A Guide to Credit Card Processing in 2020

Choosing a credit card processor is important for any business, but it can be complicated. Learn about features, fees and more with this guide.


Holding a credit card in your hand is a lot easier than carrying wads of cash, even more so when you’re paying with one. With recent statistics showing that approximately 61% of Americans have at least one credit card, nearly every business relies on some form of credit card processing as it’s the most convenient payment method for customers — and the quickest way to get paid. In fact, the COVID-19 pandemic has pushed many companies to operate online, which further prompts the need for credit card processing.

Nonetheless, convenience often comes at a costly price, and the transaction of a simple swipe or tap is no exception to the rule. Many credit card processors collect a small percentage of each sale (known as the interchange rate) and top it off with more fees, such as monthly and annual fees, service fees, PCI compliance fees, one-off fees…and the fees galore continues.

If you’re a business owner, then credit card processors have more than likely crossed your mind. Knowing all the intricacies of credit card processing isn’t required, but it helps to understand important terminology, how it works, and what to look for before committing to a processor.

What is credit card processing and how does it work?

Consumers can complete a purchase with their credit card in the following ways: in-person, online, and over the phone. Though all it takes is a swipe, there are other parties involved than just the merchant and the consumer, such as the acquiring bank (merchant’s bank), issuing bank (cardholder’s bank), and card associations like Visa or MasterCard.

The process begins with the cardholder’s information, which gets sent to the processor who then communicates with the cardholder’s bank via appropriate card networks. The cardholder’s bank either denies or approves the transaction and the approval goes back to the processor. Finally, deposits are settled in the merchant’s bank account. All of this happens both physically and virtually but is generally fast, convenient, and safe.

Though it can have a bad rap with all the costly fees in place, credit card processing may be better for your psyche because the chances of you having to worry about dealing with large amounts of cash may significantly decrease.

The Different Types of Credit Card Processing 

Incorporating the right processing technology is critical to the success of your business. There are several types of credit card processing, and one method of processing isn’t necessarily better than the other — it depends on the way you run your business and pinning down the procedure that works best according to your business model. Once you figure out what form of payments your business needs, it’s (mostly) smooth sailing from there.

  • EMV Smart Terminals: A physical credit card processing terminal is a great option for businesses with brick and mortar locations as it accepts most payment card transactions  — Europay, MasterCard®, and Visa® — while providing increased security. When shopping for a payment terminal, make sure it meets the EMV standards so that consumers can pay with chip cards or contactless methods like Apple Pay.
  • Mobile Point of Sale (POS): Mobile businesses like food trucks or market vendors may look to mPOS. It’s essentially credit card payment on the go — a smartphone or tablet operates as a register device.
  • Online Invoicing: Creating and sending digital invoices is a tried-and-true method for businesses both big and small. PayPal is one of the better known online payment systems to create, send, and track your invoices.
  • API: Application Programming Interface is designed to manage payments for eCommerce sites with specific payment solutions. API typically processes credit cards, tracks orders, and manages customer lists.

Everything You Need to Know About Credit Card Processing Fees

The most difficult concepts to grasp about credit card processing are probably the different types of service fees and pricing models for each processor. The average processing fee is between 1.3% and 3.4% for each credit card transaction, which, in hindsight, is quite expensive once you add up the direct costs.

Below is a breakdown of notable service fees and common pricing models. As a reminder, fees and pricing will vary by processor.

Service Fees

  • Interchange Fees: Known as the transactional fee because, for every transaction you run, a fee will accompany it. Credit card companies like Visa, MasterCard, Discover, and Amex are charging you a small percentage in return for the option to accept their cards. As of late, the average interchange rate is around 1.81%.
  • Recurring Fees: Monthly minimum fees, statement fees, funding fees, and annual fees fit under this umbrella. These fees pop up on your monthly bill, so that’s when you have to pay close attention.
  • One-Off Fees: Early termination fees, setup fees, and address verification fees are just a few examples of one-off fees that credit card processing providers will clandestinely charge. These can quickly add up if you’re not keeping an eye out for them.

Pricing Models

  • Percentage Markup: This pricing model is typically unpredictable since it varies by card. On top of the interchange rate, processing providers will charge an additional percentage per transaction. The more transactions processed, the more markups charged.
  • Flat Rate: It’s exactly what it sounds, you pay for a flat-rate percentage based on the provider. Similar to percentage markups, transactions processed with the flat-rate model will add up and become expensive.
  • Tiered Rate: As the most expensive pricing model, a tiered rate is when a provider groups different cards in tiers and charges based on qualifications per tier. This is a subjective approach since providers can place the most popular cards in the most expensive tier.
  • Simple Flat Rate Subscription: In exchange for paying the flat membership fee and direct costs of the cards you’ve processed, you don’t have to worry about the direct cost of interchange. The subscription model is an ideal choice if you want to avoid interchange fees.

