How Small Businesses Choose and Set Up Credit Card Processing
What credit card processing actually does, and why the choice matters
Credit card processing is the system that moves money from a customer's card into your business bank account. When a customer swipes, taps, or enters their card number, a processor—a company like Square, Stripe, PayPal, or your bank—captures that information, checks with the card issuer that funds are available, and deposits the money to you, usually within one to three business days. The processor takes a cut (typically 2 to 3 percent of each transaction, plus a small flat fee), and you keep the rest.
The choice of processor matters because the fees add up fast, the setup time varies widely, and some processors work better depending on whether you take payments in person, online, by phone, or all three. A processor that works well for a coffee shop taking card-tap payments at a register may cost you more and create headaches if you're running an online store or invoicing clients. Understanding what each processor charges and what hardware or software they require means you can avoid overpaying and avoid being locked into a system that doesn't fit how you actually work.
Key Takeaways
- Credit card processors charge a percentage of each transaction (usually 2 to 3 percent) plus a per-transaction fee, and these costs vary enough that comparing three options can save hundreds per month.
- In-person payment processors (Square, Toast, Clover) require a card reader but often have lower per-transaction fees than online-only processors.
- Online processors (Stripe, PayPal, Shopify Payments) integrate with your website or invoicing software and are faster to set up but may charge higher percentages.
- Your bank may offer processing, which can simplify reconciliation but often costs more than independent processors.
- Deposits usually arrive within one to three business days, but some processors hold a small reserve (called a rolling reserve) for the first few months.
In-person payment processors: card readers and point-of-sale systems
If you take payments at a physical location—a retail shop, salon, food truck, or service business—an in-person processor is usually the cheapest option. These companies (Square, Toast, Clover, iZettle) sell or rent you a small card reader that plugs into your phone or tablet, or a full point-of-sale terminal that sits on your counter. The reader connects to the internet and sends the card information to the processor's servers.
In-person processors typically charge 2.6 to 2.75 percent of the transaction plus 30 cents per swipe or tap. Some offer flat-rate pricing (a single percentage for all card types) to make budgeting simpler. The hardware usually costs $50 to $300 upfront, though some processors include it free if you commit to a monthly service fee. Setup takes a few hours: you download the app, plug in the reader, and start taking payments the same day. Deposits land in your bank account within one to three business days.
The trade-off is that you are tied to that processor's software. If you want to switch later, you lose the hardware investment and have to rebuild your customer and sales records in a new system. Some processors also charge early termination fees if you have a contract. Before signing up, ask whether the hardware is yours to keep, whether there is a contract, and what happens to your sales history if you leave.
Online payment processors: websites, invoices, and subscriptions
If most of your sales happen online—through a website, email invoice, or subscription—an online processor is usually simpler. Stripe, PayPal, Shopify Payments, and Square Online handle payments that customers enter themselves, without you needing a physical card reader. The processor's code sits on your website or in your invoicing software and collects the card details securely.
Online processors typically charge 2.9 to 3.5 percent plus 30 cents per transaction. They are faster to set up than in-person systems: you create an account, connect your bank, and add the payment form to your website or invoicing tool, often in under an hour. There is no hardware to buy or maintain. Deposits arrive within one to three business days, though some processors (especially Stripe) may hold a small percentage of your first few months' revenue as a reserve, releasing it gradually as they confirm you are a low-risk merchant.
The downside is that online processors do not give you a sales history or customer database the way point-of-sale systems do. If you want to track repeat customers, send receipts, or run reports, you have to use separate software or do it manually. Some online processors (like Shopify Payments) are tightly integrated with their own platforms, so switching is harder if you outgrow them.
Bank-based processing: simplicity and higher costs
Your business bank may offer credit card processing directly. The advantage is that deposits go straight into the account you already use, and reconciliation is simpler because everything is in one place. Your bank already knows your business, so approval is usually faster than with an independent processor.
The disadvantage is cost. Banks typically charge 3 to 4 percent per transaction, higher than independent processors. They also often require a minimum monthly processing volume or charge a monthly fee even if you process nothing. Some banks require you to use their point-of-sale hardware, which locks you into their system. Before opening a business account, ask the bank what they charge for credit card processing and whether there are monthly minimums or fees. Compare that number to what Stripe, Square, or PayPal would charge on your actual monthly volume—the difference often justifies switching to an independent processor.
