The world of credit card processing might look like a maze of charges, fees, unwelcome chargebacks, equipment, new technologies, and contracts. That’s because it is. There are more than a few players involved (you, your bank, your customer, their credit card’s bank) and the fees are flying everywhere.
When I talked to 30 merchants, I heard a lot about how opaque the industry is. “It actually reminds me quite a bit of shopping for a mortgage,” said Mark Aselstine of Uncorked Ventures, an online specialty wines retailer. “I’m sure there are some back-end payments going on that the average merchant simply cannot be aware of.”
There’s enough happening when you’re running your own business that you can’t afford to get mired down in choosing the best credit card processing service — so I tallied up the fees for 129 different providers, found the standouts, (including my top pick, Payment Depot) and have a few tips on how to evaluate which is best for your own business.
“Trying to figure out the full cost of credit card processing is hard. In the beginning of my business I was lost and had to do the research to understand what each charge was. It can be quite complicated if you are not familiar with the fees and associated terminology. Once you understand the terms, comprehending each statement is so much easier.”
Nicola Ford
HAUTEheadquarters.com
Our Picks for The Best Credit Card Processor
Full disclosure here: There’s no one best credit card processor for everyone. No matter who you are and what kind of business you have, you are going to have to find out the rates and do the math yourself. The coffee shop on the corner and the auto mechanic next door will probably have different “bests” — and that makes sense when you think how much money those businesses are charging, and how frequently. You get to define your own “best” by the nature of your business, but there are a few hallmarks of a great credit card processor: transparent rates, the right equipment, and strong customer service that makes it easy to get set up and just as easy to troubleshoot. In my research, I found five standout services to give you a great starting point:
- Payment Depot, Best for Large Transactions
- Shopify Lite, Best Hybrid: Online & Brick-and-Mortar
- Square, Best for New Startups
- PayPal, Best for Early-Stage Ecommerce Merchants
- Dharma Merchant Services, Best for Established Nonprofits
Know the Players and Their Prices
The essential purpose of a credit card processor is to assess the risk of obtaining cash from a purchaser’s bank on your behalf — it is verifying that there are enough funds to cover the purchase and backing it for a few days. In addition to delivering the funds from the bank to your business, it’s taking on risk.
The bank that issued your purchaser’s credit card is a partner in sending those funds to you; it also works on behalf of the buyer in the event of a charge dispute, refund, etc.
Who’s paying the cost for these services? You, the merchant, in the form of fees (although many will pass those costs onto their customers by building them into the prices).
“It’s nearly impossible to figure out what the full costs of credit are. First, there are many plans. Do I want one with a per-transaction charge or not? How about a monthly charge? How does the percentage rate factor? But it doesn’t stop there. If I do a card-not-present transaction, the fee is greater than a card-present transaction. If I don’t provide the CVV, the fees increase yet again. Foreign transactions also have a different rate. Visa is different than MasterCard is different than Discover. It’s pretty much impossible to figure out the cost of credit for any given transaction, other than on some kind of average over the monthly billing period.”
Tim Thoelecke Jr.
President
InOut Labs
To dissect what it all means — and who pays whom — consider the players in every transaction:
There’s you, the merchant.
You have a product or service that is sold, and that sale is facilitated when you accept a credit card payment.
If item A is $100 with tax, you swipe the customer’s card for $100 and the journey begins.
Then, there’s your customer (or, as the credit card sees them, the cardholder).
Your customer is agreeing to pay pack their credit card company the $100 it fronted them. This can be a pretty good deal for the credit card company: If the cardholder carries a balance, they will likely end up paying more than $100 for that swipe in the long run.
Players #3 and #4 are your credit card processor and bank (also called the “acquiring bank” because it’s the one getting the money, not sending it).
These two guys are closely linked, with your processor doing the work of assessing your business and credit score, setting up your account, and sending you a monthly summary of transactions, charges, and fees.
When a card is swiped, a message is relayed electronically to your customer’s bank (via the Visa Net or MasterCard System, for example) to determine if they are approved for the $100 transaction. If they are, that money is deposited into your bank account.
The final character is the bank that issued your customer’s credit card.
