You already know that merchant payment processing comprises a large portion of your business expenses.
Whether your customer uses a credit card or debit card to process payments, your payment processing company is the middleman. Payment processors interface between your customer’s issuing bank and your merchant bank, the acquirer, to transfer funds for your purchase.
Merchant services companies step up when cardholders swipe or enter their card information at your POS or payment gateway. Merchant services for credit card processing generally cost 1.5% to 3.5% of each transaction. This is a pretty substantial range, so you’ll want to do your research to ensure you’re getting the best rate possible.
In this article, we’ll talk about what merchant payment processing means for small businesses. We’ll also look at the top players in the market, and how to choose between them.
Let’s delve in.
What is merchant payment processing?
Merchant payment processing is how your payment processor handles payments for your small business. The key players involved are:
- Your issuing bank
- Your payment processor
- Your point-of-sale or POS system
- Your customer’s financial institution
- Your customer’s credit card company
The same merchant payment processing steps take place with multiple payment options, whether it’s online payments for ecommerce transactions, credit or debit cards, in-app payments, or contactless NFC payments.
How does credit card processing work?
This is a lot less intuitive than it seems at first glance. First, your customer swipes or enters their credit card information at your card reader. Your payment processor then verifies the funds in your customer’s issuing bank––aka the issuer. The funds are withdrawn from your customer’s bank account and sent to your merchant account. This process usually takes 2-3 business days.
Whichever payment solution is used, you’ll work with your small business’s payment service provider to negotiate your rate. There’s usually some wiggle room in credit card payment processing rates, so don’t be scared to advocate for your SMB.
What are the common pricing structures used by payment processors?
Processing fees vary quite a bit, depending on a few different factors. These include your customer’s credit card company. Discover, Mastercard, American Express, and Visa all charge different interchange rates.
That being said, the most common merchant payment processing pricing structures include:
Interchange-plus pricing
Interchange-plus pricing gives you the most transparency because you’re paying the actual interchange rate set by the card networks plus a small markup from your processor. You see exactly what goes where, which makes it easier to compare providers and spot inflated fees.
Many growing businesses like this model because it scales pretty fairly. When your volume increases, you’re not suddenly paying more than you should. It does require a bit of learning upfront, but once you understand it, it’s one of the most cost-effective ways to accept payments.
Flat rate
Flat-rate pricing keeps things simple. You pay one consistent rate for every transaction, no matter the card type or brand. This predictability is the big draw for small businesses that don’t want to dig through complicated statements.
It’s great if your volume is low or if you want an easy way to estimate your monthly processing costs.
The tradeoff is that the simplicity sometimes comes with higher overall fees, especially as your sales grow. Still, if you value ease over optimization, flat rate can be a solid starting point.
Tiered pricing
Tiered pricing groups transactions into buckets like “qualified,” “mid-qualified,” and “non-qualified.” On paper, it looks straightforward.
In practice, most business owners find it confusing because you don’t always know which tier a transaction will fall into until after you’re billed. It can also lead to surprisingly high fees if your customers use certain cards.
Some businesses still use it because they’ve had it for years or because a provider sells it as the default. But if transparency matters to you, tiered pricing is usually the hardest model to manage.
Membership
With membership pricing, you pay a monthly or annual subscription fee rather than a markup on every transaction. Your costs are typically limited to the true interchange rate plus a small per-transaction fee, which keeps your total processing costs lower as your volume increases.
This model works best for established businesses that process enough each month to justify the subscription. It also gives you more control over your expenses because there’s no fluctuating percentage fee eating into every sale. If you want predictable costs and strong long-term savings, membership pricing can deliver both.
What to look for in a payment processor
There are a few things to look at before you lock down a payment processor. Consider the following.
Prioritize transparent pricing
Every merchant payment processing provider prices things a little differently, so understanding the structure upfront saves you headaches later.
Look for transparent pricing that clearly outlines what you’ll pay for card transactions, online payments, and in-store purchases. Some merchant service providers offer custom pricing based on your volume or industry. That’s not necessarily a bad thing, but make sure you know how those rates may vary depending on your processing activity.
Avoid long-term contracts unless you’re confident the terms work for your business.
Watch out for hidden fees
Many merchant service providers offer competitive base rates, but the extra cost sits in the fine print. Keep an eye out for fees tied to early termination, PCI non-compliance, chargebacks, and even message and data rates for mobile tools.
Read your merchant services agreement closely. The best payment processors explain what each fee covers and when it applies. If a provider sidesteps your questions or can’t give a clear answer, treat that as a red flag.
Confirm acceptable payment options
Your customers expect flexibility. Make sure your payment solutions let you accept credit cards, debit cards, online payments, and contactless payments from select mobile devices. If you sell in person and online, ensure your POS system and ecommerce tools connect to the same merchant account. This keeps reporting clean and gives you a better view of cash flow across channels.