What to compare when choosing a processor
Start by calculating your monthly card volume in dollars. Then get pricing from three processors that match how you take payments. For each one, multiply your monthly volume by their percentage rate, add their per-transaction fee times the number of transactions you expect, and add any monthly fees. That number is what processing will cost you per month.
Next, check what happens if you need to refund a customer. Most processors refund the full transaction fee, but some keep a percentage. Ask whether they charge for chargebacks (when a customer disputes a charge with their bank) and how much. Chargebacks are rare for most businesses, but if you sell high-ticket items or take payments over the phone, they matter.
Finally, test the customer experience. If you are choosing an online processor, try checking out on your own website with their payment form. If you are choosing an in-person processor, ask for a demo of the app or terminal. Does it work on the devices you already own, or do you have to buy new hardware? How long does a transaction take? What does the receipt look like? These details affect how fast you can serve customers and how professional your business looks.
Deposits, holds, and what happens to your money
When a customer pays by card, the processor does not send you the money immediately. Instead, they hold it for one to three business days while they confirm the transaction is legitimate and the customer's bank has actually transferred the funds. This delay is called settlement, and it is standard across all processors.
Some processors also hold a percentage of your deposits as a rolling reserve—usually 5 to 10 percent of each transaction, released back to you 30 to 90 days later. This reserve protects the processor if you take a large number of chargebacks or if your business fails and you owe them money. Newer businesses and high-risk industries (like e-commerce or subscription services) are more likely to face a rolling reserve. Established businesses with low chargeback rates usually avoid it.
Ask the processor upfront whether they hold a reserve, how much, and for how long. If they do, factor that into your cash flow planning—you may need to keep extra money in your account to cover expenses while waiting for the reserve to release. Some processors waive the reserve if you have been with them for six months without problems.
Contracts, switching, and what to watch for
Before signing up, read the processor's terms carefully. Some charge early termination fees if you leave before a certain date. Some require a minimum monthly processing volume and charge a fee if you fall short. Some own the customer data you collect and will not let you export it if you switch processors.
The best processors have no contract, no termination fee, and let you export your data anytime. If a processor requires a contract, negotiate the length—many will agree to month-to-month instead of a year-long commitment if you ask. If they charge a termination fee, ask what it is and whether it decreases over time.
Also ask what happens to your customer records and sales history if you leave. Can you download a list of all transactions? Can you export customer contact information? Some processors make this easy; others make it deliberately difficult to lock you in. The easier it is to leave, the better the processor's service usually is, because they have to earn your business every month.
Frequently Asked Questions
How much does credit card processing actually cost per month?
It depends on your volume and which processor you choose. A small business processing $10,000 per month at 2.7 percent plus 30 cents per transaction would pay roughly $270 to $300 per month. The same business using a bank processor at 3.5 percent might pay $350 to $400. The difference is significant enough to justify comparing three options before you commit.
Can I use multiple processors at the same time?
Yes. Many businesses use one processor for in-person payments (Square at the register) and another for online payments (Stripe on the website). This lets you optimize fees for each channel. The downside is managing two separate accounts and reconciling deposits from two sources. Start with one processor and add a second only if the first does not fit part of your business.
What if a customer disputes a charge?
The customer's bank investigates and either sides with you or refunds the customer. If they refund, the processor takes the money back from your account. Most processors charge you a chargeback fee (usually $15 to $100) even if you win the dispute. Keep receipts and records of what you sold to defend yourself. Chargebacks are rare if you deliver what you promise and communicate clearly with customers.
Do I need a separate merchant account?
No. Modern processors like Stripe and Square handle merchant accounts behind the scenes—you do not have to apply for one separately. Your business bank account is where deposits land, but the processor manages the relationship with the card networks. Older processors sometimes required a separate merchant account, but that is becoming rare.
How quickly can I start taking card payments?
Online processors can be live within an hour. In-person processors usually take a few hours to a day, depending on how long it takes to receive and set up the hardware. Bank-based processing can take several days because the bank has to verify your business. If you need to start immediately, an online processor is fastest.