Credit Card Processing for Small Business – What I Learned the Hard Way
When I helped my sister set up credit card processing for her bakery, I thought it would take like… an hour? We would just pick a company, sign up, done. Four weeks and about 50 phone calls later, I learned that credit card processing is way more complicated than it has any right to be.
So here is everything I wish someone had told me before we started.
How This Whole Thing Actually Works
Okay so when someone swipes their card at your store, here is what happens in about three seconds:
The card reader grabs the info and sends it to your payment processor. The processor pings the credit card network (Visa, Mastercard, whatever). The network asks the customer bank hey, is this legit and do they have the money? The bank says yes or no. That answer travels all the way back to your card reader.
All of that happens in maybe 2-3 seconds. Pretty wild when you think about it.
Here is the annoying part: you do not get the money instantly. It usually takes 1-2 business days. And everyone along that chain takes a little cut, which is why this stuff costs money.
All The People With Their Hands Out
There is a bunch of different entities involved, and honestly it took me forever to understand who does what:
- Payment processor – The company you actually deal with. They handle the day-to-day transactions.
- Acquiring bank – A bank that works with the processor to hold your money
- Card networks – Visa, Mastercard, Amex, Discover. They run the system that connects everything.
- Issuing bank – The customer bank that gave them the credit card
The thing that frustrated me is that your payment processor might actually be bundling multiple services from different companies. Or they might be handling everything in-house. It varies a lot.
The Fees – Let Us Just Get Into It
This is where it gets ugly. There are SO many fees, and companies love to hide them or make them confusing.
Interchange fees – These go to the issuing bank. You can not really negotiate these because they are set by the card networks. They are usually like 1.5-3% of the transaction, sometimes plus a fixed amount.
Assessment fees – These go to Visa/Mastercard/etc. Also non-negotiable. Usually small, like 0.1-0.15%.
Processor markup – This is where your processor makes their money. This IS negotiable, and it is where you have some power.
Then there is all the extra stuff: monthly fees, statement fees, batch fees, PCI compliance fees, chargeback fees, sometimes even regulatory fees that mean basically nothing. My sister first provider had like 8 different line items on the monthly statement. Switching to a simpler processor saved her about $150/month.
The Pricing Models That Exist
This confused me for the longest time, so let me break it down:
Flat rate – You pay something like 2.9% + 30 cents on every transaction. Simple, predictable, easy to understand. This is what Square and Stripe use. Good for small businesses or businesses with small average transactions.
Interchange plus – You pay the actual interchange fee (which varies by card type) plus a fixed markup. Like interchange + 0.3% + 10 cents. This is usually cheaper for larger businesses but harder to predict monthly costs.
Tiered pricing – Stay away from this. They put transactions into categories like qualified, mid-qualified, and non-qualified, then charge different rates. Problem is, they control which transactions go where. It is designed to look cheap but ends up being expensive. My sister original provider used this and it was a nightmare.
Choosing a Processor – What I Would Do Different
If I were starting over, here is what I would focus on:
First, what kind of business is it? Retail store? Restaurant? Online only? Different processors are better for different setups. Square is great for small retail. Stripe is great for online. Toast is built specifically for restaurants. Do not just go with whoever is cheapest overall – go with who is best for YOUR situation.
Understand the contract. My sister almost signed a 3-year contract with early termination fees. We caught it at the last minute. Lots of processors now do month-to-month, which is so much better. Read the fine print.
Equipment costs add up. Some processors give you free equipment but then charge you more per transaction. Others sell you the equipment outright. Do the math on which is cheaper over time based on your transaction volume.
Customer support matters more than you think. When something goes wrong at 2pm on a Saturday and there is a line of customers, you NEED to reach someone who can help. Ask about support hours and actually test them before you sign up.
PCI Compliance – The Thing Nobody Explains Well
PCI DSS is a set of security rules for handling credit card data. You are required to follow them, and you can face fines if you do not.
The good news: if you use a modern processor with their equipment, most of the hard work is done for you. The terminal handles the encryption, the processor handles the data storage. Your main job is not doing dumb stuff like writing card numbers on post-it notes.
Most processors charge a monthly PCI compliance fee – sometimes $10-20/month. Some will waive it if you complete an annual questionnaire confirming you are following the rules. It is worth the 15 minutes to fill that out.
What I Would Tell My Sister Now
A few years into this, here is what actually matters:
Do not overthink it for a small business. If you are doing under $10K/month in credit card sales, just use Square or Stripe. Yeah, the rates might be slightly higher than some complicated interchange-plus deal, but the simplicity is worth it. No hidden fees, no contracts, easy equipment.
As you grow, re-evaluate. Once you are doing $30K+ monthly, it probably makes sense to shop around for better rates. By then you will understand your business better and can negotiate from a position of knowledge.
Watch your statements. Even with a good processor, errors happen. Fees get added. Rates drift up. Take 10 minutes a month to actually look at what you are being charged.
Accept that credit card fees are a cost of doing business. I have seen business owners try to get customers to pay cash by adding credit card surcharges or giving cash discounts. Sometimes that makes sense! But do not make your customers jump through hoops to give you money. Most people want to pay with cards now – if you make it hard, they might just go somewhere else.
That is my brain dump on credit card processing. It is not glamorous, but getting it right means more money in your pocket at the end of the day. And fewer headaches along the way.
