How Does Small Business Payment Processing Work?

Jan 16, 2023

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.

  •      Customer

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.

  • Merchant

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. 

The bottom-line

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.

Let us help you get a high risk merchant account today!

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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