Small business owners have a lot of things on their plates. Whether they’re selling goods or providing a service, merchants have to worry about inventory, staffing, accounting, taxes, and varying levels of regulations, permits, and licensures. Lastly, small businesses also have to consider how they will accept payments.
With such a mounting headache, it would be nice if the money just flowed into the checking account. But unfortunately, payment systems are something they need to worry about as well. Fortunately, these days, much of the back end of debit and credit card processing can be taken off their shoulders. With the help of a good merchant service provider, that is.
How the Term Small Business is Defined
What is a small business, anyway? It all depends on who you ask. According to the Small Business Association or SBA, a small business is defined by revenue and the number of employees.
If a business falls between $1 million and $40 million in revenue, it’s a small business. If a business has between 100 and 1,500 employees, it’s also a small business.
But according to the ACA (Affordable Care Act), a small business is anything less than 50 full-time employees. And according to the IRS, the definition is a little bit more complicated (as you might expect if you’ve ever filed your own taxes). But generally speaking, a small business would have less than 500 full-time employees.
These differences in calculating what defines a small business have to do with what each organization does. The SBA gives out loans, so revenue is an important consideration.
But the ACA isn’t about loans—it’s about health insurance and mandating how big a business needs to be before it’s required to provide benefits.
Finally, the IRS is all about collecting money. So they’re less concerned with the size of the business. Rather, they’re more concerned about how it’s structured.
Small Businesses are Usually NOT C-Corporations
To explain that last part a little further, many small businesses are organized as an S-corporation. This allows the business owner to put themselves on a payroll. Then they can have the rest of their profits pass through to their personal income tax return as profit. Avoiding the 15% FICA taxes that employers (and even sole proprietors) need to pay.
A C-corporation is different in that the business will end up filing a separate tax return. Moreover, a C-corporation can sell shares of stock on a public market like the NYSE. That said, a C-corporation is what we commonly call a big business—not a small business. If your small business has reached the point of needing to fundraise more capital by selling stock…congratulations: you’ve made it to the big top.
Of course, some small business owners are not structured as S-corp. It could even be one person with a mall kiosk (selling goods) or doing tax returns (selling services). For the purposes of our discussion vis-a-vis small business payments, we’ll let you (the reader) be the judge of whether or not the term “small business owner” applies to you.
The Importance of Small Business Ownership
For years, “Main Street” has been the economic and cultural heart of America. Prior to the Covid Pandemic, there were more than 31 million small businesses in America. Making up 99.9% of the domestic business ownership landscape.
Did the Covid Pandemic change the small business landscape? Certainly. Although, on paper, it may seem not. As of 2022, there were more than 33 million small businesses in the United States. Meaning that the Covid Pandemic saw the growth of small business ownership. By more than two million new organizations.
But as you probably know from firsthand experience, there is more to it than that. According to a small business roundtable report cited by CBS, as many as 22% of small businesses closed their doors in February of 2021. It doesn’t seem hyperbolic to say that nearly everyone came out of the pandemic with a sad story about a favorite local spot going away for good.
As you can see, not everything is lining up here. Beyond the usual need to reconcile different surveys, there might be some significant changes to the method of inputting data (e.g. what qualifies a small business).
To make things seem rosier than they are. But such investigative journalism is beyond the scope of this article on payment systems for small business owners. So, we will let you dive into that rabbit hole yourself if you’d like.
Covid Changed the Way We Do Business and How Small Businesses Take Payments
Suffice it to say, Covid changed the way we do business. Like any other crisis, business owners that responded proactively had a better chance of keeping their doors open. Curbside pickup, delivery, and contactless payments became a few hallmark features of the new B2C landscape in the pandemic era. And in terms of payment services for small businesses, that meant new technologies and new modalities.
Large corporations were poised to make these kinds of changes. They could leverage huge moats of cash or obtain financing to forge new partnerships. Or, they could do internal overhauls of legacy systems and sales paradigms.
This in turn changed how consumers view a shopping experience. For instance, even in 2022, 66% of millennials choose curbside pickup as a means of obtaining a desired purchase.
And what about small business owners? As of now, around 93% of small business owners are using at least one technology platform to manage their business. This is a far cry from the days of Main Street movie theaters and ice cream parlors.
It’s been about 100 years since the heyday of a main street atmosphere you can now only find at Disneyland. But, within the last three years, tech usage has accelerated as a necessity of the times via consumer demand.
And once again, a significant portion of that technological shift involves payment solutions.
Who Are Small Business Owners?
Interestingly, more than half of small business owners are 55 and older. A significant 9% of them are veterans. Suggesting that successful business ownership is something that (more often than not) accompanies life experience—whether it’s due to the natural course of life or accelerated by military service.
