If you’re reading this article, there’s a good chance you’re a business owner who is ready to make the jump into accepting payments. Perhaps until this point you’ve only accepted cash or checks. You might be using a P2P app like PayPal, CashApp, or Venmo. Or you might be conducting your business through a platform like Shopify or Clickbank, depending on whether you’re selling goods or services. You might also already have a payment processor, but be searching for a new one. But what merchant payment solutions are best for you?
Let’s look a little deeper to navigate your merchant payment solution options.
The Drawbacks of NOT Having Your Own Debit and Credit Card Processor
But if you haven’t started accepting cards and are still relying on these other methods, you know that they each have drawbacks. Cash businesses will find that consumers are carrying less cash, less often, and tend to make smaller purchases with it. If you’re a service provider—like a contractor or an accountant—you’ll find that checks are time-consuming to cash…and even if you use your banking app, you don’t get paid quickly enough. They can also bounce, of course.
Then there are the P2P payment apps. These apps take substantial percentages off your revenue. Sometimes as much as 3% by the time the money hits your bank account. They are also not functional for a serious retail business because the transaction takes too long. Moreover, they don’t build consumer confidence. This is because customers view these P2P interactions as personal exchanges and not true retail interactions.
What if My Platform Does Payment Processing For Me?
What if you’re selling goods on a platform like Shopify, eBay, or Etsy, and the platforms are doing everything for you (including payment processing)? Although they shoulder the backend concerns and user experience, that comes at a hefty price. The same is true if you’re selling services—something like an online course—on a sales funnel platform or ed-tech site.
If you want your bottom line to scale, you will eventually have to separate from the platforms that automate your business. They’re great for startups, but at a certain point, you need to leave the pond for bigger waters. And one thing you’ll need to figure out is how to get paid.
Let’s take a look at a cost-benefit analysis of going down your own path. Ed-tech platform Udemy may take as much as 50% of every sale, while ClickBank takes 7.5%. Etsy takes 6.5%. Shopify’s rate is a bit complicated. It’s often around 1.5%, in addition to the payment processing, which may be around 2.5% (so we’ll say 4% total).
Of course, money talks louder than percentages, so let’s translate these examples into dollar amounts. If you’re selling a $1,000 course, you could be losing as much as $500 on every sale. If you’re selling something on a site like Shopify, and your average tab is $100, you could be losing around $4 per sale. How much this all adds up to at the end of a year depends on your sales volume. It can, however, become significantly thousands or tens of thousands of dollars.
Gig Workers that Accept Payments through a Platform
Then there are gig workers. Uber drivers may see their revenue reduced by as much as 25%. This is a significant amount, given the fact that they already have to pay for their own gas, vehicle insurance, and maintenance. And gig workers on marketplaces like Upwork may be shelling out up to 20% of their client payments.
Of course, there are trade-offs to consider. Service-based professionals may find that offering their services through a platform is necessary for getting traffic. But sole proprietors or business owners who already have a proven track record of success selling on platforms (we haven’t even touched Amazon) will improve their revenue by finding a payment processor and setting sail into the uncharted waters beyond the safe harbor of platform-based selling.
The Solution is Merchant Payment Solutions
So now on to an explanation of debit and credit card processors. A debit and credit card processing company, or merchant service as they are called, can help you take non-paper payments (that is, cash and paper checks). These can include debit cards, credit cards, eChecks, and ACH transfers.
Many companies providing merchant payment solutions also provide related services like business loans, point-of-sale lending, payroll, and accounting software. They may also integrate with other software(s) you have such as inventory management or analytic software.
The Hardware: POS Systems
There are a number of merchant payment solutions that these companies can provide. One is POS systems or point of sale systems. This is the hardware you see in stores that can take card payments. Today’s POS readers can read magnetic strips, chip cards, contactless payments, and even mobile payments.
While there is a diversity of payment modalities right now, the magnetic strip will likely disappear from cards entirely by 2030. This means that chip and contactless payments (including contactless mobile wallet payments) will drive transaction volume in the years ahead.
