As consumers, we take credit cards for granted. We present a card to buy goods or services, and the transaction gets approved almost instantly. The charges appear on our monthly statement. For business owners, there is a lot more to understand about how to accept credit card payments. Read on to learn all about getting set up, acceptance methods, the steps in a transaction, and pricing so you can make an informed decision when choosing a provider. Let’s get started.

Accepting credit card payments is a complex process that involves numerous entities and processes working behind the scenes to ensure that transactions remain secure and that money flows to the right place. Here are the primary parties involved:

• Merchant: A merchant is any business that sells goods or services and accepts credit and debit cards for payments.
• Cardholder: A cardholder is the person making the purchase. It could be a consumer or another business.
• Card brands: The card brands—also called card associations or card networks—set the standards and policies for issuers and acquirers. They also set interchange fees and assessments. The major brands include Visa, Mastercard, Discover and American Express.
• Acquirer: The acquirer is the merchant’s bank or financial institution that the card brands license to process payment transactions and settle the funds into the merchant’s account.
• Issuer: The issuer is a financial institution or entity that extends credit to a cardholder and issues a card under one of the card brands.
• Payment processor: A payment processor is an acquirer or a third-party provider that acts as an intermediary between the issuer and acquirer that captures purchase details from the merchant, routes transactions to the appropriate network for authorization, and sends the response back to the merchant. Payment processors underwrite each merchant account on behalf of its acquiring (“sponsor”) bank and manage risk and compliance.

Other entities that may be involved in providing technology and operational services include:

• Payment gateway provider: A payment gateway is middleware technology commonly used to securely transmit online payment data to a payment processor. While mostly used in e-commerce, some gateways accept in-person payments captured on a credit card reader. Some payment gateways are independent third-party intermediaries, while others are owned and operated by an ISO or a payment processor.
• An ISO or MSP: Registered resellers of merchant services accounts aligned with acquirers to enroll businesses in payment processing services on their behalf. Visa refers to them as Independent Sales Organizations and Mastercard calls them Merchant Services Providers.
• Payment Facilitators (PayFac) or Payment Services Provider (PSP): A third-party business or platform that contracts with an acquirer to provide payment services to their customers, referred to as “sub-merchants.” Stripe, PayPal, and Uber are well-known examples of PayFacs. An acquiring bank sponsors the PayFac, which is the merchant of record. The PayFac receives all funds and settles respective deposits to its customers’ bank accounts.

All types of businesses can be set up to accept credit cards. It could be a bricks-and-mortar shop or services business, an e-commerce business, a mobile business like a food truck or in-home service provider, a personal or professional company like a law office or accounting firm, or a company such as a manufacturer that provides goods and services to other businesses or government agencies.

Most established businesses will sign up for a merchant services account through a payment processor. Getting approved is not guaranteed, and the onboarding and underwriting process requires a review to verify the authenticity of the business. Merchant underwriting verifies that a business has sufficient funds and resources to fulfill its obligations to its customers. The goal is to ensure that a merchant can accept payments safely and securely and be accountable to customers.

A thorough “Know Your Customer” (KYC) underwriting review helps reduce risk. It involves evaluating the company's ownership structure, financial records, customer terms, and other factors. Here are some of the common things that underwriters look for:

• At least three years in business. Previous tax returns are usually required.
• Verified as a bona fide business and that the principal business owners are applying for the account.
• Verify that “doing business as” (dba) company names are legitimate
• An open business bank account
• A positive business and personal credit rating
• A good record with any previous merchant accounts
• A low chargeback ratio
• Policies related to billing terms, refunds, guarantees and fulfillment
• Data security handling

Online businesses get more scrutiny due to a potentially higher risk of fraud. Extra steps in the underwriting process include:

• Verification or URLs and website domain ownership
• Customer service processes related to delivery, returns, refunds, and data privacy
• Disclosures that define transaction currency, export restrictions and terms and conditions

“High Risk” businesses like i-gaming or e-cigarette sales undergo a rigorous underwriting process. Merchants in this category could be subject to the holdback of funds to cover any potential losses.

Whether a payment is initiated in person or online, the credit card transaction flow involves three steps: Authorization and Authentication, Clearing and Settlement, and Funding.

