Guide To Small Business Invoicing

6. Payment Processing: How it Works, Explore Your Options

Next Read: Past Due and Outstanding Invoices: A Primer

Business Finance

Payment Processing: How it Works, Explore Your Options

Apr 20, 2023 • 10+ min read
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      Accepting credit card payment is essential for any business. Most people have at least one credit card at all times, but can the same be said for cash? Some people will still pay with cash, but that target audience is slimming down in a big way. 

      Using your bank to process credit card payments might seem like a quick and easy solution, but that convenience may come with hefty fees that cut into your profits. The right payment processing service can give you more options for accepting payments, give you a better reputation, and drive your business forward.

      What is payment processing?

      A payment processing provider handles the operational aspects of accepting credit and debit card payments. You can utilize payment processors, which move card information from the customer to the networks and banks in the transaction, to manage card payments. Accepting card payments often requires a payment processor, such as Square or Payment Depot. The ideal choice for your business depends on your sales volume and payment acceptance method.

      How payment processing works.

      How payment processing works.

      While payment processing occurs nearly instantaneously, there are actually several steps throughout the process to ensure the transaction is secure.

      Step 1: Authorization

      When a customer presents their credit or debit card to a business, the business sends a payment authorization request to their payment processor through a point-of-sale system, ecommerce website, or mobile payment acceptance platform. The payment processor sends the transaction to the appropriate card association and issuing bank, which evaluates the request against factors such as account balances, validation, and expiration dates. The issuing bank sends an approval or denial status back through the same channels to the business. 

      Step 2: Settlement

      To get paid from credit card transactions, businesses send authorized transactions to their payment processor, which then communicates the appropriate debits with the issuing banks through card associations. 

      Step 3: Funding

      The issuing bank charges the cardholder’s account, transfers the appropriate funds to the business bank—minus interchange fees—and then the business bank deposits the funds into the business’ account. This process has been optimized to occur almost immediately, allowing for quick payments to businesses.

      Payment processing companies.

      Popular payment processing companies.

      There are multiple companies to choose from to set up payment processing. Below are some of the most popular ones.


      Previously a peer-to-peer payment service for reimbursing shared expenses, Paypal has expanded to an all-in-one payment solution that includes credit card processing, mobile wallet integration, Automated Clearing House direct debit, and buy now, pay later financing options. Rates vary for different payment types, including a credit card processing fee of 3.49% of the purchase price, plus a 49-cent transaction fee.


      The mobile payment terminals in Square allow businesses to process card payments on the go, by syncing with their smartphones, computers, or tablets. In addition to in-person transactions, Square offers online payment options through its Square Checkout API and peer-to-peer payments through its sister product, Cash App—both owned by Block Inc.

      Payment depot

      Payment Depot offers businesses a membership model, which differs from the interchange-plus pricing model offered by most competitors. On average, this saves member businesses $400 per month. This service allows businesses to conduct purchases both in person and online, based on the amount they intend to process annually without contracts or termination fees.


      Clover provides point-of-sale card and mobile wallet payment processing services and is popular in the restaurant industry. It has features that support online transactions as well. Clover offers various pricing options based on industry, hardware, and software needs.

      Shopify payments

      This payment processing company offers standard payment processing rates but also provides customer service and assistance with credit card chargebacks. Part of Shopify’s subscription-based platform—with monthly fees starting at $14.44 for a full-year subscription—the service supports various payment methods, including credit cards, mobile wallets, and cryptocurrency. It also offers tiered processing fees ranging from 2.4% to 2.9% commission per purchase, plus a 30-cent transaction fee for all card-based payments.

      Payment gateways vs. payment processor.

      Businesses require a payment processor to accept electronic payments, and ecommerce businesses specifically need a payment gateway, which comes in two types: third-party gateways and integrated gateways. 

      Third-party gateways redirect customers to an external site during checkout, whereas integrated gateways allow transactions to occur on the business’s website. While payment gateways may or may not charge a monthly fee, processing fees are always applicable (ranging from 1% to 3% of the purchase) with the business discount rate cutting into the total fee. This means that on a $100 scale, the business would receive $97-$99 after fees.