Let’s talk briefly about how each type of payment works, first starting with the (soon-to-be-defunct) magnetic strip. This strip stores key information about the card and the customer. The reader picks up this information when the customer swipes it. A different approach is taken with chip cards. These issues a one-time encryption and/or token to the POS reader, making every transaction have its own unique signature.
Contactless card payments and contactless payments made with a mobile wallet (card information stored on cardholders’ smartphones) rely on something called near-field communication, or NFC. It’s a sort of short-frequency radio wave that only works within a few inches, making these transactions secure against outside encroachment.
What to Consider in Terms of Merchant Service Hardware
The inner workings of swipe credit card processing versus chips are not important to know, although they may interest you. What is important is to work with a card payment solution provider that gives you the option of leasing or upgrading your hardware.
The payment landscape is changing fairly rapidly—so much so that biometric payments may not be far off (don’t blink). You do not want to work with a payment processor who tries to unload some soon-to-be defunct hardware on you so that they can try to upsell you a more up-to-date product later. The old bait, switch, and unload old inventory, as they say.
You also want to work with a payment processing company that provides, sells, or leases its own equipment (or equipment from a partner) because you will get a better deal than buying them yourself. A good POS system can cost up to $2,000 to install the hardware and software, followed by $1,000 annually for maintenance. This does not include the transaction fees you will still have to pay for processing payments. Because you will still need to find a payment processor to connect to the card networks.
The better solution, of course, is to buy or lease the hardware from a payment processor. The processor will also be able to service the hardware, update it, and respond to acute issues as they come up (and they always will). You do not want to be up customer creek without a POS and a long line of angry customers, while you’re on the phone trying to troubleshoot the hardware or software yourself.
Mobile Devices for Flexible Payment Collection
Credit and debit card solutions can also include mobile payment processors. These are small devices that can be plugged into a phone to facilitate payment processing on the go. If you have a business with very mobile human talent—like subcontractors or waiters—mobile payment processing is a better solution than fixed POS terminals.
Mobile payment solutions can also complement brick-and-mortar businesses that do need fixed POS terminals. If you are selling goods, food, or even services from a fixed location, but want to participate in an event or fare, mobile credit card readers can make that happen.
A good merchant payment solutions company will have a range of hardware options that can accommodate your business. After speaking with you and learning your business needs, they can work with you to provide the right type of hardware.
Accepting Online Payments
Now on to online payments. If your business is exclusively online, things like contactless payment processing are less of a concern. Or are they? Many online businesses benefit immensely from making appearances in reality at consumer-facing fairs and B2B trade shows.
While companies like Square do provide their online merchants (like Shopify Sellers) with hardware, you’ll be subject to the same fees you’re hoping to escape from. Additionally, you will have a harder time troubleshooting issues with their monolithic customer service team… something that does not work in your favor if you’re on the floor of a convention center, or hawking thine wares at Ye Olde Renaissance Faire.
A good payment processor, once again, will work with you to find the right mix of software and hardware. For online payment acceptance, credit card processing options should seamlessly integrate with your website, without having to reroute the customer away from your store.
How Online Payments Work
As you probably know from doing your own interwebs shopping, online payment gateways ask the customer to input key card data like card number, expiration date, CVV, and billing address. This information can then be routed through the card networks and passed around to the right parties: the customer’s bank, your bank, and nobody else. And that’s another reason you will want to work with a payment processing company to accept online payments: security.
Businesses that collect online payments must comply with certain laws and measures meant to facilitate the safety of conducting business on the world’s greatest super freeway—and no, it’s not the 26-Lane Katy Freeway in Houston, Texas (everything’s bigger in Texas, ain’t it). Payment processors have the right tools to assist card networks in thwarting fraudulent purchases. Today that may involve some complicated AI tools you don’t have at your disposal.
What are QR Codes?
