Merchant Payment Processing: Everything You Need to Know

Merchant Payment Processing: Everything You Need to Know

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.

Merchant Payment Processing_Average Card Processing Costs_Infographic

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
Merchant Payment Processing_Players Involved_Infographic

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. (59% of SMBs already use mobile or contactless payments, so you don’t want to be a late adopter of this trend.)

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 The funds are withdrawn from your customer’s bank account and sent to your merchant account.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.

Pricing also varies depending on which integrations your SMB needs. Do you need a virtual terminal to process debit card transactions at your point of sale system? What about contactless payment options, which have exploded since the pandemic?

Some payment processors charge a monthly fee in addition to your transaction fee. However, this is most common when using a tiered pricing structure, which rarely pans out well for the merchant. While tiered pricing looks like a great deal at first glance, transactions can easily be labeled as “non-qualified.” When this happens arbitrarily, merchants have to go up to bat for a single transaction or simply accept exorbitant fees.

Merchant Payment Processing_Pricing Models_Infographic

What to Look for in a Payment Processor

There are a few things to look at before you lock down a payment processor. First off? Some solution providers will try to tack on additional fees. These include transaction fees, early termination fees, and exorbitant chargeback fees.

Check your merchant payment processing agreement for disclosures. It’s here you’ll find whether your potential processor is PCI compliant, as well as how payments are processed. You want an automatic payment processor for credit cards, not one that uses ACH payments. That’s because ACH payments take 3-5 business days to process, and don’t offer the same security options.

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 five of the most popular payment processors have to offer.

Payment Depot

With no markups, no contracts, and no hidden fees, certainly the most cost-effective is Payment Depot. Payment Depot uses a subscription-based pricing structure, saving merchants an average of $400 a month on credit card processing. 

Merchants only pay a monthly fee (and a small per transaction fee) in exchange for the direct costs of interchange—regardless of how much they process. This puts it ahead of merchants with aggregate, tiered, or flat rate pricing.

However, Payment Depot only works for merchants and card networks within the US. Customers need to find a different payment processor for international credit card transactions.


Stax offers a transparent pricing structure that customers can trust. Its easy 2-way QuickBooks integration makes it a hit for small business owners. 

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 $10,000 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.


Stripe is a third-party payment processor like PayPal. Although Stripe’s flat rate payment structure seems intuitive, accounts are less stable than with a traditional payment processor. Like PayPal, this can result in your merchant account being suddenly shut down at the slightest whiff of fraud, which results in lost business and tons of unhappy customers.

Aggregate payment processors like Stripe can get your business up and running quickly. Stripe is even optimized for international business. But if you need account stability or easy setup, Stripe is not the right solution for you.


Clover’s flat rate pricing structure makes it a great option for brand-new businesses. The company’s month-to-month contracts make it a popular option for businesses that don’t have the funds to go the traditional route.

However, terminals, POS stations, and payment gateways need to be rented or leased from Clover. They aren’t part of the contract, like with many other payment service providers. In addition, with Clover, First Data is your merchant acquirer. First Data is not BBB accredited and has 2.2/5 stars from BBB customer reviews.


Square is popular because of its easy integrations with complimentary software. However, merchants have to pay an additional fee to use its advanced features. Customer service at Square isn’t very competitive either, which can cause issues for merchants when something needs to be resolved right away.

Square’s flat rate pricing structure means it can be more costly than necessary for businesses with a large processing volume. But Square’s online store builder is fun and intuitive to use. So, it’s a good option for smaller businesses that are just getting online.

The Bottom Line

Payment Depot Highest Rated Processor_Banner

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, membership 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 they process payments automatically.

Q: Who are some popular payment processors?

Some popular payment processors include Payment Depot, Stax, Stripe, Clover, and Square. Each has its own 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.

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