What you need to know about payment processing


What things do I need to start taking credit card payments?

For you business to accept credit card as payments, you need a merchant account and either a payment gateway or credit card terminal. A merchant account is an account that essentially gives your business a line of credit with the ability to accept credit card payments. It is not a bank account; you can use any bank account you want to receive funds. A merchant account will also give you the ability to accept debit cards (see difference between debit and credit cards).

The payment gateway is software that works with your website to take payments over the internet and credit card terminals are the physical hardware to take payments in person (in a store, office, or while mobile).


What are the steps I need to go through to start accepting credit cards?

These are the steps you are going to go through as a merchant to accept credit cards, whether you are switching providers or setting up for the first time.

  1. Create a shortlist of payment processors: You will research the different providers that exist in the market. It won't be difficult to get a list. There are a ton of them out there. Almost all payment processors will offer a merchant account, payment gateway, and hardware terminals. If you have specific needs, like recurring billing for example, ensure the shortlist of providers have it.
  2. Contact the payment processors: You can either call or fill out an online form to get in touch with the payment processors. If payment processors do not have a phone number to contact them, you might want to be aware of the level of customer support you will get from them.
  3. Double check they have the right products: Sometimes websites don't have all the information about the products, so need to verify they have the specific features and functionality you want (if you have specific needs - most merchants don't have too specific needs).
  4. Get a rate quote: The conversation will quickly move to pricing. If you already have a merchant account, it is possible they will offer to do a rate comparison of what you would pay if they were doing the processing for you. If you don't already have a merchant account, you should ask what your effective rate would be. Most processor pricing is roughly the same. There are some processors out there that will do some deceptive pricing, but this is becoming more rare. Some key points you should ask about: is there a cancel fee, am I locked into a contract, what happens with my data if I change processors, are there any other fees we haven't talked about (i.e. hidden fees), how do your customers rate your customer support?
  5. Compare the shortlist of processors: Now you have an idea of the products, pricing, contract termination fees, and customer support level. You'll choose one to move forward with, probably one without a termination fee so your business can remain flexible.
  6. Fill out the application: Next you'll fill out the application form that details you and your business. You'll likely be able to sign this application electronically. Most processors take anywhere from 15 minutes to 3 days to approve your application. The more complex or high risk the business, generally the longer it takes. What the processor is doing is assessing the risk (i.e. underwriting process).
  7. Receive your online tool: The moment you are approved, you will get access to an online tool (i.e. payment gateway) that will give access to reporting and some payment methods: APIs for eCommerce, virtual terminal, recurring billing, etc. This will allow you to start taking payments immediately.
  8. Receive your payment terminals: Your payment terminals (if you need them) will be shipped directly to your business with overnight shipping. Generally, there is a pretty simple step-by-step guide to plug in your hardware terminal and get it working.
  9. Receive your first billing statement: At the end of the month, you will receive a statement with your processing amount and your fees. Double check them to make sure it's what you expected.


How do I receive the funds after you process a credit card sale?

Payments accepted with Visa, Discover, or MasterCard are generally deposited in your bank account the next business day after you close your batch (see below on batch close). AMEX takes a little longer at around 5 days.

A batch close is generally referred to a settlement or deposit. It is when you summarize and total all of the transactions processed by your business from the last time you performed it and begins the process of settling transactions to deposit funds into your bank account.


When do I get charged the credit card fees (merchant services fees)?

Processing fees are typically taken out either daily as funds are deposited into your bank account or charged on a monthly basis.


What types of credit cards do merchant accounts accept?

Merchant account providers generally combine Visa, MasterCard and Discover as a standard offering. American Express deals directly with merchants to create an account, but we can help set that up too. These are the four major credit card networks.

 VisaMasterCardAmerican ExpressDiscover
Market Share by Spending53%22%21%4%
# of Global Cardholders755 million550 million110 million57 million

There are, of course, other credit cards networks even though the "big four" are the majority. Cards like JCB and Diner's have millions of cards in circulation and credit cards like UnionPay (aka China UnionPay or CUP) are growing.