Authorization and Authentication:

1. The cardholder presents a credit card to the merchant as payment either in store, online, by phone/mail, or in an app.
2. The purchase information and card details are sent to the payment processor who routes it to the appropriate card brand’s network.
3. The credit card network forwards the information to the cardholder’s issuer for authentication and approval.
4. The issuer validates the cardholder account details, checks the available line of credit and responds with an approval or decline. The issuer will reserve the necessary funds in the customer’s account if approved.
5. The communication loop is closed with the card network, payment processor and merchant.

Clearing and Settlement:

1. The merchant sends a batch of approved transactions to their payment processor, typically at the end of each day.
2. The payment processor forwards them to the acquirer.
3. The request for sent to the respective card networks and forwarded to the issuing banks.
4. The issuers charge the cardholders’ accounts, subtract the interchange fees owed to the issuer, and send the remaining funds to the acquirer via the card networks.

Funding:

1. The acquirer deposits the funds into the merchant’s bank account. Merchants typically receive the funds within 24 – 48 hours.
   • In the PayFac model, the funds are deposited to the PayFac’s account. The PayFac pays out funds to its submerchants.
     Read our PayFac article for more information about the definition, features and benefits of PayFac as a Service.
2. The acquirer may deduct their fees at the time of the deposit or may collect all transaction-related fees once a month, depending on their contract terms.

There are differences in how credit card payments are accepted, primarily driven by the way in which payment details are initially captured.

In-person credit card payments

Most businesses that operate a physical storefront use a credit card terminal to accept in-person payments. It could be a stand-alone device that simply captures card details and routes transactions for processing, or it could be integrated with your point-of-sale system or other software you use to run your business.

The customer inserts, taps or swipes their credit card, phone or wearable on a terminal at the checkout (like a retail counter) or on a mobile device (tableside or in a customer’s home).

Online credit card payments

E-commerce businesses and businesses that allow customers to pay bills or make donations can collect payments through their websites, emails, and apps. Merchants can add a “pay now,” “buy now,” or “donate now” button to a hosted form on their website that allows visitors to securely enter sensitive card details.

Pay-by-link allows a business to send an email or text with a link to a digital invoice that contains a secure form to submit payments from any browser-connected device. Digital invoices are great for services such as healthcare providers, automotive services, law offices,

An e-commerce site typically connects with an integrated shopping cart platform.

Telephone and mail order credit card payments

Businesses that take payments over the phone or by mail typically key payment details into a Virtual Terminal hosted by the payment processor, or into payment-related fields in their business software. Address Verification Service (AVS) is a fraud-fighting measure that captures a customer’s address, zip code and card verification value (CVV) code and sends it with the authorization request.

Recurring and subscription credit card payments

Businesses that set customers up to make payments regularly can securely store credit card details with customer records. The first time a transaction is run, the payment processor will replace sensitive credit card information with a token to be stored for future payments. Tokens have no value if stolen during a data breach.

Understanding the cost of credit card acceptance is complex. The US has hundreds of interchange categories, with various rates varying wildly. Add to that processor-specific mark-ups and fees and it’s easy to see why calculating the true cost is nearly impossible.

Interchange and assessments

Interchange fees are non-negotiable and set by the card brands. They consist of a percentage (typically 1% - 3%) of the transaction value plus a flat authorization fee (typically less than $0.50). Interchange fees are deducted from each transaction, most of which goes to the card issuer. The card brands also collect an assessment fee to cover the operating costs of managing their network.

Interchange and assessments comprise nearly 99% of the total transaction fees for accepting credit cards. The rates vary, depending on several factors:

• Card brand: Visa, Mastercard, American Express, Discover set card brand-specific wholesale rates for each interchange category.
• Card type: Rewards, purchasing, corporate and government-issued cards carry higher interchange rates than consumer non-rewards cards. Debit cards typically cost less than credit cards.
• Merchant segment: Sometimes, a merchant’s industry (airline, supermarket, hospitality, small ticket, etc.) and processing volume tier factor into Interchange rates. Often, higher rates are applied to segments with a higher risk of fraud and chargebacks.
• Capture method: Card-not-present and manually keyed transactions are riskier and more expensive than card-present purchases made in person with a swipe, dip or tap.
• Transaction data: Including data such as zip code, CVV, sales tax, and item detail can lower interchange rates, especially for commercial card transactions.
• Settlement windows: Transactions downgrade to higher rates if you don’t settle a batch within 24 hours.

