An In-depth Guide to Small Business Payment Processing
Managing a small business’s transactions can be a daunting task. Everything presents its own set of difficulties, from keeping your accounting books in order to managing your credit card payment processing. As a result, it’s essential to understand how to make the most of the tools provided by your current payment processing platform or find a better alternative in order to manage your transactions efficiently.
What is small business payment processing?
Automating transactions between customers and a merchant is simple and convenient when using online payment processing. Accepting online payments is essential for streamlining your small business’s finances, increasing overall sales, and giving your customers much needed flexibility and convenience.
However, small businesses must invest in the necessary tools if they want this to be implemented and executed properly and safely. It’s recommended that you (and the rest of your team) familiarize yourself with the intricacies of the online payment procedure in order to identify the ideal payment solution for your small business.
At Emerchantbroker, we often assist startups and small businesses like yours in processing online payments safely and effectively. We created this small business payment processing guide to ensure that you don’t miss any critical gaps in your processes.
Who is involved in the payment processing process?
Although you don’t need to be a payment processing expert, understanding the basics and the players does help.
This is the customer who will purchase your goods or services. They will proceed to the register and choose their preferred payment method. They will then provide the necessary payment information and proceed to checkout.
The online seller is the merchant. Therefore, you receive the customer’s payment and give them your products or services in return.
- Merchant account
Before the money from your sale is transferred to your business account, it is held in the merchant account. Every company that accepts payments online needs to establish a merchant account. Your payment processor may provide this account automatically.
- Payment processor
This is the third party that handles online transactions for your company on your behalf. It will transmit payment information securely, verify that the required funds are available, and approve (or reject) the transaction.
- Payment gateway
The customer’s payment information must pass through the payment processor’s gateway when making an online transaction. This helps safeguard your customer’s financial information until the money is sent to your merchant account.
How does small business payment processing work?
The two primary steps of the online payment process are the authorization, or when the transaction is approved, and the settlement, or when the money is deposited into your account. However, the process may vary based on the customer’s preferred payment method.
Here is an overview of how money often flows from your clients to your business.
- A customer uses a credit or debit card to purchase your product or service from your website.
- The POS data, or transaction information, goes through a predetermined payment gateway, which secures your data with encryption before sending it to the gateway processor.
- The processor checks with the consumer’s issuing bank to see if there is enough credit available to pay for the purchase.
- The processor is notified by the issuing bank after approving or declining the transaction.
- The processor notifies your merchant bank to credit your account and sends you a confirmation of the transaction.
This entire process takes place in a matter of seconds, during which the issuing bank transmits the funds to your merchant bank, which then credits your account.
5 small business payment processing methods
Learn about the different payment processing options to decide which ones your business should provide to ensure that customers have a smooth experience.
1. Debit card
Debit card transactions are typically very easy to complete because the issuing bank does not have to determine whether to provide the customer credit to pay the purchase price. The issuing bank often accepts the transaction right away as long as your customer’s bank account has enough money.
Debit card transactions also have much lower risks than credit card transactions because no credit is issued. Therefore, the interchange rates—the costs associated with using debit and credit cards—are also lower.
2. Credit card
Processing credit card payments typically starts with a customer’s purchase. The processor calls the issuing bank after receiving the cardholder data from the processing network to determine whether there are sufficient funds in the customer’s account to cover the cost of the purchase.
The network then conducts the transaction and distributes the transaction fees after confirming there is enough money. After that, the money is transferred to your merchant account.
It is essential to have a thorough understanding of how the process works, including choosing the appropriate POS systems and credit card terminal, processing rates, and more, if you plan to accept credit card payments.
3. ACH payment processing
ACH, or Automated Clearing House, is a network that coordinates automatic financial transactions and various electronic payments between financial institutions without using wire transfers, cash, checks, or credit cards.
ACH payment processing involves the following phases, which are often used for recurring transactions:
- Customer authorization: Customers consent to direct bank account payments on your website.
- Transaction initiation: An ACH provider or the Originating Depository Financial Institution, which is your bank o, receives the payment information from your company (ODFI).
- Payment request: The receiving depository financial institution receives the ODFI’s payment request.
- Payment processing: The RDFI verifies your customer’s account to ensure there are enough funds available to meet the payment cost, and the payment is processed after confirmation.
4. Digital wallet
Digital wallets integrate smart devices such as smartphones, tablets, smartwatches, and other mobile payments to accept and process payments.
Customers are not required to enter all of their information or use their credit or debit cards to complete a transaction because digital wallets save payment information in these smart devices.
This payment processing option enables cashless and contactless mobile payments by using radio waves to transmit signals from your customers’ smart devices to your POS terminal.
Digital wallets use Quick Response (QR) codes, Near-Field Communication (NFC), or Magnetic Secure Transmission (MTS) technology.
Since most digital wallet devices are connected to consumers’ cards, the backend of the payment process is similar to processing credit or debit card transactions.
5. Payment gateway
Payment gateways are independent third-party companies or established merchant services that handle credit card processing for online and brick-and-mortar businesses.
Payment gateways such as Emerchantbroker offer improved security, speed, and efficiency in the payment processing process through encryption.
It is essential to do some research to see whether small business payment processing provides the solutions most suited to the unique requirements of your business. Keep in mind that different payment gateways charge different transactional, monthly, and cross-border fees.
What are the benefits of small business payment processing?
1. Accept credit and debit cards
Having the ability to accept credit and debit cards is one of the main benefits a merchant account can offer. Customers’ preferences for credit cards and debit cards are continuing to rise, and eliminating any friction in the purchasing or payment acceptance processes can help businesses attract new clients and increase cash flow.
2. Increase sales
Studies show that customers tend to spend more when offered the option to use debit or credit cards. In fact, a poll sponsored by Intuit found that 83% of small companies that accepted credit cards saw a boost in sales.
3. Better money management
Your company’s transaction processes will be more efficient if you start accepting credit cards and switch to online payments. Electronic payments can help you stay organized and enable improved forecasting and cash flow instead of counting cash.
4. Customer convenience
Simply by enabling users to make purchases in a variety of ways, a merchant account can result in satisfied (and repeat) consumers. When a customer can easily purchase how and when they want, they will always look forward to doing business with you.
5. Avoid bad checks
Your business can avoid the inconvenience and expenses related to bad checks and chargebacks by using small business payment processing services and accepting electronic payments. Your merchant account also allows you to accept recurring payments when used in conjunction with a full payment system this is ideal for services such as classes, landscaping, cleaning, etc.
Not all leaders take the time to fully understand how payment processing for their small businesses works. However, knowing all the ins and outs of how online transactions are made and end up in your bank account helps you choose a payment processor that satisfies all of your business’s and your customers’ needs.
It is recommended that you invest in a comprehensive small business payment processing system that can create personalized payment plans for each customer and generate accurate data on your online sales. Emerchantbrokers offers merchant solutions that help improve the relationship between your business and your clients, opening the door for meaningful interaction.