According to a Federal Reserve report, 32% of all payments are made using credit cards, 30% using debit cards, 16% in cash, 13% using ACH transactions, and only 3% using physical checks. The share of cash transactions, in particular, has dipped from 31% in 2016 to 16% in 2023.
Cash is fast becoming one of the least preferred modes of payment, as more and more American customers switch to digital payment options. Whether you run an online store or a brick-and-mortar one, ignoring this trend can put your small business at a serious disadvantage.
In the current landscape, accepting card and digital payments is non-negotiable—for both in-store and online transactions. As such, small businesses have a growing reliance on payment processing companies for facilitating online and in-person customer payments.
Choosing the right payment processor could make all the difference in the world to your business cash flow, customer satisfaction, and growth. In this article, we’ll explore the factors you need to consider when choosing a payment processor and see which are the best processors in the market at the moment.
Let’s get started.
Why Small Businesses Need Reliable Credit Card Processors
In 2024, the number of credit cards being used in the US rose to 1100 million—a figure that’s only expected to rise significantly in the future. Even though accepting card payments is the need of the hour, small businesses need to watch out for certain “red flags” when choosing a credit card processor. These include:
- Hidden fees: A reliable credit card processor is one that ensures transparency before onboarding a business. This means there should be no hidden fees and the processor should provide a detailed breakdown of percentages, frequencies, potential waivers, etc. associated with their credit card processing fees.
- Complex pricing structures: Complex or multi-layered pricing structures are confusing and don’t provide transparency. Reliable payment processors offer simplified pricing structures that are easy to understand and estimate, helping avoid costs which are unexpected and unaccounted for.
- Lack of customer support: There could be times when you urgently need the help of your payment solution provider (e.g., to manage chargebacks). Ideally, a payment processor must offer round-the-clock support through a wide range of communication channels including phone calls, email, and live chats. Not having access to appropriate customer support at crucial times can be frustrating and detrimental for small business owners.
Besides these red flags, you must also consider your business needs when choosing a payment processor. For instance, does the processor offer merchant services specially tailored to your industry? Does it integrate seamlessly with your existing systems like CRM or ERP? Does it support a range of payment methods including card-present and card-not-present transactions?
Likewise, if you have an international customer base, you should check if the payment processor can process payments in multiple currencies.
Given that customers increasingly favor non-cash payments, accepting them is key to gaining a competitive edge in the market. Some small businesses may perceive this as a high-tech or costly affair. However, facilitating credit card payments is sure to pay off in the long run. You’ll benefit from:
- The ease-of-use, flexibility, and customer satisfaction
- Having access to online shoppers
- Improved brand image
- Accurate business insights, forecasting, and automated reporting
- Increasing loyalty and retention
- Reduced risks of handling cash
- Faster and hassle-free transactions
- Reduced chances of non-payments
- Impulsive and higher-value purchases using credit cards
Features to Look for in a Small Business Credit Card Processor
Now that you know why you need a reliable processor, let’s look at the key features you should consider when choosing one.
1. Pricing model
Credit card processors follow several different pricing models. While most industry experts recommend interchange-plus pricing, as an entrepreneur, you must consider which model suits your business the best. Some of the most common pricing models are:
- Flat-fee pricing: No matter how many transactions you process or their amount, the processor will charge a fixed percentage as processing fees for every transaction. While flat-fee models are simpler to understand because there are no additional fees, they can cost you a lot of money if you process large volumes of transactions. Hence, this model is best-suited for businesses with low monthly sales volumes.
- Interchange-plus pricing: This is the most popular and cost-effective pricing model for small businesses. It includes two parts: non-negotiable interchange fees (set by card networks like Visa, Mastercard, Discover, etc.) and processor markup. The latter may be negotiable based on your transaction volumes, which ensures you get the best deal.
- Tiered pricing: This model has several tiers—qualified, mid-qualified, non-qualified—with increasing charges (based on the type of card and mode of payment used). The qualified rate is charged when regular cards are swiped, the mid-qualified rate applies to reward cards, and the non-qualified rate applies to premium cards, swiped or keyed in. The rates can differ from tier to tier and processor to processor, which makes this pricing model quite difficult to wrap your head around.
- Membership pricing: Membership or subscription-based flat-rate pricing is where merchants pay a fixed monthly (or annual) fee to the processor regardless of the volume of transactions they process. Sometimes, a small per-transaction fee may also be involved. However, unlike the flat-fee pricing model described above, the payment processor doesn’t take a cut from every transaction you process. This makes this option best suited for businesses that process large volumes of transactions.
2. Payment methods
Another important consideration is the payment methods your processor supports. Look for one that supports debit and credit cards, contactless payments, digital wallets (Apple Pay, PayPal, etc.), and ACH transfers. Your choice of payment processor will naturally depend on how well it caters to your customers’ preferred modes of payments.
3. Transaction fees
While choosing the right payment processor, examine and compare the transaction fees you are required to pay. Look out for any additional charges (e.g., terminal fees, monthly fees, annual fees, setup fees, chargeback fees, etc.) and confirm there are no hidden fees before zeroing in on your options.