A related solution to online payments is QR codes. These black and white checkerboards can be scanned by customers, who are then prompted to an online payment gateway. A payment processor can help you set up these codes or answer further questions about how they work so that you can implement them into your payment options.
QR codes are increasingly being used by restaurants to direct customers to menus and to collect payments, supplanting the traditional service and payment scheme where waiters have to collect tangible cards and bring them away from the customer. Which can be a security concern. QR codes are also useful for satellite operations like a popup stand at a fair or tradeshow.
In summary, payment processors can provide online payment gateways that integrate with your website, keeping customers in your digital store. Consumers who can’t wait less than 60 seconds for a web page to load will definitely abandon their carts if a third-rate payment processor takes them to a different website to check out. On the other hand, a quality payment processor will allow you to take payments on your site, improving customer experience and facilitating payments securely.
Do You Sell Subscription Services?
But there’s another reason why a payment processor is beneficial for the online aspect of your business. Payment processors can also facilitate subscription services. This is something that most P2P applications like Paypal and Venmo cannot smoothly facilitate.
For example, in the case of PayPal recurring billing, the customer needs to use PayPal. While that may not seem like a significant hurdle to jump through, customers prefer to be in control of how they pay and to have more than one option for making payments.
Subscription services are an increasingly popular business model, especially among American consumers, who comprise 53% of all digital subscriptions—especially the millennials who hold 17 subscriptions each (that’s 8 in one hand and 9 in the other, in case you need a visual).
Many subscriptions are cloud-based services or entertainment subscriptions, but not all of them. Some subscriptions involve the delivery of tangible goods like food, alcohol, or bespoke, handmade crafts. This last subscription subtype falls into a niche market called subscription boxes and accounts for a market value that has already surpassed $18 billion.
The basic formula of subscription services is such: the customer pays a monthly fee, and in return gets membership access to certain services or periodic delivery of tangible goods. A payment processor can facilitate the consistent delivery of customer payments so that you don’t have to run them manually again and again.
ACH Transfers: Pros, Cons, and Fees
Payment processors can also facilitate eChecks and ACH transfers. ACH transfers are good for recurring payments because they are drawn right from a bank account, without having to be passed through the card networks. This results in lower fees (generally around $0.29 per transaction), which is good for you.
Many big payment apps cannot do ACH transfers, and if they do, they still charge larger fees. For example, Square likes to brag that its ACH transfers can save merchants money (compared to card payments) but they still cost 1%. Would you rather pay $1 or $0.030 for a $100 sale?
ACH transfers are also good for recurring payments. This is because they are not dependent on credit or debit card numbers, which can change if the customer loses the card or if it gets stolen. Account numbers are permanent, so this can reduce accidental customer churn (and having to follow up with the customer).
ACH payments are not good for one-off purchases, especially in person. While it’s true that consumers can easily find account and routing numbers on a paper check, (almost) nobody carries paper checks anymore.
And while they can be found on online banking apps, that’s a far more cumbersome checkout process than waving a card over a terminal. For these reasons, your merchant payment solutions provider should also provide you with debit and credit solutions, even if your business is subscription based.
What Are the Processing Fees for Merchant Services?
To review, we’ve talked about hardware, software, online payment gateways, and subscription services. As you can see, payment processing can take care of getting paid. But now on to the question you’re surely wondering about since not everything in life is free (and even Mastercard knows that). What are the fees for payment processing?
All the fees are bundled into something called the merchant discount rate (MDR). This is charged to the merchant by the payment processor. The merchant discount rate is usually expressed as a percentage plus a flat fee per transaction.
Generally speaking, you can expect this fee often to be around 2% or less of every sale, and sometimes 3% for certain cards. That’s a far cry below the 7.5%, 6.5%. Or 4.5% of the platforms we mentioned.
The Merchant Discount Rate or MDR comprises several other fees. One is the interchange rate or interchange fee. This covers the cost of your bank (the acquiring bank) taking money from the customer’s bank (the issuing bank).
