number of steps required to complete a transaction and works across mobile and web platforms.

• Performance: Conduct thorough testing that includes scenarios such as transaction failures, refunds, and chargebacks to confirm the system can perform under a variety of conditions.

Acquire hardware and software for in-person transactions

When selecting hardware and software for in-person transactions, consider these factors:

• Hardware considerations: When selecting hardware for in-person credit card transactions, consider durability, ease of use, compatibility with different card types (e.g., chip, magnetic stripe, NFC), and battery life for mobile devices.

• Online system integration: In-person transaction systems should be capable of fully integrating with your online systems, offering real-time data synchronization and a unified view of customer activity.

• Ongoing support: Look for service providers that have ongoing support and training for the hardware and software for minimal downtime and quick resolution of any issues.

• Comprehensive solution evaluation: Consider the hardware and software environment. This includes how well the components integrate with each other, how easy it is to update software, and the availability of features such as inventory management or customer loyalty programs.

• Data synchronization: Look for a solution that provides real-time data synchronization across all channels, including sales data, inventory levels, and customer information.

• Future-proofing: Choose hardware and software that are future-proof, meaning they can easily adapt to new payment methods, comply with upcoming regulations, and integrate with evolving technology.

Compliance and security considerations

Engage in the following security and compliance practices to stay up to date with regulatory requirements and industry standards.

• Regular compliance updates: Create a schedule for regularly reviewing and updating your compliance practices. This includes staying informed about changes in PCI DSS standards and implementing necessary changes in a timely manner.

• Incident response plan: Develop a comprehensive incident response plan for potential security breaches. This plan should include steps for containment, investigation, notification, and recovery, along with roles and responsibilities for your team.

• Continual employee education: Establish an ongoing education program for employees, focusing on security best practices, new threats, and compliance updates. Regular training can reduce the risk posed by human error and help maintain a culture of security awareness.

Credit card payment best practices for small businesses

Advanced security measures

• End-to-end encryption (E2EE) and tokenization: Beyond basic PCI DSS compliance, E2EE and tokenization keep cardholder data encrypted at every point in the transaction process, reducing the risk of data breaches.

• Multifactor authentication (MFA) for transactions: Implement MFA for online transactions, especially for high-value purchases or changes to account information. This adds a layer of security and reduces the risk of unauthorized access.

• Regular security audits and penetration testing: Conducting thorough security audits and engaging in regular penetration testing help to identify vulnerabilities in your payment processing system and fix them before fraudulent actors have an opportunity to exploit them.

Payment processing

• Dynamic currency conversion (DCC): Offer DCC to international customers so they can see prices and make payments in their local currency. This can improve the customer experience and potentially increase sales from international markets.

• Intelligent routing: Use intelligent routing to select the best payment gateway based on factors such as transaction success rates, processing fees, and the card’s issuing bank. This can boost approval rates and reduce costs.

• Failover mechanisms: Implement failover mechanisms that automatically reroute transactions through a secondary processor if the primary one fails, ensuring continuity of service and minimizing lost sales.

Customer experience

• Checkout: Enhance the checkout process by minimizing steps and reducing friction, especially on mobile devices. Consider options for one-click purchasing and storing customer payment information for future transactions.

• Personalization: Use the data gathered from payment processes to personalize the shopping experience. This can include customized offers or tailored recommendations based on purchase history.

• Communication: Keep customers informed about the payment process, providing clear instructions and immediate feedback on the transaction status. Transparent communication can reduce chargebacks and strengthen customer trust.

Financial management

• Interchange fees: Get to know the factors that influence interchange fees, and implement best practices to qualify for the lowest possible rates.

• Chargebacks: Develop a comprehensive strategy for managing and disputing chargebacks. This should include maintaining detailed transaction records, providing excellent customer service, and using tools such as address verification service (AVS) and card verification value (CVV) checks.

• Cash flow: Use insights from your payment processing to better manage your cash flow. Analyzing the timing of settlements and reconciling them promptly can help you forecast and manage your finances more effectively.

Continual improvement and adaptation

• Industry trends: The payment industry is constantly evolving. Stay informed about the latest technologies, regulatory changes, and customer payment preferences to adapt your strategies accordingly.

• Feedback loops: Establish mechanisms to gather feedback from customers and internal stakeholders about the payment process. Use this feedback to continually refine and improve your payment strategies.

• Staff training: Train your staff on the most up-to-date payment processing security protocols and best practices. An informed team can provide better service to customers and help mitigate risks.