How amazing would it be if a customer could make a credit card payment and their funds instantly appeared in your business checking account, with no effort on your part? Unfortunately, small business owners don’t have it quite that easy, but they can set up something that’s almost as seamless by using a payment processor.
What is payment processing?
Payment processing is a business-to-business (B2B) service that enables small business merchants to accept payments from a variety of sources, including debit cards, credit cards, mobile wallets, Automated Clearing House (ACH) bank transfers, and buy now, pay later (BNPL) transactions. They provide payment services on both the customer’s and merchant’s end of the transaction.
- The payment processor provides a payment interface for the customer. The payment processor offers a payment gateway—a medium by which a customer can use various payment methods to complete a sale. For in-person sales, this is usually a physical payment terminal capable of accepting credit cards, debit cards, contactless tap-to-pay mobile wallet apps, cash, and sometimes gift cards. For online payments, the payment gateway is a digital application programming interface (API) that lets a customer enter payment information during the checkout process. The payment processor must protect the customer’s financial information and ensure a secure checkout experience.
- The payment provider gives the merchant a simple, secure way to receive their money. For most merchants, a payment provider mostly functions as a credit card processor. It lets a small business owner accept credit and debit card payments—as well as other payments like those from mobile wallets (think Apple Pay)—and then have those payment balances transferred to the business owner’s checking account. The payment processor charges transaction fees for this service. Most hover around 3% of the total purchase amount. Some may also charge monthly fees for account maintenance.
Payment processing companies have exploded onto the market in recent years, leaving small-business owners with many options for steering customer payments into their own business checking accounts. Here are seven payment processing companies that have gained considerable market share in the small business community.
PayPal has come far from its start as a peer-to-peer payment service, where friends could reimburse one another for shared expenses like restaurant bills and vacation rentals. Now it offers an all-in-one payment solution.
- Processing options: Many merchants use PayPal as a credit card processing company, but it also integrates with mobile wallet accounts like Apple Pay and Google Pay. Merchants can use PayPal’s Braintree service to accept ACH direct debit payments from a customer’s bank account. Plus, PayPal offers BNPL, which shows the increased appeal of this financing option among contemporary shoppers.
- Fees: PayPal maintains a vast fee schedule with different rates for different payment types. Merchants particularly care about credit card processing fees, and for that, PayPal charges 3.49% of the purchase price, plus a 49¢ transaction fee.
Square’s launch of mobile payment terminals that sync up with merchants’ smartphones and computers allowed merchants to process card payments on the go. Square now also powers online payments and supports peer-to-peer payments with its Cash App.
- Processing options: Square is best known for its in-person transaction services. Using a device called a Square Reader, merchants can run credit cards and debit cards using swipes, chip card inserts, and tap-to-pay. The most up-to-date Square Readers can also handle tap-to-pay mobile wallet transactions. Online, Square offers a Square Checkout API to power a website’s checkout process. The company also works in the peer-to-peer payment space via its sister product, Cash App. (Both Square and Cash App are owned by Block Inc.)
- Fees: Square’s fees are among the lowest of the major payment processors. Most in-person sales incur a fee of 2.6% of the purchase price plus a 10¢ transaction fee. Online Square Checkout payments cost the merchant 2.9% of the purchase price, plus a 30¢ fee per transaction. Find the full fee schedule on Square’s website.
3. Shopify Payments
Shopify Payments handles payment processing at industry standard rates, but it adds a customer service component. It’s part of the overall Shopify platform, which works on a subscription model. Monthly fees start at $14.44 when you sign up for a full year.
- Processing options. Shopify Payments handles all the standard payment processing a merchant would need, including credit cards, debit cards, mobile wallets like Apple Pay and Google Pay, BNPL, and even cryptocurrency. Notably, Shopify merchants don’t have to use Shopify Payments for their online checkout provider. They can use the Shopify platform to manage their overall online store but then use a third-party vendor like PayPal or Apple Pay to handle checkout.
- Fees. Shopify Payments offers tiered processing fees, depending on a consumer’s type of Shopify subscription. Credit card commissions range from 2.4% to 2.9% of a purchase, and all card-based purchases come with a 30¢ transaction fee.
4. Amazon Pay
Amazon Pay connects Amazon customers to non-Amazon websites. The Amazon Pay API allows customers to use their stored Amazon payment information to complete transactions, offering a mix of security and convenience.
- Processing options. Amazon Pay appeals to Amazon customers who want to migrate their payment and address information to other websites. This speeds up the checkout process and helps reassure customers that their data will be safe. Amazon Pay can also handle credit and debit card transactions from people who don’t have Amazon accounts. It does not accept other payment options.