4. Hardware and software compatibility
Your credit card processor should integrate seamlessly with your existing software and hardware infrastructure. Smooth integration means cost savings, minimal downtime, good security, and better customer experiences. So before choosing a credit card processor, find out if it works well with your credit card readers (or card terminals), POS systems, and virtual terminals.
5. Integration with accounting software and eCommerce platforms
If your processor integrates seamlessly with your existing accounting software, it can make transaction reporting easier, automatic, and error-free. This also means accurate reporting for taxation with minimal manual intervention.
Likewise, effective integration with your eCommerce platform means better control and record of both your online as well as offline sales. It can help you keep track of your transactions in one place, regardless of where the sales take place. Having consolidated data across your online and offline channels means better forecasting and strategies.
6. PCI compliance and fraud protection features
Customers are wary (and rightfully so) of sharing sensitive data with businesses. Ensuring your processor is PCI compliant and protects against fraud, therefore, is of utmost importance. Besides earning the customer’s trust, a card processor with strong security features can reduce the chances of data breaches, fraudulent transactions, and financial losses.
Top Credit Card Processors for Small Businesses
With the above considerations in mind, the following credit card processing solution providers are some of the best in the market for small and mid-sized businesses.
- Stax: One of the most reliable credit card processors, Stax offers transparent, subscription-based pricing with no hidden fees. Being equipment agnostic, its software is designed to integrate seamlessly with your accounting, CRM, and ERP platforms. It also enables businesses to use the point-of-sale (POS) hardware of their choice. Stax is PCI DSS compliant and uses tokenization to ensure payment security.
- CardX: CardX is an automated surcharging platform which enables businesses to accept online as well as in-person credit card transactions. Easy to set up with a user-friendly virtual terminal and online payment gateway, it also offers merchant training. With CardX, you can enjoy automated billing, invoicing and eCommerce integrations. Available in states where surcharging is legal, the payment processor is available in 48 states, including New York.
- Payment Depot: Best known for its transparent interchange-plus pricing, Payment Depot offers some amazing benefits for small businesses. For starters, there is no monthly fee. It also provides free software, which includes a virtual terminal and gateway. Currently available for US-based businesses, Payment Depot does not support high-risk merchants.
Credit Card Processors for Small Businesses: Special Considerations
Small businesses have unique needs and challenges when it comes to payment processing. Keep in mind the following special considerations when choosing the right credit card processor for your business.
1. Transaction fees and total processing costs
Small businesses often have a limited profit margin. So, high processing costs can have a serious impact on the bottom line and cash flow. Higher transaction fees could affect their competitiveness as they may try to offset this by raising the prices. It is also important to ensure that processing charges are predictable and transparent rather than unexpected. This allows a small business to make the appropriate and timely provisions.
2. Terms related to termination fees and cancellation policies
Some credit card processing companies demand a commitment from small businesses by getting them to sign a contract of 2-3 years and locking them in. Switching over to another payment processor means terminating the existing contract, which can attract a hefty penalty. This could deter a business from opting for a new and more suitable processor.
Startups that cannot predict their future needs can find this somewhat problematic. Small businesses must therefore be mindful of the conditions and the associated fees before committing to a particular credit card processor. As much as possible, it is best to avoid long-term financial commitments.
3. Handling of chargebacks and disputes
Chargebacks and disputes have a significant financial impact, especially on small businesses with typically low margins. Chargebacks refer to situations when customers dispute a transaction and the merchant, unable to confirm its authenticity, is required to refund them. This could mean lost revenue, chargeback fees, and, in the case of repeated chargebacks, even merchant account termination!
However, credit card processors often provide dispute resolution support, chargeback prevention tools, and analytics/reporting tools. Before choosing a credit card processor, it is, therefore, useful to find out the terms and services related to chargebacks and disputes.
4. Support for in-person transactions, mobile payments, and online payments
Needs, costs, and implications vary from one transaction to another. A robust support mechanism is necessary for all modes of payment. For in-person transactions, this would mean quick and secure acceptance of cards, while for mobile payments, merchants would want support for various payment modes like QR codes, Apple Pay, or Google Pay.
Likewise, if the bulk of your transactions happen online, you should check how well the processor integrates with your website. No matter which mode of payment your customers use, the idea is to find a payment processor that can ensure top-notch customer experience, satisfaction, and loyalty.
5. Scalability of the system for growing business needs
As your business grows in size and diversity, your payment processing needs may change. Your credit card processor should have the ability to accommodate these changing needs so that you don’t need to switch over to a new one as you grow. Some of the relevant questions to ask yourself before choosing a payment processor would be:
- Can the processor deal with high-volume sales without disruptions?
- Can it serve multiple channels?
- Does your processor provide volume discounts so costs may reduce as your sales increase?
- Does it provide multi-location support?
- How well can it integrate with a range of business systems?
Final Words
Choosing the right payment solution involves an elaborate decision-making process (or so it should be). As a small business owner, you must carefully consider several factors such as pricing, functionality, and business needs.
While the decision-making process should comprise various nuances and contours, some critical aspects to never lose sight of are reliability, transparency, and customer support. Keep these in mind to ensure that your chosen payment processor can boost your profitability, competitive edge, rather than being a source of worry.