Then there is an assessment fee. This covers the cost of the payment traveling through the Visa, Mastercard, Amex, or Discover universe. Then there is the markup. This is the amount of money the payment processor keeps for orchestrating the transaction.
How the Processing Fees are Determined
The discount rate set by your payment processor will take into consideration several factors such as sales volume, average sale amount, and how the payment is being processed. For instance, transactions made with a physical card are more secure than transactions made where the customer is not in front of you or card-not-present transactions. To compensate for the risk of fraud presented by card-not-present transactions, a higher fee is charged.
If customers pay with a debit card and input a PIN, the charge may run through a separate debit network, instead of the regular card networks. This also has a lower fee, especially since 2013 when limits were put on banks valued over $10 billion on how much they could charge to accept debit payments.
In the same train of thought, QR codes are included in card-not-present transactions, even if the customer is in front of you. That’s because they are directed to an online payment gateway. These are the types of considerations you will need to consider when reviewing your payment solution options—and a good payment processor will discuss them with you, answering your questions and presenting a transparent fee structure.
Another factor the merchant payment solutions provider will consider is the nature of your business and its history. Business credit (sometimes your credit), payment history, and your industry as a whole are all factors in this pricing model.
What Are High-Risk Businesses?
For instance, some businesses are regarded as inherently high-risk businesses. Gun sales, CBD products, adult entertainment, and herbal supplements are all shady businesses according to payment processors.
No offense to anyone in these lines of work. It has nothing to do with moral judgments, and everything to do with complex legal landscapes and the potential of these businesses to attract fraud. In other instances, the products may have unproven or untested consequences that financial institutions prefer not to become embroiled in.
Other businesses are considered high risk because of their own history. If your business has a history of chargebacks, there is a good chance that you have been (or will be) dropped by card networks, who will put you on their Black List along with the likes of Blackbeard, Captain Kidd, and Captain Morgan (who was a real person, not just a rum brand).
In all seriousness, card networks do keep a list of merchant offenders, and may refuse service to these businesses. Although there are ways to get off this list, your best bet is to not get on it. A payment processor with good security protocols and front-line defense strategies against fraud can help minimize the number of chargebacks you experience.
Chargebacks: Something You Want To (And Can) Avoid
Chargebacks are when a customer contacts their bank to reverse a charge instead of contacting you for a refund. They will ultimately cost you the loss of the good or service, in addition to fees and fines from the banks and card networks. Sometimes these can add up to $200 per offending transaction.
Having a good payment processor on your side may also help minimize friendly fraud. This is when customers pay for something, use it, or experience it, and then deny it ever happened. You may be surprised, but this is a frequent occurrence in some industries. Particularly the travel industry (so travel agents beware).
Across all industries, friendly fraud may have surged as much as 30% in the past year alone. In addition to security protocols against actual fraud, a payment processor can have protocols and procedures for preventing it in the first place, or for disputing chargebacks with banks when they do (unfortunately) occur.
How to Pick a Credit Card Processing Company
Now you’ve been armed with a basic overview of merchant payment solutions, how they work, and how they’re priced. Hopefully, now you can see the value of leaving behind the business platforms you’ve used heretofore, and setting out on your own.
While the purpose of this article is not to go into anything other than payment processing methods, we should mention that the user experience end of things can easily be achieved through website builders. And of course, if you’re going brick-and-mortar, you can’t rely on these platforms anymore. In other words, growing your business may be easier than you think.
Merchants like Square will tell you that they can facilitate your brick-and-mortar presence. However, in the end, they will charge the same fees you’re hoping to escape from. They are also infamously unresponsive to technical issues. And if you are hit by fraud, they may lock you out of taking payments, with no recourse to collecting them other than cash.
In picking a payment processor, you want to work with a company that has the time for you and gets to know your business. This merchant service provider can recommend the right hardware, provide the right software, and supply ongoing service and security. If you have any other questions about merchant payment systems, how they work, and how they can help scale your business, give us a call or contact us through our website.