It does take a unique type of driven person to run a small business. Around 18% of small businesses will close after one year, 50% survive five years, and just 35% survive ten. As mentioned, running a business is a complex process that involves a lot of juggling, thinking on your feet, and commanding the ship through periodic storms.
As you might guess, the largest small business territory is food and beverage. With 12% of that industry comprised of small businesses. Retail and business services are next at 11%. Followed by health, beauty, and fitness at 9%. Finally, residential and commercial services at 7%.
One interesting upshot of this particular finding is that small business owners will still need solutions for in-person payments. Like POS systems, in addition to online payment gateways.
Complex Problems Require Simple Solutions
This payment processing complexity (e.g. juggling multiple solutions) is typical of doing business today. Supply chains are more complicated than ever, there is more competition than ever. Not only for consumer loyalty but even for consumer attention.
And to top it all off, there are dozens, if not hundreds, of software options for everything from inventory management to payroll. Creating thousands if not tens of thousands of permutations, combinations, and integrations. Far more than lions, tigers, and bears. Oh my!
But business owners (as seen) who make it in the long haul know how to pivot. More importantly, they know when to outsource and delegate. Around 37% of small business owners are very happy, 35% are somewhat happy, and only 4% are unhappy.
Small business owners typically love what they do and they work hard. But they know when to hire someone or something who can do a particular task better. And once again, that includes finding the right merchant account.
No business owner wants to do their HR, payroll, and accounting with paper and pencil (although maybe some do, to be fair). And most business owners who have found reliable inventory software have switched to app-based inventory management, instead of tacking receipts to a bulletin board (although it does have sort of a rustic look, perhaps well-paired with coffee stains on a drop-tile ceiling). The same is true about the world of card readers and transaction fees. Let someone else manage this multifaceted headache!
So now let’s look at the landscape of payment systems for a small business.
POS Systems
Once upon a time, merchants collected credit cards and rubbed the embossed numbers onto a carbon copy paper to run a charge at the end of the day. As artistic as such moments were, card companies have long since moved on.
In fact, by 2033, Mastercard (and probably Visa) will have totally phased out magnetic strips. So much so that you won’t even find them in Disneyland. That said, your point-of-sale system will need to have a chip reader and probably a contactless one as well.
You probably already know what a POS is, unless you’re one of those merchants still collecting embossed numbers. This is a device that may or may not be integrated into your cash register. Which can collect debit and credit card data from in-person transactions.
This data is sent over a card network—e.g. Visa, Mastercard, Discover, or American Express. And ultimately facilitates the transfer of money from a customer’s checking account or credit line into your merchant account.
How Much Does a POS System Cost?
Today’s POS systems have extra bells and whistles that can help your business. This can include software to help manage your inventory, track pricing, and gauge consumer behavior. For instance, you can determine average sale sizes, what times of the day see the most sales and even what types of items customers typically purchase together. Data like this can help you rearrange the flow of the store and inform your purchasing patterns to maximize profit.
But what’s the cost of all this? A complete POS cash register can cost up to $1,200 per unit. That’s out of pocket, of course. Which is a relevant consideration, because you can also find a payment processor that will let you rent or lease the POS system.
In the rapidly changing payment landscape of disappearing magnetic strips, chip insertions, and contactless payments, it’s probably a good idea to let someone else own and service the hardware.
If you already have POS systems and terminals, but they don’t accept contactless payments (and especially if they don’t accept chip (EMV) payments) you will need to upgrade your hardware to avoid being phased out of existence.
In the long run, payment options are all moving toward a bizarre future (utopian or dystopian, depending on who you’re discussing it with). Where people wave their microchipped hands over a POS to make payments. And if you think that’s a hyperbolic assessment, take it up with the folks over at Walletmor.
The Importance of Contactless Payments
But even before we reach that Star-Trek-like Or Revelationary future, POS systems will need to be upgraded to accept contactless payments via card or mobile device. Tea-sipping, crumpet-eating bankers over at Barclays (across the proverbial pond) are saying that contactless spending was up by 50% between 2021 and 2022. Specifically up 38% in grocery, 54% in household staples, 98% in electronics, and 77% in furniture.
Why some businesses saw more contactless spending than others could yield an interesting Ph.D. thesis. Purchasing electronics does seem a bit more high-tech than milk, bread, and eggs, perhaps impelling consumers to explore new frontiers.
But again, such analysis is beyond the scope of this article. If you accept credit cards, your business may or may not be more likely (currently) to need contactless payments. But with the disappearance of magnetic strips and increased consumer preferences for contactless payments, this is one train you’ll need to jump on if you want to arrive at the Main Street of the future.
