Getting Started: Credit Card Processing For Small Businesses

Credit card processing for small businesses can be expensive and difficult if you are not utilizing the right providers. Few small business owners truly understand the vast credit card network, leaving them vulnerable to large mark-ups by both banks and processing agencies. If you are being assessed even one percent more than you need to, the results can be in the thousands of dollars each month for small businesses. Understanding some basics will help you negotiate for the best fees.

The Credit Card Network

The primary players in the credit card network are: the credit card issuer (Visa, MasterCard, etc.), the purchaser's bank, the retailer (you) and your merchant bank. A merchant bank is the place where you will turn in your credit card fees each day in order for them to be processed and made into actual profits. The merchant bank does this by contacting the card issuer, who contacts the consumer's bank, and completes the payments. 

How Fees are Set

Fees are charged by both the credit card issuer and the merchant banks. Those fees are set based on a variety of factors. Most importantly, those factors are volume and "risk" level. The volume of transactions you complete each month will inversely affect your rates; processing more will lead to lower rates. Your risk level is determined by a host of factors including the industry you are in and your average charge-offs each month. A charge-off occurs when the payment cannot actually be made. High risk industries include e-commerce credit card processing, gaming businesses, pharmaceuticals and others. Charge-offs additionally tends to be higher in these brackets. 

How You Negotiate Fees

As a small business, you are assessed a fee your bank determines appropriate. You have little room to negotiate with the bank if your volume is very small. You can either set up your processing online, on a computer, or with a small portal that allows you to "swipe" cards. In each case, you will be charged a fee on every transaction. You can lower this fee by increasing your volume and reducing your charge-offs each month. Since this is hard for small businesses to do, there are credit card processing companies which will assist you.

Credit Card Processing Providers

The most well-known provider is usually PayPal, but there are a host of companies that assist with credit card processing for small businesses. These companies sign up several businesses in order to bundle all of the processing. This gives them more pull to negotiate for lower fees with banks. They also have insider knowledge to reduce charge-offs and get banks to accept businesses that are not easily accepted on their own. These processors will also assess a fee on each transaction. Even with this middle-man, though, most small businesses will see a reduction in the total fees they are paying on each transaction. If you are looking to set up credit card processing for your small business, it is likely in your best interest to seek a processing company to take you through the process rather than going straight to a bank.