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Merchant Payment Processing: The Basics And Benefits

A person offering a credit card for payment to a merchant for goods or services.

Business owners need merchant payment processing services to have a fully functional business, mainly if they accept payments online. Accepting credit cards and debit cards online allows you more flexibility in accepting payments and gives your customers more convenient payment options. Having flexibility in your business ensures customer satisfaction and loyal customers. 

The Basics Of Merchant Payment Processing

The basics of merchant payment processing are pretty simple: you sign up with a merchant payment processor so you can accept debit cards, credit cards, and other alternative forms of payment from customers. The merchant payment processor then collects fees from each transaction and deposits the rest into your merchant account.

There are several types of merchant accounts to consider, and each has its own purpose. Choosing the best option for your business will: 

  • Save you money
  • Provide useful data
  • Find solutions tailored to your specific business needs

Types of merchant accounts include:

  • Retail Merchant Accounts: Retail merchant accounts are used to help product-oriented businesses with a physical storefront. These accounts are provided by a third-party processor and connect you to card networks and issuing banks. This traditional account comes with several options for card-reading hardware, such as a basic POS system. POS systems are designed to handle physical cards and related security issues.
  • Internet Merchant Accounts: Internet merchant accounts are specifically for e-commerce businesses that accept credit cards online. If your business is partially or entirely online, these accounts are a cost-effective option that give several payment options and a secure online portal for customers. 
  • Mail Order Or Telephone Order Merchant Accounts: These accounts are specifically for telephone or mail order businesses. These services are often bundled into online or retail options.


The Basics Of Merchant Account Fees

A person holding cash to pay their merchant payment processing account fees.

Alt text: A person holding cash to pay their merchant payment processing account fees.

Merchant accounts have several different types of fees based on the specific type of merchant account and the business industry. Standard fees associated with merchant accounts include:

  • Transaction Fees: These fees are applied to each transaction. They typically include a percentage of the transaction amount and a flat fee for every purchase. The percentage and flat fee can vary based on the size of your business, your processing volume, and other factors.
  • Minimum Fees: Minimum fees are applied each month. The processor may charge this service fee. 
  • Statement Fees: Statement fees are document processing fees that are also charged monthly. These fees can change based on how you accept your fees.
  • Gateway Fees: Gateway fees are monthly fees that can apply if the merchant account provider uses a third-party payment processor. Sometimes merchants use a third-party gateway for specific payment processing features they can’t get with the merchant account provider.
  • Incidental Fees: Incidental fees are more miscellaneous and vary greatly from one merchant account provider to another. Some examples of these fees include chargebacks, customer service, or add-on services.

What Is Credit Card Payment Processing?

A person paying with a credit card on a laptop for merchant services online. 

A credit card payment processor is a middleman between the customer’s credit card issuer and the merchant accepting payment. Funds get transferred from the customer’s credit card account to the merchant’s account when a purchase is made. This process can happen over the phone, in person, by mail, or online.

The Steps Of Card Payment Processing

Card processing works in three processes:

  • Authorization
  • Settlement
  • Funding

Steps Of Authorization

  1. The cardholder presents their card either online or in-person to a merchant in exchange for goods or services.
  2. The POS system sends a request for payment authorization to their payment processor.
  3. The payment processor of the merchant submits the transaction to the card association and then to the card issuing bank.
  4. Authorization information is sent to the card issuing bank, including the card expiration date, CVV, and validation. 
  5. The card issuer bank approves or denies the transaction. Transactions will be declined for insufficient funds or no available credit if the cardholder’s account was closed or expired, etc.
  6. The card issuing bank then sends the status back to the merchant.

This entire process only takes seconds.

Settlement And Funding Steps

  1. Merchants send batches of authorized transactions to their chosen payment processor.
  2. The processor sends transaction details to the card associations, which send the debits to the issuing banks in their network.
  3. The issuing bank charges the cardholder’s account for the transaction amount.
  4. The issuer bank sends the funds to the merchant’s bank minus any interchange fees.
  5. The merchant bank deposits the money into the merchant’s account.

