How to Accept Credit Card Payments

Updated on January 27, 2021
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accepting credit card payments

As a small business owner, outfitting your enterprise to take credit card payments isn’t as simple as you might expect it to be. When it comes to choosing a payment processor, you’re a bit spoiled for choice—but with all of those choices come equipment and fees to stay on top of.  

But don’t let these complications deter you. Accepting credit card payments is crucial to the success of your small business, and the better you understand how the process works, the more empowered you are to choose your payment processing system wisely.

A Step-by-Step Guide to the Credit Card Payment Process

Before we get granular on the component parts necessary to the process, we’ll lift the hood on what’s really occurring every time you accept your customer’s credit or debit card at your store.

1. You input your customer’s credit card information into your card reader. The equipment or software required to accept this data depends on whether the transaction is in-person, online, or over the phone—we’ll get into greater detail on equipment later.

2. After you swipe/dip/tap/manually input the data from your customer’s credit card, your payment processor transmits that data to your merchant account. If it’s an online sale, then your customer’s information passes through a payment gateway, which authorizes merchants to accept online payments and securely submits the customer’s credit card information.   

3. On the way to your merchant account, your payment processor checks in with the customer’s bank, or issuing bank, before they can accept or deny the payment information. That decision depends on whether the customer has sufficient funds, is spending below their credit limit, and whether there’s evidence of fraud.

4. If the issuing bank approves of the customer’s purchase, then you can accept the payment and complete the transaction. If the bank doesn’t approve, then the customer’s payment will be declined.

5. Once approved, your payment processor will deduct their fees and then deposit the remaining funds into your merchant account. All told, you should see funds for each approved transaction in your business bank account (minus fees) within a few days.  

Merchant Accounts vs. Payment Service Providers (PSP): Which Should You Choose?

To accept credit card payments, you can go old school or new school: Open a merchant account, or opt for an all-in-one payment processing system. There’s a lot to learn about each of these options, but here are the most salient details.

Merchant Accounts

The traditional way for merchants to accept credit card payments is by opening a merchant account. Basically, a merchant account is a type of bank account. Funds from credit card purchases are deposited into that account first, before being transferred into your bank account.  

There are hundreds of merchant account providers out there, including banks, independent sales organizations, or payment processing companies themselves. You might be able to sign up for a merchant account online, but you’ll likely need to contact a sales representative and negotiate a contract. In addition to countertop credit card terminals, some merchant account providers offer equipment and services like mobile card readers and ecommerce payment setup.

But beware: Merchant accounts can come with lots of attached fees, like setup fees, software or equipment fees, monthly fees, early cancellation fees, and processing fees, among others. And many merchant accounts aren’t exactly forthright about the existence of these added costs in the fine print, which may leave you with an unpleasant surprise when your bill arrives.

Payment Service Provider

As an alternative, you can opt for a streamlined payment service provider (PSP). Popular examples of PSPs include Stripe, Square, PayPal, and Shopify.

These all-encompassing payment processing systems allow business owners to accept credit and debit card payments without requiring the business owner to open a separate merchant account; the merchant account is baked into the product itself. Generally, too, PSP fees are much more clear-cut than they are with a traditional merchant account.

Also know that POS systems have capabilities other than simply accepting credit card payments. For instance, with the Square POS app you can track inventory, manage employees, quickly deposit funds into your bank account, and accept credit card payments even when you don’t have internet access.

Major Credit Card Processing Fees to Watch out For

Unfortunately, accepting credit card payments comes with a price.

Although the exact credit card fees you’re responsible for are dependent upon your payment processor and the equipment you need, the two major (and unavoidable) fees involved in this process are the interchange rate and your payment processor’s markup.

Interchange Rate

The four major credit card companies—Visa, Mastercard, Discover, and American Express—charge a fee for using their products. This fee is known as the interchange rate.

Rates vary among card companies, as well as the level of risk involved in the transaction. For instance, an in-person transaction is less risky for the card company than an online transaction, because there’s less chance of fraud if the merchant can verify the customer’s identity. Card networks consider certain businesses and industries riskier than others, too, which can result in a heftier fee.  

Markup Fee

Your payment processor handles interchange rate fees for you, but they’ll charge an additional fee, or markup, on top of the standard interchange rate. That markup is how the processor makes money off each transaction.

Markup rates vary depending on the risk of fraud involved in the transaction, as well as your particular processor and their payment plan. Here are a few types of payment plans you might encounter:

Tiered Plans

Traditional merchant accounts often have either tiered plans or interchange-plus plans.

If your processor has a tiered plan, they’ll charge a different fee depending on the type of transaction that’s taking place; and, once again, the riskier the transaction, the greater the fee. Factors like the type of credit card involved in the transaction (e.g. a rewards card, miles card, or business credit card) and the method of payment (i.e. online, in person, or over the phone) help determine risk.