Convenience tops the list in terms of consumer reasons for embracing contactless payments. Almost 48% of those polled expressed appreciation for the fact that contactless payments are almost ten times faster than other payment methods (swiping or chipping in particular). And despite the fact that mask mandates and quarantines have (mostly) gone away, around 36% of consumers still appreciate contactless payments for health and safety considerations.
Online Payment Gateways
Online payment gateways are an obvious must if your business is entirely eCommerce. But even for brick-and-mortar businesses, an online store can complement your in-person retail revenue.
For instance, during those times when your store is closed, people can place orders online. If they aren’t able to come into your store for whatever reason, you can also retain their business without them shopping with big businesses such as Amazon or Walmart.
This is especially true if you are operating a restaurant. An online payment gateway gives customers the opportunity to dine with you even if they can’t get out. Say, for instance, that you’re a small boutique pizzeria offering delivery. An online payment gateway can be the difference between a customer ordering from you and ordering from a big business like Dominos.
Watch Out For Payment Gateway Aggregators
Setting up an online payment gateway is not as easy as using Shopify Payments or PayPal. For starters, these payment processors are actually payment aggregators. This means they collect a large number of merchants under their own merchant ID. While this can streamline the approval and setup process in some regards, it can also have its downsides.
If you’re having any issues, they’ll drop you like a hot tamale. A few more chargebacks than usual, a one-off fraudulent purchase, or even a legitimate transaction far above and beyond your average transaction amount can get your account frozen or dropped. And because you won’t have a personalized account manager, it can take much longer than you’d like to get the issue resolved so you can get back to business.
The solution to these issues is working with a payment processor who can give you the time of day. This means a dedicated account manager to serve as a point person for problem resolution. It also means a more flexible fee and payment structure that works for your business. Rather than having to adopt the policies of a large company like PayPal or Square (the Wizard of Oz behind Shopify Payments).
QR Codes
A QR code is essentially a little chessboard of black and white squares that can be scanned with a phone. Which will then direct the scanner to a website. If the end goal of directing the scanner to this website is to collect a payment, they’ll be greeted by a payment gateway.
QR codes are increasingly being used in restaurants to expedite service, especially table turnover. The placing of orders and tabulating of the final bill becomes a simultaneous activity that doesn’t require a server to take a plastic card to a terminal in the back and add up the final check.
In a fast-paced environment like a restaurant, where customers experience a combination of goods (food) and service (being waited on) and require a space to do so, QR codes may prove to change the game.
Perhaps that’s why of the 1 million restaurants in the United States, around 52%, have switched to using QR codes to collect orders. Or at least have incorporated them into the possible methods of collecting orders and processing payments.
What business owners need to know is that for the time being, QR codes are processed as a card-not-present transaction. Because the customer is essentially being taken to an online payment gateway. Just as they would if they were shopping at home. As online purchases carry a higher risk of fraud, these purchases will have higher processing fees.
That’s a tradeoff you might be willing to make if QR codes can expedite the speed of service, and/or kill two birds with one stone. As they do in the restaurant industry, where they facilitate payment and order collection at the same time.
Another consolidation is the benefit of QR codes for popup shops or satellite stores. You don’t need any hardware for a QR code. Making it very helpful for facilitating a more hassle-free booth or kiosk setup. Without the need for electricity, batteries, or even a charged-up phone.
Mobile Payments
Mobile payments are another payment model you’ll want to accommodate. These payments are facilitated by mobile phones and often by so-called mobile wallets that store encrypted card information.
Consumers appreciate the convenience of contactless payments. Some of them appreciate the convenience of contactless phone payments even more. Because they don’t even have to take out a credit card.
Having the right hardware to accept mobile wallets like ApplePay and GooglePay can make a smoother customer experience. Especially for the 32% of polled consumers who said they’d like to pay for everything with their mobile phone. To be fair, the same survey found that 24% don’t want to pay for anything with their phone, at all, ever.
A significant 15% of consumers said they wanted to pay for everyday purchases with their phones. A statistic that is likely to increase as time goes on. Research conducted by certain think tanks has resulted in estimates that by 2026, 60% of the global population, or 5.6 billion people, will be using mobile wallets. To put things in a little perspective, the entire population of planet Earth was 5 billion in 1987.
Wrapping up Small Businesses Payment Systems
If you’re a small business owner, you probably realized long ago that taking cash, check, and card meant more business. Although checks are definitely out and cash might be soon as well, you’ve still got to offer a number of different payment methods. Namely, chip, contactless, and even mobile (for in-person transactions), online payment gateways, and perhaps QR codes. Depending on the nature of your business.
Working with a payment processor who can service all these modalities and who gives you dedicated attention with account management, are the pieces to a payment processing system your business needs to thrive.
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