      Types of payment gateways.

      Types of payment gateways.

      Hosted payment gateways.

      Hosted payment gateways (such as PayPal) redirect customers away from businesses’ websites to the Payment Service Provider page, offering secure and simple transactions with fraud protection. However, they limit your control over the user experience and checkout process.

      Self-hosted payment gateways.

      Self-hosted payment gateways—QuickBooks Commerce’s B2B Payments and Shopify Payments—offer a seamless customer experience and customizable payment journey as the business’ website collects payment details and sends them to the payment gateway’s URL. On the downside, these gateways may lack technical support, forcing you, as a business owner, to resolve issues on your own or hire a professional.

      API payment gateways.

      API-hosted payment gateways allow customers to enter their payment information directly on your checkout page and provide a customizable payment experience. This also means you’re responsible for ensuring Payment Card Industry Data Security Standard compliance and purchasing SSL certification, which may affect the security of the payment process. 

      Redirect payment gateways.

      Redirects are an alternative way to provide payment options, allowing small businesses to leverage the convenience and security of larger platforms. These gateways result in less control for you as a business owner and create an additional step for your customers.

      Local bank integration payment gateways.

      This gateway redirects customers to the payment gateway’s website, where they enter payment and other details, then return to your website. Local bank integration gateways are ideal for small businesses with a one-time payment structure, but they may lack advanced features such as returns or recurring payments. This makes them less suitable for wholesalers.

      Smartphone readers

      Smartphone card readers attach directly to your smartphone, usually through the headphone jack. Their small size makes them easy to transport, meaning you can have the freedom to expand your business anywhere, whether you run a food truck or sell at trade shows. With a smartphone card reader, you are able to accept credit cards anytime, rather than just cash, which will drastically increase your sales.

      Mobile interface

      Having a card reader that plugs into your phone is fantastic, but without a secure processing app, it’s virtually useless. A safe and secure mobile app, in coordination with a smartphone card reader, will turn your smartphone or tablet into a secure virtual terminal that will let you accept credit cards with ease. The easy-to-use nature is appealing to customers, plus it can be fun to sign with your finger. Most apps have a tipping option that lets your customers leave you some gratuity directly from the tablet or smartphone. An email receipt system means neither you nor your customers need worry about losing a small scrap of paper.

      Card readers

      Even in today’s increasingly Internet-connected world, there are times when you can’t be connected to the Internet. A secure card reader that can accept payment to be fully processed later, all while not connected to the Internet, is a must-have. Add to that card reader the ability to securely process payments in real-time when it can connect to the Internet, and you instantly have something indispensable. A good card reader will encrypt data from the moment of the credit card swipe, regardless of whether or not you are Internet connected, then delete sensitive payment information from the device to increase security.

      Online terminal

      Managing a business is stressful enough without having to worry about whether or not credit card payments will be safely and correctly processed. A safe and secure online terminal where you can process credit card payments—and know instantly if a card is accepted or declined—means you can stop worrying, and get back to making your business even better. Accepting credit cards with any computer or smartphone is as simple as entering customer credit card information. 

      You should also be able to generate reports, create a recurring transaction, and automatically re-attempt collection in cases of insufficient funds. You could even link your online terminal to a card reader to make accepting credit cards even easier.

      Email invoices

      You might not always be able to, or even want to, accept payment at the moment a service is rendered. Sending an email invoice can be more convenient for both you and your customers. You’ll be able to create an invoice, outlining exactly what your customers will be paying for. 

      Then, instead of having to wait for snail-mail and worrying about processing a check, you can include a totally secure link for accepting payment right within the email. The link will take your customers to a completely secure payment area, making payment a smooth process.

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      About the author
      Sean Peek

      Sean Peek has written over 100 B2B-focused articles on various subjects including business technology, marketing and business finance. In addition to researching trends, reviewing products and writing articles that help small business owners, Sean runs a content marketing agency that creates high-quality editorial content for both B2B and B2C businesses.

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