And if you ever plan to sell in other countries, ask whether your merchant services provider supports international card payments.
Review funding speed and cash flow impact
Processing payments shouldn’t slow down how fast you get paid. Most payment processors deposit funds into your business bank account within one to three business days. Faster funding helps small business owners stay on top of inventory, payroll, and day-to-day expenses.
With that, ask how settlement timing works, whether weekends delay deposits, and if next-day funding comes with an extra cost. Getting clarity here directly affects how you manage your business checking account and cash flow.
Make sure they’re PCI compliant
Security matters, no matter how big or small your business is. Your merchant services provider should maintain PCI compliance and protect customer data during every step of the transaction. This applies whether customers pay in person, on the go, or through your website. A compliant service provider helps reduce fraud risk and builds trust with your customers, especially if you handle higher-value credit card payments or store customer data for repeat purchases.
Evaluate customer support and additional services
When something breaks, you want a support team that actually shows up. Look for payment processors with responsive customer service and clear troubleshooting resources. Think about the other services they provide, too.
Some offer POS hardware, mobile readers, invoicing tools, and integrations that improve customer engagement. The goal is to choose a partner that supports how your unique business operates, not one that forces you into tools you won’t use.
The best payment processors for small businesses
There are hundreds of merchant service providers for small business owners to choose from. Which one is right for you will depend on a few different factors. These include your customer’s preferred payment method, your business type, location, and processing volume.
Let’s take a look at what two of the most popular payment processors have to offer.
Payment Depot
Payment Depot streamlines your credit card transactions by equipping you with the latest payment technologies and terminals. Plus, with Payment Depot, you won’t encounter hidden fees thanks to our transparent, interchange-plus pricing model, ensuring you always know what you’re being charged.
Stax
Stax offers a transparent pricing structure that customers can trust.
Stax is subscription-based, meaning business owners pay a monthly fee instead of per transaction pricing. Obviously, SMBs don’t want to pay for features they don’t really use. So it’s ideal for businesses processing $5,000 a month or more.
With that said, Stax offers dedicated account managers to its clients. This means a single person is assigned to guide you through the process. So, issues are resolved quickly and easily in most cases.
The Bottom Line
It’s hard to find all of the features you need for merchant payment processing in one place. But, for US-based businesses, Payment Depot’s award-winning customer service and A+ BBB rating put us ahead of the competition. Especially when we’re able to save merchants an average of $400 a month on credit card processing.
It all starts with transparent, hands-on Interchange Plus pricing. Contact our award-winning customer support team today to learn more.
Quick FAQs about Merchant Payment Processing
Q: What is merchant payment processing?
Merchant payment processing refers to how a payment processor handles payments for a business. It involves several key players, including the customer’s issuing bank, the payment processor, the point of sale (POS) system, the customer’s financial institution, and the customer’s credit card company.
Q: How does merchant payment processing work?
The process begins when a customer swipes or enters their card information at the POS or payment gateway. The payment processor verifies the funds in the customer’s bank and withdraws the funds, transferring them to the merchant’s account. This process usually takes 2-3 business days.
Q: What are the costs associated with merchant payment processing?
The costs for merchant services for credit card processing generally range from 1.5% to 3.5% of each transaction. However, pricing can also vary depending on factors like the customer’s credit card company, the required integrations, and whether the payment processor charges a monthly fee.
Q: What should I look for in a merchant payment processing agreement?
It’s important to check the agreement for any additional fees, such as transaction fees, early termination fees, and chargeback fees. You should also confirm that the processor is PCI compliant and that it processes payments automatically.
Q: Who are some popular payment processors?
Some popular payment processors include Payment Depot, Stax, Stripe, Clover, and Square. Each has its pros and cons, and the best choice will depend on factors like your business’s processing volume, location, and the preferred payment methods of your customers.
Q: What is a payment service provider?
A payment service provider is a company that provides businesses with the ability to accept payments. They work with businesses to negotiate rates for processing payments.
Q: What does PCI compliant mean in terms of merchant payment processing?
PCI compliant means that the payment processor adheres to the Payment Card Industry Data Security Standard (PCI DSS), a set of security standards designed to ensure that all companies that accept, process, store, or transmit credit card information maintain a secure environment.
Q: How can businesses reduce costs associated with merchant payment processing?
Businesses can potentially reduce costs by negotiating the rate with their payment service provider, ensuring they are getting the best rate possible. They should also evaluate their needs to avoid paying for unnecessary features or services.
Q: What are some trends in merchant payment processing?
One major trend is the increasing use of mobile or contactless payments, with 59% of SMBs already using these methods. This is particularly important given the changes in consumer behavior brought about by the pandemic.
Q: How can the right payment processor benefit a small business?
The right payment processor can offer competitive rates, efficient transaction times, excellent customer service, and a range of payment options to suit both the business and its customers. It can also provide stability and security, protecting both the business and its customers from fraud and data breaches.