- Fees. Amazon Pay’s standard fee is a 2.9% commission plus a 30¢ processing fee for each transaction.
Clover tailors its offerings toward in-person transactions. It has a lot of overlap with Square, including its use of proprietary card readers to facilitate point-of-sale card and mobile wallet purchases. It has gained a particular following in the restaurant industry. Like Shopify, Clover offers all-in-one merchant services that come with monthly subscriptions. These services include Clover’s payment processing capabilities.
- Processing options. Clover lets you accept payments from credit cards, debit cards, Venmo, PayPal, and mobile wallets like Google Pay and Apple Pay. Most merchants focus on its point-of-sale (POS) features, but Clover software can also power online purchases.
- Fees. Clover offers myriad pricing options depending upon your industry, the hardware you buy, and the business support software you need. When it comes to payment processing, most of its plans charge a 2.3% commission plus 10¢ per transaction.
Stripe’s business model is based on accepting a massive array of payment options. You can run the Stripe API on an existing website and allow your customers to use any number of payment methods.
- Processing options. Stripe handles a wide span of payments. It can process credit cards, debit cards, all major digital wallets (including Google Pay, Apple Pay, and Alipay), BNPL, and ACH direct debits from bank accounts. It also lets you accept international credit cards.
- Fees. Stripe charges merchants a 2.9% commission plus 30¢ per transaction on online purchases (add an extra 1% commission for international transactions). In-person payments incur a 2.7% commission and 5¢ per transaction.
7. Chase Payment Solutions
As one of America’s largest banks, JPMorgan Chase has used its considerable heft to enter the payment processing field. Every payment processor needs a bank to hold funds that eventually get distributed to merchants. Chase serves as both the payment processor and the acquiring bank, which makes Chase Payment Solutions an all-in-one direct processor.
- Processing options. Chase Payment solutions can power ecommerce checkout, and it can also handle POS payments with a physical card, thanks to various hardware products. The platform specifically focuses on credit card and debit card payments. Because Chase serves as its own acquiring bank, it can theoretically distribute payments to merchants faster than other payment processors.
- Fees. Chase charges 2.9% plus 25¢ per transaction on each ecommerce purchase. In-person purchases cost slightly less—2.6% commission plus 10¢ per transaction.
What to consider when choosing a processing company
Small-business owners typically keep two things in mind when choosing a payment processing company:
- Finances. It costs businesses money to accept any type of payment other than cash. Therefore, small business owners have to decide how much of their sales income can go toward payment processing fees. Those who can handle higher commissions in exchange for user familiarity might opt for PayPal, while those who need the lowest commissions possible may be drawn to Square. Merchants can also pay extra for support services offered by companies like Clover and Shopify. These subscription-based models offer a lot more than just payment processing, but they have to align with a business owners’ monthly budget.
- Customer needs. To ward off an online seller’s biggest headache—the abandoned shopping cart—merchants need to make the checkout process as easy as possible. This means accepting many different forms of payment, most notably credit cards and debit cards. A seller may find themselves appealing to younger customers by accepting buy now, pay later payments, which can be handled by platforms like Shopify, Stripe, and PayPal. The more payment types you accept, the more customers you can reach.
Payment processing companies FAQ
How much do payment processors typically make per transaction?
Each payment processor has its own formula for commissioning a transaction. Most charge in the range of 2.6% to 2.9% of each transaction total, plus a fee of roughly 30¢ per transaction.
How does a payment processing company work?
A payment processing company transfers money from a customer to a merchant. It does this by receiving payment at the point of sale (POS) using a process like charging a credit card or debiting a bank account. It then transfers that money to an aggregate merchant account, which is a special type of bank account that handles co-mingled monies belonging to many different companies. From there, the payment processor distributes money to individual business checking accounts, minus commissions and fees.
What does a payment processing company do?
A payment processing company serves as the conduit between a customer and a merchant. It handles the financial backhaul required to get money from a customer’s payment source (like a credit card or digital wallet) into a merchant’s business checking account.
How does interchange-plus pricing work?
Interchange-plus pricing is a pricing model that combines the interchange fees set by credit card companies and the extra fee added by a credit card processor. For instance, a payment processor may get an interchange-plus rate of 1.99% but charge their customers a fixed rate of 3.49%. Their profit comes from the extra 1.5% they charge to the customer. Most small businesses cannot access true interchange-plus rates; these are only available to businesses that handle massive numbers of transactions with credit card companies.