That said, you can’t always predict which tier the processor places which transactions in—and, as a result, you can never really know how much you’ll be charged per transaction. For that reason, tiered plans can become costly, or at least pose a giant question mark in your business budget.

Interchange-Plus Plans

This payment plan rolls the card company’s interchange rate and the processor’s markup fee into one fee. The markup is typically a small percentage of the interchange rate, plus a fixed dollar amount.   

Flat-Rate Plans

Flat-rate plans charge fixed processing fees per transaction. Typically, PSPs have flat-rate payment plans.

As an example, Square charges:

  • 2.6% + $0.10 for in-person transactions
  • 3.5% + $0.15 for manually entered payments
  • 2.9% + $0.30 for online payments

Because of their transparency and consistency, flat-rate plans enable business owners to better plan for credit card processing fees within their budget. But if your credit card transaction amounts are on the larger side, those small percentages can add up quickly.   

How to Accept Credit Card Payments in Store or On-the-Go

Now that you understand the nuts and bolts involved in credit card acceptance, we’ll tell you exactly the gear you need to accept credit card payments in any scenario.

In Store

To accept credit card payments in your brick-and-mortar store, you’ll need either a merchant account plus a traditional credit card terminal, or a point of sale system.

Regardless of whether you have a credit card terminal or a POS, your customer will swipe, tap, or dip their credit card into the terminal, which sets off the process explained above. Also remember that markups tend to be lower for in-person transactions, since there’s less risk of fraud in these scenarios.   


To accept credit cards online, you obviously don’t need a countertop credit card terminal or a POS system with physical hardware. Instead, you’ll need a merchant account that enables online payments plus a payment gateway, or a payment service provider that already includes both—that’s in addition to your ecommerce store itself, of course. (Heads up: Square and Shopify both offer services that let you create online stores, and Square’s ecommerce platform is free.)

Alternatively, you can buy a virtual terminal, like those offered by Square and PayPal. Virtual terminals are software that essentially turn your computer into a credit card terminal, into which you can manually input your customer’s credit card information. For that reason, if you plan on accepting payments over the phone it’s a good idea to invest in a virtual terminal.

Keep in mind that markups for online transactions are higher than those for in-person transactions, since there’s a much greater risk of fraud. Processing fees for manually entered credit card information tend to be highest, due to the (very real) possibility of human error involved in these transactions.

via Smartphone or Tablet

If you want to accept in-person credit card payments but you’re not tied to a brick-and-mortar location—let’s say you’re a food truck owner, a massage therapist who makes house calls, or you often sell your products at crafts fairs or farmers markets—then you’ll need to invest in a mobile card reader that plugs into your smartphone or tablet.

Luckily, this hardware isn’t hard to find—most POS providers, like Square, PayPal, and Shopify, all offer free or inexpensive mobile readers and an accompanying app. Most mobile card readers on the market today are capable of accepting swipe and chip cards, and some, like Shopify’s mobile reader, are also compatible with NFC payments (that’s the “tap” card).

Since these are in-person transactions, processing fees are on the lower end when you receive credit card payments via your phone or tablet.

Choosing the Right Way to Accept Credit Card Payments for Your Business

Understanding the process, equipment, and fees involved when you accept credit card payments is certainly important—but only inasmuch as that knowledge informs your decision about which payment processor to choose for your business.   

Ultimately, whether to opt for a traditional merchant account and credit card terminal or a PSP largely depends upon the volume and average price of your transactions. If you’re processing tons of credit card transactions for expensive items, then the per-transaction flat fees a PSP charges will rack up quickly. Comparatively, a traditional merchant account may be more affordable, even though they come with more types of attached fees.

In general, PSPs are excellent options for startups and the smallest of small businesses, not least because their payment structures are much more transparent and manageable than those for merchant accounts. They also don’t usually require years-long and tough-to-break contracts that merchant accounts do.

But if you’re a larger small business, or if you anticipate growing rapidly in the near future (with the increased credit card transactions to match) you might find the support and lower cost you need with a traditional merchant account.

Whichever route you choose, make sure that you’re equipped with the hardware and software necessary to accept payments in any scenario, especially if you want the option of selling your products or services outside a physical location.

Caroline Goldstein
Contributing Writer at Fundera

Caroline Goldstein

Caroline Goldstein is a contributing writer for Fundera.

Caroline is a freelance writer and editor, specializing in small business and finance. She has covered topics such as lending, credit cards, marketing, and starting a business for Fundera. Her work has appeared in JPMorgan Chase, Prevention, Refinery29, Bustle, Men’s Health, and more.

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