There are around 3 billion credit cards out there in the world, 365 million credit cards in USA, and 75 million in Canada. That's a big market. In fact, the average North American has over 3 credit cards in their wallet. In the end, to accept any credit card, you need a merchant account if you are processing more than $100,000 per year.


When are the merchant account fees?

Fees are charged when using a credit card. Merchants pay those fees, which are typically 2% to 4% of the amount charged on the credit cards, depending on the type of card a consumer is using and how it is processed (eCommerce vs in-store). How fees are charged and the amount that is charged varies across merchant account providers, making it difficult to compare rates.

If you already have a merchant account and you want to know your fees, the best way is to check your effective rate. Just take the total fees you have been charged and divide that by the total dollar volume of credit card sales. That's the best way to do a rate comparison - if you're shopping around for a new merchant account, find out what fees, and the effective rate, you would have been charged with the same volume, card types, etc on the new provider.


What is interchange?

Interchange is the rate that credit card networks (i.e. Visa, Discover, etc) charge as a fee to use their network. These are non-negotiable costs that are publicly announced. As an example,Visa, Discover, and MasterCard charge approximately 1.5% to 2.5% of the credit card sale amount. AMEX generally charges 2.5% to 3.5%. In general, the fancier the credit card, the higher the percentage fee. So, those travel rewards cards are on the more expensive side for merchants. You can view the exact interchange rates (fees) by card type on the following documents:

Visa USA interchange fees (pdf)Visa Canada interchange fees (pdf)
MasterCard USA interchange fees (pdf)MasterCard Canada interchange fees (pdf)


Do I need to care about PCI Compliance?

It's possible. If you are handling credit card numbers, you do need to care about PCI. PCI is a standard set by an organization that exists to ensure security in the payment card industry (PCI). These standards are for all companies involved with credit cards, including merchants.

There are a number of standards set by PCI, however it essentially means that all merchants 1) need to remain compliant - at the most basic level, complete a Self Assessment Questionnaire (SAQ) annually, 2) merchants cannot store the 3 or 4 digit security code or PIN, and 3) if credit card data is being passed or stored by merchants, they need to meet security levels.


What is "risk" in credit card processing?

Risk is a common term used in the credit card industry. Some industries are considered higher risk than others, for example gas stations are considered low risk and furniture stores are considered high risk. This is based on historical processing data, the amount of chargebacks, fraud, etc.

It is more difficult to get a merchant account in high risk industries. When high risk industries get a merchant account, the fees are much higher due to the risk.


What is underwriting in payment processing?

Merchant account providers are financially responsible for merchant losses. This is why risk is an important consideration. Merchant account providers assess a merchant through an process called underwriting to determine the risk level. The underwriting process takes into consideration the age of the business, historical financials of the merchant, the industry they are in, etc.

A merchant account provider has a few ways to reduce their risk when providing a merchant account to "riskier" merchants. First, there may simply be higher fees, second, there may be a reserve. A reserve is an amount of dollars kept on hold for a certain time period. For example, it may be structured that 20% of all credit card sales are held for 4 months.


What is a personal guarantee?

A personal guarantee is quite common in the industry. It is a way to align the risk between the merchant account provider and the business owner. This ensures that both parties have an incentive to deliver on the products and services sold by the merchant.


What are chargebacks? Are Chargebacks bad?

Chargebacks are a hot topic in the industry. It is a feature of credit cards used to protect consumers. Consumer have 6 months after the purchase to dispute a charge. If a consumer disputes a charge on their credit card, those funds are removed from the merchants bank account. Merchants then have to prove that it was a valid purchase before they will see those funds back. That is a chargeback. There is a fee to merchants for chargebacks. Merchants with a history of chargebacks are considered higher risk. For a merchant, chargebacks are bad.