These are the banks associated with the Visa or MasterCard (or Discover card, etc.) and they charge your credit card processor a fee for their service. That’s called an interchange rate. These rates vary by card type and transaction; a Rewards Visa has a different rate than a Visa Debit, and a swipe with a confirmed CVV has a different rate than one without. (Check out the 2016 rates for both Visa and MasterCard.)
If their cardholder (your customer) convincingly claims not to have received a good or service that they paid for, a “chargeback” to the merchant is sent via the issuing bank. The legitimacy of the claim is subject to the merchant’s evidence of delivery or non-delivery of goods (various processors are more successful with chargeback reversals than others).
Your credit card processor pays the interchange fee. It covers that cost — and makes money — by charging you a marked-up fee (and sometimes a membership fee too). It also might lease you the equipment (another ongoing charge), or have you buy it outright.
There are three different pricing structures a credit card processing service can use to mark up its fees and make a profit:
- Tiered pricing. The credit card processor ranks every type of transaction and sets fees for each one — its fee for a card-not-present transaction, for example, will be different than for a card-present transaction. This type of structure is famously complicated and opaque: Processors don’t share what type of transaction is assigned each rate, or even what those rates are.
I do not recommend this method. This is the old-school way of doing it, and you’ll find this pricing model at processors like Cayan, Flagship, and Chase Checkout. Under some circumstances, you might be able to score a great rate under a tiered structure, but to do so — and know for sure — requires an incredible about of diligent research. Either of your other two options is likely a far better choice. - Interchange plus. The processor charges an up-front fee plus whatever the interchange rate is on the transaction. This fee might be a per-swipe cost (say 25 cents), a percentage of the swipe, or a bit of both. With interchange-plus, you know up front what you’ll be paying each player, but your fees will fluctuate based on card and transaction type.
- Flat rate. The processor sets a rate that’s the same for every single one of your transactions: say 2.9 percent of the swipe plus 30 cents. These rates are typically higher than interchange plus rates, but they’re always consistent. Every swipe has that same set fee.
If you go with a flat-rate processor, and it charges 2.9 percent + 30 cents, it’ll take $3.20 of your $100 charge.
“Companies like Shopify Payments, Stripe, and Square decided to step up and say, ‘Forget this, customers don’t understand what the heck this means. Let’s just make it easy for them and charge them one rate for all transactions. We might make a ton of money on one order with a debit card and lose money on a business credit card order, but in the long run we’ll still make enough profit to make it worthwhile for us to stay in business.’
By removing the complexity, business owners can see the cost, agree to it, and move on with their lives. That’s why those processing services are seeing so much success.”
Allen Walton
SpyGuy Security
To choose the rate structure that’s best for you, simply run the numbers.
Let’s look at $10,000 in transactions for two very different companies.
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You can see that the transaction fee matters a lot if you’re doing lots of small purchases — taking $0.30 out of a $2 swipe is a much larger percentage than that same $0.30 out of a $2,000 sale. For fewer larger purchases, it’s the rate that’ll have the bigger impact.
Processing equipment (terminals, swipe readers, etc.) can also add costs. If the equipment isn’t free, I recommend purchasing instead of leasing. Arif Gangji (Neon Rain Interactive), president of a Denver-based web development firm that works with a lot of ecommerce clients, agrees: “If a business has an in-store point-of-sale system, they are sometimes contractually tied to their processor long-term if they lease the unit,” he says. “Processors love leased credit card machines because that binds the client. Plus, it is primarily all profit for the processor after the first few months.”
Price matters, but it might not mean everything.
I found across the board that no merchant was happy with unclear fees or murky rates. Everyone simply wanted to know what they were paying. In fact, there were a number of merchants who said they’d rather pay more just to know what they were getting, and not having to stress over whether or not they were being swindled.
The Best Credit Card Processors
Payment Depot
Overall Best for Large Transactions
Payment Depot de-complicates its rates with a simple pricing structure: the interchange fee plus between $0.05 and $0.25 per transaction and a monthly fee of $29 to $99. (The higher your monthly fee, the lower your transaction fee.) The big standout here: It doesn’t charge any additional percentage of the swipe fee. That said, it includes a slew of lower-price, mass-consumer clients including Subway, Domino’s Pizza, and Fantastic Sams — but if you’re a small business, Payment Depot is a good choice if your business model is based on fewer, larger purchases.