PCI Compliant Fees vs. PCI Non-Compliance Fees

Something to keep in mind about accepting credit card processing is PCI, or Payment Card Industry, compliance. It’s essentially a set of rules that must be followed to ensure consumers’ sensitive information is protected and that proper security measures are being taken at places that accept credit cards. If you’re non-PCI compliant, you will be charged a PCI non-compliance fee that’s separate from the provider’s costs. Another is EMV compliance, which is for EMV smart terminals. If you’re non-EMV compliant, you run the risk of being liable for fraudulent activity.

It goes without saying that credit card processing is much like any other service that operates off of technology and fees. Knowing which processor that serves your needs best will outweigh the downsides to it.

How to Keep Your Credit Card Processing Costs Low

You might be mulling over the costs and fees of payment processing, but there are several ways in which you can keep those numbers low. The following methods are meant to be starting points and they by no means have a 100% success rate.

  1. Negotiate the interchange rate and other fees with credit card processors.
  2. Purchase your own processing equipment, EMV-compliant terminal, to avoid the leasing fee that comes with renting equipment from a processor.
  3. Learn about the purpose behind the various fees to either avoid or opt-out of undisclosed fees.
  4. Use an address verification service (AVS) to reduce the risk of credit card fraud.
  5. Consult with an expert or sales rep to understand your options when it comes to contract terms, service fees, and the various pricing models.

Tips on How to Select the Best Credit Card Processing Provider

There is no perfect credit card processing provider, but you can narrow down your choices based on your needs and a few important factors.

Tip 1 – Consult With an Expert

If you’re still unsure of where to start, consulting with a credit card processing expert might answer any lingering questions you may have. As the merchant, you should express your concerns about the costs and fees to ensure you’re not overpaying your provider every month.

Tip 2 – Reflect on Your Needs and Numbers

Understand your business model to make an efficient decision on how you plan to accept card payments. If you’re a small business owner that makes less than $5,000 per month, it may be best to opt for the online invoicing option (i.e. PayPal, FreshBooks, Xero) to avoid costly rates from a full-service processor. However, if you have a brick-and-mortar location that does fairly well each month, incorporating an EMV smart terminal may be your best bet.

Tip 3 – Shop Around

You’ll want to speak to several providers and compare pricing quotes that they give you. For example, let’s compare Merchant One and Flagship Merchant Services. Merchant One was established in 2002 and offers a full lineup of POS systems, including Clover terminals. Interchange-plus pricing is available and there are no equipment leases, so that’s already fewer fees to worry about. The company, however, requires a three-year contract, and if you terminate early, fees are $295 or more.

In contrast, Flagship Merchant Services was founded in 2001 and offers month-to-month contracts. They have a pretty high applicant approval rate, so they can be your backup if you’re not accepted by other payment processors. Hidden fees are Flagship’s downfall, though, which means there’s no transparency between their sales agents and customers.

No matter which credit card processing provider you choose, you want to find one that benefits your business the most. One provider might have expensive service fees but their interchange rate may be lower than another provider you’ve been eyeing. It all depends on your business and how much you can afford per month based on the rates, fees, and pricing models.

Comparing Merchant One and Flagship Merchant Services

Since we picked out Merchant One and Flagship as examples, here’s an overview of their differences in what they offer and crucial factors you should consider when choosing your provider.


Merchant One

Flagship Merchant Services

Rates As low as 0.29% As low as 0.35%
Monthly Service Fee $6.95 $7.95
Pricing Model Interchange-plus & tiered Interchange-plus & tiered
Contract or Monthly Three-year contract Monthly, but one-year contract required for free equipment program
Payment Solutions In-store, online, mobile, or MOTO In-store, online, mobile, or MOTO
Special Offers N/A Free $200 Amex Gift Card*, free Clover Mini Point of Sale**

*Only if Flagship does not provide the lowest processing cost.

**Must sign a one-year agreement to qualify.

As seen in the chart above, Merchant One and Flagship requirements differ on every level. Note that fees and rates are based on quotes, so these numbers aren’t concrete or guaranteed. The most notable difference is Merchant One’s three-year contract versus Flagship’s monthly subscription. If you don’t mind a long-term agreement, then Merchant One is your pick. If you prefer extra goodies when you sign up, then Flagship is the way to go.

It pays to incorporate credit card processors for your business, even if there are some caveats. At the end of the day, your company is on the frontline, so ensuring success means partnering with the right payment processing provider that checks off the necessary boxes for you and your business.

A Guide to Credit Card Processing in 2020