The settlement process typically happens within a day or less.

Costs Involved With Card Payment Processing

There are a few different costs involved in merchant payment processing of cards, including:

  • Rates: Rates are the processing fees you pay for each transaction. Rates are usually a percentage of the transaction.
  • Fees: The majority of payment processors charge monthly account fees, which are reflected on your statement.
  • Equipment costs: Equipment costs are usually a one-time expense for the hardware to accept credit cards in person. Many processors offer to lease for these types of equipment.

Card Processing Rates

The rate you pay merchant payment processing for credit cards consists of an interchange rate, the card’s assessment fee, and the processor’s price. The interchange rate and assessment fee are set by the credit card network, and every merchant pays the exact amounts. Each processor chooses their own rate for processing within the three main rate structures, including: 

  • Flat-rate Pricing: Flat-rate pricing is the most affordable for businesses that process less than $5,000 per month because you only pay a fee for each transaction, and there usually aren’t any monthly or annual fees. 
  •  Interchange-Plus Pricing: Interchange-plus pricing is recommended for businesses that generate a large amount of credit card sales. The price you pay is the processor’s fee which you can easily compare between various processors.
  • Tiered Pricing: Tiered pricing bundles interchange rates assessment fees and the processor fees and splits them into three tiers, a qualified, mid-qualified, or nonqualified tier. In a tier pricing system, it is impossible to determine the processor’s fees, and the number of tiers varies with processors. 

What Is the Average Processing Rate For Card Processing?

The average card processing fee is between 2 to 4 percent of the transaction price. There are several factors that determine the average processing rate:

  • The type of card the customer uses (debit, credit, rewards, premium rewards, etc.)
  • How the card is accepted (in-person, manually keyed in, online, etc.)
  • The pricing structure the merchant processor uses (flat rate, interchange plus, tiered)

How To Choose The Best Merchant Payment Processing

When choosing the best merchant payment processing, there are several factors to consider, including: 

Transaction Types

Transaction type refers to the way that payment data enters the payment system, such as in-person, online invoiced, or mobile entry. You will need to choose a payment processor that can meet your needs for the transaction types that you regularly use.

Cost Transparency

Cost transparency is critical to being able to compare products and providers. When providers provide cost information on their website, it is simple to identify solutions within your budget that have the features you need. 

Overall Price

View the overall price of the processing service. This can include monthly fees, transaction fees, chargeback fees, setup costs, compliance fees, etc. 

Card Readers And Applications

If your business takes in-person payments, a card reader and app are necessary. A card reader should have the ability to accept EMV chip cards, contactless payments, and magnetic stripe cards. Some payment processors provide a free magnetic stripe card reader, and others may provide an EMV chip and contactless reader for a charge. You will want hardware compatible with all mobile devices, and the app should give you the ability to accept payments without the reader.

Integrations With Software

The ability to transfer transaction data to software such as accounting software is crucial whether you use a card reader, an app, or a POS system. The ability to sync with accounting software will provide accuracy and save time.

Deposit Time

The amount of time it takes to receive funds from a transaction shouldn’t be long. The next day is ideal. Some processors provide same-day deposits, which can be crucial for a business. 


It’s best not to get tied into a long contract in case you decide you don’t like the payment processor. Some payment processors don’t have contracts and do month-to-month service instead. You should choose the processor that is the right option for you.

Customer Support

While live 24/7 customer service is ideal, it may not be necessary for every business. If a payment processor has extended business hours, this can help in case an issue arises on the weekends or at an inopportune time.

Final Thoughts

Merchant payment processing is crucial for running a successful business, especially if you take online payments. Payment processors act as the middleman between your business and the customer to ensure a smooth transaction. 

Choosing the right merchant payment processor can benefit your business with fast deposit times, integrating with existing software, accepting multiple payment types, and more.

Researching and choosing the best merchant payment processing for your business can provide convenience to your customers and keep your business booming. 

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