“Payment Depot charges a flat yearly ‘membership fee’ based on the annual credit card charges you will run, (mine is $700) and that is how they make most of their money. My credit card charges went from 3.5 percent to 1.6 percent by switching to Payment Depot. With my past processor, each month I was handing over almost 2 percent of my profits.”
Ryan McEniff
Minute Women Home Care
Shopify Lite
Best for Hybrid Online & Brick-and-Mortar Merchants
This is a great credit card processor for businesses that have customers in both online and in-person retail environments. Even if you are in one but might expand into the other, Shopify Lite is worth a good look.
Shopify excels at the online space, but it understands the fluidity of retail. If you have a store that, for example, might expand for just a season into a pop-up shop, it provides an extensive tutorial explaining how that might work — even for merchants who have never ventured offline before.
“If you need a full service website, shopping cart, and credit card processor, Shopify is a great option to get up and running quickly without needing a lot of technical experience.”
David Batchelor
DialMyCalls.com
That service-simplicity factor is evident in many other respects. Even with the Lite plan (other plans are Basic, Pro, and Unlimited) there is 24/7 support, including live chat. In my chats, the customer service was extremely friendly, helpful, and patient. The Lite plan doesn’t limit how many products you can sell or how much file storage you get. The website is simple to navigate (with lots of educational information and an FAQ section) and has easy-to-understand terms of service.
The pricing structure – 2.7 percent + $0 (in person) and 2.9 percent + $0.30 (online), with a $9 monthly fee — likely won’t beat out an interchange plus model, but you’ll always know how much you are paying with every swipe. For equipment, a simple $19 card swiper can be purchased (the first one is free); its NFC (near-field communications) chip reader costs $149.
The downsides: Shopify is designed to process credit cards, not debit cards. Some debit cards can be processed as credit, but an extra (more expensive) terminal has to be added to accept them all. Shopify also has a reputation for being unwieldy when contesting chargebacks. If you expect a lot of them, opt for Square, which has a similar pricing model, but $250 in chargeback protection each month.
There is a very real argument that flat-fee processors like Shopify Lite, Square, and PayPal are, bottom line, more expensive than interchange-plus processors. That’s because interchange rates swing from 0.005 percent to more than 3 percent. In the lowest transactions, flat-fee processors still charge their same amount: between 2 and 3 percent. (Conversely, they lose money on transactions with higher interchange rates.)
If you sign up with a flat-fee processor, you’re paying for the convenience of clarity — and for a lot of small business owners, it’s worth it.
“Using Square, I know it costs X amount when I swipe a card through my reader, and X+Y if I type in the credit card number. It’s super simple for me to understand with Square versus other credit card companies. With others, there were a lot of hidden fees and agendas that make trouble for a small business owner who, at the end of the day, is just trying to make a living.”
Danita M. H.
Rated M Wine Infused Foods
Square
Best for Startups
You’ve likely seen the evidence of Square’s success: Its square card readers seem to be the way to pay at just about every food truck and farmer’s market stand these days. Square has proprietary-design equipment that is cool (both aesthetically and in function) and free when you sign up. But the real advantage is for new businesses, which often lack a credit history to qualify for other services.
Square also charges no ongoing monthly fees, which is really great if you’re running a seasonal business or a side gig, and no maintenance fees. You only pay when you make a sale.
Pricing is a flat-fee of 2.75 percent to 3.5 percent + 15 cents per transaction. That includes $250 in monthly chargeback protection, as well as inventory-management features, payroll functions, and online support. All of this is succinctly explained on an easy-to-read, easy-to-navigate website. For businesses that grow, Square is also willing to negotiate its fees to keep you on as a client.
I talked to Shaun Eli Breidbart, a performer with Liberty Comedy Corp, who depends on advance payments to secure performance gigs — he said price isn’t his biggest consideration. “With Square, I can send a payment link to the client and they can pay the deposit by credit card when signing a contract,” he explained. “I’m not super thrilled to give up 2.75 percent, but it does speed things up and makes clients more secure about paying 50 percent in advance. I’m sure that some rush to pay because they want the credit card rewards.”
