How to Choose a Small Business Payment Processor

By Julie Knudson | Posted January 05, 2015

When small business owners look for credit card processing options, the first place many turn to is their bank. However Phillip Parker, founder of CardPaymentOptions, a site that reviews and compares card processing services, and author of Fee Sweep, says that banks may not be the best source of information or services. "They just act as a reseller of another provider," said Parker. "Typically, banks have the worst pricing, and they have some of the worst contracts."

You'll find a lot of credit card payment processors in the marketplace, so how do you pick one that's right for you?

Selecting a Credit Card Processor

Begin narrowing down the various options by considering how you want to accept payments. According to Darrah Brustein, co-founder of Equitable Payments—a consulting firm that works with merchants to find the right payment processing solution for their needs—says that answering a handful of questions about your business will help in the search.

credit card processing for small business

"Are you primarily a swipe merchant or an ecommerce merchant? Are you mostly doing phone payments? Are you more mobile-based, or are you some combination of all of the above?" asks Brustein. "If you're strictly an ecommerce merchant, you're going to have different needs—from both a technology standpoint and from a rate standpoint—than you are if you're a majority swipe merchant," Brustein says.

Evaluating how your industry generally does business also helps you identify the best solution. "A restaurant's going to need a different type of processing equipment than, say, a small shop with one register," Parker says. "If you have a mobile business, you may be more inclined to use your smart phone to accept payments. If you own a small coffee shop, you may want to use a tablet with some sort of an app that takes credit cards."

Different payment processors may support only a slice of these technologies, and you don't want to limit your options if you intend to rely on one or more specific platforms. Parker says that if he were running a small business, "I'd probably start by talking to other business owners and ask them which payment processor they use. See if they're happy with the vendor they're using, and go from there."

Credit Card Processing: Pricing Tiers

The credit card processing industry is powered by a wide variety of pricing tiers and fee structures. Equitable Payments' Brustein says that providers such as Square and PayPal, for example, use flat-fee pricing. In this scenario, you pay a flat fee per transaction, and there may be a monthly fee as well.

"All your swiped transactions cost one rate, and all non-swiped cost another rate," Brustein explains. "This is advantageous in the cases of businesses that don't do high volumes; it's really simple, it's straightforward, and business owners know exactly what they're going to pay." She adds that once a business starts doing about $2,000 a month in total transaction volume, that's when it usually makes sense to move away from the flat-fee pricing model.

In most other pricing models—processors refer to them by many different names—rates vary according to the card used. As you shop around, Parker encourages you to ask for a structure often called "interchange plus," which takes all those different rates and adds a simple percentage to the top.

"If you swipe a particular card and that card runs at one-and-a-half percent, you pay the one-and-a-half percent on that card. Then the provider's allowed to add a small markup," he says. That means if the interchange rate is 1.5 percent and the markup is 0.3 percent, you'd pay a total of 1.8 percent on that card.

It's a relatively transparent pricing structure, Parker says, which "makes it possible to compare processors across the board."

Credit Card Payment Features

Once you've identified a card processor that offers the fees and services to match your business needs, you should consider a few other things before making your final decision. One primary concern: the contract term they want you to accept. "Ideally, you want a month-to-month agreement with no early termination fee," Brustein says.

Processors may try to push three-year contracts that automatically renew. Most of these contracts also include an early termination fee that could range from a few hundred dollars up to several thousand. "These are the first questions you should ask," Brustein says. "What are the contract terms? What's the early termination fee?"

Some small businesses may need a dedicated piece of equipment—a credit card terminal—to process cards. If so, it's important to know how the equipment side of the payment process will work. Parker suggests asking the following questions:

  • Are they providing the equipment as a rental?
  • Do they want to lease it to you?
  • With sufficient cancelation notice, can you return the equipment without being charged for it?
  • Can you purchase the equipment outright (ahead of time)?

Parker believes it's best for businesses to purchase their equipment outright if possible. Many entry-level setups run from $150 to about $300. "Typically," he said, "it's a lot less expensive over the long term."

Julie Knudson is a freelance writer whose articles have appeared in technology magazines including BizTech, Processor, and For The Record. She has covered technology issues for publications in other industries, from foodservice to insurance, and she also writes a recurring column in Integrated Systems Contractor magazine.

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