A Small Business Owners' Quick Guide to Payment Processing
By: Colton Redtfeldt - 3/6/2023

As a small business owner, one of the most important decisions you will make is selecting a payment processor for your business. With so many options available, it can be overwhelming to determine which one will best meet your needs. Below we've compiled a list of the key factors we consider when helping businesses connect with a payment processor.

Pricing Model & Fees One of the most significant factors to consider when selecting a payment processor is the fees and pricing associated with a process. Different processors offer different pricing models and some models are better for different types of businesses. While a processor's plan might look like a great deal on the surface, additional fees can add up quick and cost you more in the long run. When choosing a pricing model, merchants should consider their business's transaction volume, the types of cards their customers use, and the overall cost-effectiveness of the pricing model. Below is a list of some of the most common types of plans you'll see right now.

<div style="background-color: rgba(105, 167, 191, .3); display: block; float: right; padding: 1%; margin: .5%; width:30%; line-height: 175%;"> POS Pro Tip: Interchange Fees are the fees charged by credit card companies to merchants for processing credit card transactions. These fees vary depending on the type of card used and the transaction amount. They are typically a percentage of the transaction amount plus a fixed fee. </div>

Interchange-Plus Pricing: The processor adds a markup to the interchange fees. The markup is typically a percentage of the transaction amount, plus a fixed fee per transaction. This model allows for transparency, as merchants can see the interchange fees and the processor's markup separately. It's also great because some transactions are more affordable. For example, debit card transactions are typically less expensive than credit. At the same time, however, it can make it harder to estimate what your processing costs will be each month because each transaction has a different price associated with it. Some credit cards - like American Express or Capital One - can also charge high interchange rates which get passed on to you. Larger transaction sizes also tend to incur higher interchange rates because they're inherently riskier for a payment processor to process. If you know you work with customers who are more likely to pay with elite cards or if you tend to have higher volume transactions, it might be best to consider a flat-rate pricing model. Your Merchant Category Code can also impact your rates.

Flat-Rate Pricing: The processor charges a fixed rate for all transactions, regardless of the card type or transaction amount. This model simplifies pricing for merchants but may not be the most cost-effective option for businesses with high-volume or high-value transactions. These types of pricing models are commonly used by large point-of-sale software companies like Square, Toast, Shopify, and Clover. The rates for each company vary but usually fall somewhere around *2.3% + $0.10* per transaction to *2.99% + $0.15*. Flat rate processing also allows you to accept elite cards without extra cost.

Tiered Pricing: In this model, the processor groups transactions into different tiers based on factors such as the card type, the transaction amount, and the risk level of the transaction. Each tier has a different processing fee. This model can be difficult for merchants to understand and may not be transparent.

Subscription Pricing: This pricing model charges a monthly fee in exchange for lower processing fees. Merchants pay a flat monthly fee regardless of transaction volume. This model can be cost-effective for businesses with high transaction volumes but not every processor offers a plan like this.

Software Compatibility Make sure the payment processor you choose is compatible with your business's point-of-sale system. Some software companies require you to use specific processors. This is common with large software companies like Square, Shopify, Toast, and Clover which can require you to use their own credit card processing.

<div style="background-color: rgba(105, 167, 191, .3); display: block; float: right; padding: 1%; margin: .5%; width:30%; line-height: 175%;"> POS Pro Tip: While the payment processing models offered by Square, Clover, Toast, and other large software companies are easy to understand, they don't leave a lot of room for negotiation and aren't ideal for all businesses and you might end up paying substantially more in processing fees than if you chose a slightly more expensive software with 3rd party payment processing support. </div>

POSGuys offers POS software that allows you to use your own party credit card processing company. These 3rd party processors tend to be more open to negotiation and you can save a lot of money in the long run.

Some business owners charge surcharges on credit card transactions to recover some of the costs with credit card processing interchange fees. Be careful when surcharging customers however because certain states and payment processors prohibit or limit surcharging. One way to get around this is to set discounts for cash transactions and keep your credit card transactions the same.

But software compatibility goes beyond just your POS System. If you're using accounting software like Quickbooks you'll want to see if the processor can export your transaction data automatically. This can save you a ton of time by reducing the need to manually enter data each night when you batch out. If you operate an online e-commerce site as well you'll need to consider what kind of support a processor provides for integrating your site with their processing portal.

Payment Options Different payment processors offer different payment options, such as credit cards, debit cards, mobile tap-to-pay solutions like Apple Wallet, e-checks, and bank transfers. Depending on your business's needs, you may need to choose a processor that offers a variety of payment options. If you're a grocery store, consider if you'll accept EBT as those types of payments can have their own requirements and specialized reporting. Furthermore, if you operate in a global market, make sure that the payment processor you choose supports multiple currencies.

Value-Added Services Some payment processors offer value-added services such as chargeback protection, fraud monitoring, and loyalty programs. Some payment processors also provide robust reporting and analytics tools that can help you gain insights into your business's performance. Look for a payment processor that offers real-time reporting and analytics to help you track your revenue, monitor payment trends, and identify areas for improvement. Often times some of these more advanced features include additional monthly fees so make sure to read the fine print before signing on to these extra services. POSGuys can help you navigate these extra features and find a set of additional services that make sense for your business.

Processing Time & Deposit Speeds Processing speed is another factor to consider. A payment processor should process transactions quickly and efficiently. Look for a processor that offers fast processing times to reduce wait times for your customers. Additionally, once that transaction is finished, consider how long it will take for that money to be deposited into your account. 24 hours up to three days is a typical range.

Customer Service Customer service is essential when selecting a payment processor. You need to choose a processor that offers 24/7 customer support and is responsive to your needs. Look for a processor that offers multiple channels of support, such as phone, email, and live chat.

<center>How Does Merchant Payment Processing Work?</center>

Knowing how payment processing works can help you feel more confident when it comes time to select a processor and negotiate your processing model.

1. In general, payment processing starts when a customer uses their credit card to pay for something. Your card reader will encrypt that information, including your merchant information, and send it to the payment processor. Some point-of-sale programs will send the payment information through a middleman called a gateway who then passes that information along to the payment processor.
2. The payment processor will contact the customer's bank to confirm that all their payment information is correct.
3. After confirming all the details included in the transaction, the customer's bank will send a message back to the payment processor approving or denying the transaction. The processor will then forward that message to your payment terminal.
4. After all this happens, the payment information is saved in your terminal or POS system until the end of the day. From here, you would submit your batch of authorized transactions to your payment processor.
5. Finally, the payment processor will pass the transaction details to the appropriate card associations and banks who will then pull funds from your customers' accounts and deposit those funds into your merchant account.

<center>![Payment Processing Steps][1][][]</center>

[1]: https://posguys.blob.core.windows.net/content/images/blog/79004/payment-Processing-Steps.jpg

A Small Business Owners' Quick Guide to Payment Processing By: Colton Redtfeldt - 3/6/2023

Recent Posts By Colton Redtfeldt

A Small Business Owners' Quick Guide to Payment Processing
By: Colton Redtfeldt - 3/6/2023