Transaction pricing

Merchants indirectly pay Interchange and Assessment fees through their payment processor, which adds a markup to each transaction (percent and/or flat fee) to cover the costs of technology, regulatory overhead, fraud and risk management, security and compliance, and support. The markup is sometimes referred to as a “discount rate.” The three most common pricing models are:

• Flat pricing: Small businesses with low transaction volume (i.e. less than $3,000 per month) prefer the simplicity of flat pricing, which bundles all account fees into one, two or three rates, typically card-present, card-not-present and key-entered. Payment facilitators like Square and PayPal employ this method.
• Tiered pricing: Interchange fees are divided into general rate tiers such as Qualified, Mid-Qualified and Non-Qualified. Risk factors and the card’s reward level determine the appropriate tier. It’s a subjective pricing model, meaning each payment processor can define their thresholds. Missing information or late settlements can cause transactions to downgrade to the most expensive tier.
• Interchange Plus pricing: This is the most transparent pricing plan, preferred by most mid-tier and large businesses. Merchants pay the card brands’ published Interchange plus the payment processor’s flat markup. However, the “plus” is dictated by the processor and what goes into the markup varies greatly.

Discretionary fees

The card brands are only responsible for setting the wholesale pricing charged to acquirers as Interchange and Assessments. The payment processors and third-party providers involved in the transaction flow define discretionary merchant fees. The most common fees include:

• Application fee: A one-time fee charged when a business signs up for merchant services.
• Monthly or annual fee: A charge to cover operational costs to service the merchant.
• Gateway fee: A per-transaction flat fee for using a gateway service.
• Statement or reporting fee: A fee to cover printing and mailing costs, or the cost to maintain online merchant portals.
• PCI Compliance fee: Covers the cost of a merchant validating compliance with payment card industry security regulations.
• PCI non-Compliance fee: Sometimes charged for merchants who neglect to certify PCI compliance.
• AVS fee: A nominal fee ($0.01 - $0.03) added to telephone and e-commerce purchases as a fraud prevention measure.

Some providers get creative and add various nuisance fees for things like tax reporting, next-day funding, early termination, EMV non-compliance, customer support, etc. This is why looking beyond an attractive transaction rate is critical in understanding the total cost of accepting payments.

On the surface, it may seem expensive to accept credit cards, but the benefits of acceptance far outweigh the costs. Here are the top reasons merchants across all industries accept credit card payments:

• Higher sales: Customers aren’t limited to the amount of cash in their wallets and are more likely to make impulse purchases. Plus, many consumers like earning reward points for travel or cash back with every purchase. Increasingly, with the advent of click/tap-to-pay and digital wallets, purchase costs fade to the background. Consumers continue to use credit and debit cards for most of their payments, accounting for 57 percent of total payments in 2021.
• Speedier checkout: Credit card transactions are completed in seconds since there is no exchanging of money and change.
• Customer confidence: Accepting credit cards positions your business as legitimate in customers' eyes, especially for online and e-commerce purchases. Plus, fraud prevention tools like EMV, AVS and chargeback protection extend peace of mind.
• Improved cash flow: For businesses that invoice customers and wait to receive checks by mail, accepting credit cards improves days to receivables. Adding a simple “pay now” button to your website or sending digital invoices is a fast and convenient way for customers to pay.

While the popularity of credit cards is undeniable, some consumers may not be candidates due to low credit scores or other factors. According to a 2019 report by the Federal Reserve, 22% of American adults (63 million) are either unbanked or underbanked. The 6% of unbanked Americans have no bank account and must rely on alternative financial products and services—such as payday loans, check cashing services, money orders—to manage their finances. The 16% of underbanked Americans have some sort of bank account but rely on alternative financial services.

In addition to accepting credit cards, businesses are wise to accept alternative payment methods. This helps reach a wider audience, increasing sales. Plus, many alternative payment methods carry lower transaction costs than credit cards. Here are the leading alternative payment methods in the US:

• Debit cards carry the convenience of a credit card, but funds are debited from a customer’s bank account instead of being applied to a line of credit. This helps consumers better manage finances since purchases can only be paid with available funds.
• ACH bank transfers use the Automated Clearing House network to directly move funds between customer and merchant bank accounts. ACH is a low-cost alternative to credit cards.
• eCash services like Skrill allow unbanked and underbanked customers to pay with the convenience of a card, which is especially useful when making online purchases.