PayPal
Best for Early-Stage Ecommerce
While PayPal is making headway into brick-and-mortar retail by providing card-reader equipment for in-person transactions, online transactions remain its core business and strength — and boy does it have that down.
PayPal’s payment portal integrates easily with websites. Customers can pay via PayPal with one click, and funds from one PayPal account can easily be transferred to other business accounts. It also easily integrates with accounting software like Xero. “Workflow and avoiding double entry are important to me,” says Thoelecke. If your credit card processor helps decrease time spent in the back office, then it may be saving you money through time and salary cost even if its rates are a bit higher.
Speaking of rates: PayPal’s are a straightforward 2.9 percent plus 30 cents per transaction (a higher 3.9 percent plus a variable fixed fee is charged on international transactions). But, like Square, there are no fees charged for startup processes, no monthly costs, and there are no termination fees if you decide to go with another provider. It even has an invoice-creation system that works with a Microsoft Excel template and facilitates a direct payment from those invoices.
The PayPal website is a clean interface with lots of good educational materials, however 24/7 live chat and phone support are not provided.
Dharma Merchant Services
Best for Established Nonprofits
No processor that we could find works exclusively with nonprofits, but several offer special rates. The credit card processor that rose to the top in fundraising transactions is Dharma Merchant Services.
Dharma is a B Corporation, a distinction for its work with cause-related enterprises. It places equal emphasis on people and the planet as much as profit. In 2015, the company contributed $175,000 – 50 percent of its own profits — to nonprofit causes.
Dharma’s $15 monthly fee added to its low per-transaction fees – 0.25 percent + interchange + 10 cents (in person) and 0.35 percent + interchange + 15 cents (online) – are competitive, but they’re even lower for nonprofits: 0.2 percent + interchange + 10 cents (in person) and 0.3 percent + interchange + 15 cents (online). Compare these to PayPal (also popular with nonprofits), which has a flat nonprofit fee of 2.2 percent plus 30 cents.
These rates are still subject to variable interchange rates, of course. But as co-founder and president Jeff Marcous told us, Visa and MasterCard also have lower interchange rates for nonprofit transactions and donations. Dharma turns away for-profit and nonprofit clients with transactions totaling less than $10,000 per month, as well as those without an established credit history. Those restrictions enable them to provide a high level of customer service. “The idea is we want to build a community,” he says. “We have a high retention rate because we try to be present for our merchants.”
Questions to Ask Yourself Before Shopping for Credit Card Processing Service
Credit card processors are not a one-size-fits-all matter. Before you look at what the credit card companies offer, spend some time detailing the transaction of your business.
- Are you a startup or are you established?
- Are you selling online or by other means: over the phone, with a mobile reader, or at a cash register in-person?
- How many transactions to you process a month, and what is your average ticket cost? Do you make 5,000 transactions at $6 each, or 6 transactions at $5,000? Or 5,000 transactions at $5,000 each?
- Do you want to be able to track your cash payments in the same system, and do you want integration with your accounting software?
- Are you a nonprofit?
- Is your business high-risk? (Some businesses like gun sales, airlines, and even selling on eBay or Amazon as a third-party can be considered high-risk, so not every credit card processor will accept your application.)
Take Action
- Assess your business. What is the range of transaction sizes and with what frequency do small, medium, and large transactions occur? Got it? Now, run the math on the credit card processors you’re considering. With transparent pricing, it’s easy to see what you’d be charged. You can see who charges the lowest rate for your transaction mix and weigh that against each company’s perks.
- Do the math on your current plan (if you have one). Look at statements from your current provider and see if its fees and charges are as expected. Are the rates transparent? If not, it’s time to switch processors.
- Start accepting chip cards. As of October 2015, if you’re not accepting chip cards with a chip-card reader, you are on the hook for any fraudulent charges. This liability shift was created not by law, but by the banking and credit card processing industries to put more pressure on merchants to prevent fraud. If you don’t have and use an EMV reader on a “dip chip” card, you accept full responsibility for any fraud.
- Do a semi-annual checkup. Just like last summer’s clothes don’t always fit the following spring, your business may have changed enough that you need a new credit card processing service. Time to start negotiating!
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