What you need to set up credit card payments
To take credit card payments, you need three things: a merchant account (a bank account that holds card payments before they move to your regular business account), a payment processor (the company that handles the transaction), and equipment or software to actually process the card. Most small businesses use a single provider that bundles all three together rather than shopping for each piece separately.
The processor connects to the card networks (Visa, Mastercard, American Express, Discover) and your bank. When a customer swipes, inserts, or taps their card, the processor checks with the card issuer that the funds are there, holds the money temporarily, and then deposits it into your merchant account. From there it moves to your regular business checking account, usually within one to three business days.
You do not need to be incorporated or have a business license in most states to open a merchant account, though some processors ask for a Social Security number or an Employer Identification Number (EIN). If you are a sole proprietor, your Social Security number is usually enough.
Key Takeaways
- A payment processor, merchant account, and card-reading equipment or software are the three pieces you need, and most providers bundle them into one service.
- Interchange fees (set by the card networks), assessment fees (set by the processor), and monthly fees vary widely, so comparing total cost across providers matters more than looking at one rate alone.
- Square, Stripe, PayPal, and Clover are common for small businesses because they have low setup costs and let you start with a phone or tablet rather than expensive hardware.
- PCI compliance (a security standard for handling card data) is required by law, and most modern processors handle it automatically if you use their equipment or software.
- Chargebacks happen when a customer disputes a charge with their bank, and you lose the money plus a fee unless you can prove the transaction was legitimate.
How payment processors charge you
Every time a card is processed, you pay a combination of three types of fees. Interchange fees go to the card issuer (the customer's bank) and are set by Visa and Mastercard — you cannot negotiate these. They typically run 1.5% to 2.2% of the transaction, though they vary by card type (debit cards cost less than credit cards) and by industry. Assessment fees go to the card networks themselves and are usually 0.1% to 0.3%. Processor fees are what the payment company keeps, and these are where you can negotiate or shop around — they range from 0.5% to 2% depending on the provider and your sales volume.
Beyond per-transaction fees, most processors charge a monthly fee (often $10 to $30) to maintain your account, and some charge statement fees, batch fees, or gateway fees depending on how you process cards. A few charge nothing monthly but take a higher cut per transaction. The cheapest option depends on your sales volume and how often you process — a business doing $500 a month might pay less with a flat monthly fee, while one doing $50,000 a month might save money with a lower per-transaction rate.
Some processors also charge setup fees, early termination fees, or fees for chargebacks (when a customer disputes a charge). Read the full fee schedule before signing up, not just the headline rate.
Square, Stripe, PayPal, and Clover: what each one does
Square is the most common choice for retail and service businesses. You plug a small card reader into a phone or tablet, and customers can insert, swipe, or tap their card. Transactions cost 2.6% plus 10 cents for online payments, and there is no monthly fee. Square also offers invoicing, appointment booking, and inventory tracking in the same app. Setup takes minutes and requires only a bank account and Social Security number.
Stripe is built for online businesses and developers. You embed a payment form into your website or use Stripe's hosted checkout page. Transactions cost 2.9% plus 30 cents for card-not-present payments (online or phone orders). Stripe does not offer in-person card reading without buying additional hardware. Setup is free and fast, but you need to be comfortable with technical integration or hire someone to do it.
PayPal lets you take payments through your PayPal account, either in person (with a card reader) or online. In-person transactions cost 2.7% plus 5 cents; online transactions cost 3.49% plus 49 cents. PayPal also handles invoicing and allows customers to pay by bank transfer or PayPal balance, not just cards. You can start with just a PayPal account, though you will need a bank account to withdraw money.
Clover is a full point-of-sale system that works on tablets. It costs more upfront (the hardware runs $500 to $2,500 depending on the model) but includes inventory, employee management, and detailed reporting. Transaction fees are 2.7% plus 10 cents, and there is usually a monthly software fee ($49 to $99). Clover is better for retail stores or restaurants that need more than just payment processing.
In-person, online, and phone payments: which processor to use
If you take payments in person (at a physical location or market), you need a card reader that connects to a phone or tablet. Square, PayPal, and Clover all offer this. Square is the cheapest and easiest to start with. If you already use PayPal for other business purposes, their card reader integrates seamlessly.
If you take payments online (through a website or email invoice), Stripe and PayPal are the most common. Stripe integrates directly into your website code and gives customers a smooth checkout experience. PayPal lets customers pay through PayPal or as a guest with a card, and you can send invoices that customers pay by clicking a link. Square also offers online invoicing, though it is less common for e-commerce.
If you take payments by phone (customer reads their card number to you), all four processors support this, but you will pay a higher rate (usually 3.5% to 4%) because there is no card present to verify. Some processors also require you to be PCI Level 1 compliant (a security certification) to take phone payments, which costs money and time. For this reason, many small businesses ask customers to pay online instead of over the phone.
PCI compliance and keeping card data safe
PCI compliance is a set of security rules set by the card networks to protect customer card data. If you use a modern processor's equipment or software (like Square's app or Stripe's hosted checkout), the processor handles PCI compliance for you automatically — you do not have to do anything extra. This is the easiest and safest route.
If you build your own payment system or store card data yourself, you become responsible for PCI compliance, which means encrypting data, using find networks, limiting who can access card information, and undergoing annual security audits. This is expensive and complicated, which is why almost all small businesses use a processor instead.
The key rule: never store a customer's full card number, expiration date, or security code. Let the processor handle that. If you take payments by phone and write down a card number, you are breaking PCI rules and exposing yourself to liability. Use a processor's phone payment feature instead, which encrypts the data as it is entered.
Chargebacks: what happens when a customer disputes a charge
A chargeback happens when a customer contacts their bank and says they did not authorize a charge or did not receive what they paid for. The bank pulls the money back from your merchant account and charges you a fee (usually $15 to $100). You lose both the payment and the fee.
You can fight a chargeback by providing proof that the transaction was legitimate — a signed receipt, an email confirmation, a tracking number showing the item was delivered, or a recording of the customer authorizing the charge. If you win the dispute, you get the money back but not the chargeback fee. If you lose, the money stays gone.
Chargebacks are rare for legitimate businesses, but they happen most often when a customer claims they did not receive an item, did not authorize the charge, or received something different from what they ordered. To protect yourself, keep records of all transactions, send order confirmations by email, and use tracking for shipped items. If you sell services, get written consent before charging.
Getting started: the steps in order
First, decide which processor fits your business. If you take payments in person, start with Square. If you take payments online, start with Stripe or PayPal. If you need a full point-of-sale system, look at Clover.
Second, go to the processor's website and sign up. You will need a bank account (for deposits), a Social Security number or EIN, and basic business information. Most processors approve you within minutes to a few hours.
Third, if you are taking in-person payments, order the card reader (usually $29 to $99 for Square or PayPal). If you are taking online payments, integrate the processor into your website or start sending invoices through their platform.
Fourth, test a transaction with a small amount to make sure everything works. Then start taking real payments. Money will appear in your bank account within one to three business days.
Frequently Asked Questions
Do I have to use the same processor for in-person and online payments?
No. You can use Square for in-person and Stripe for online, or any other combination. However, using one processor for everything simplifies your accounting and reporting. Most small businesses stick with one unless they have a specific reason to split.
What happens if a customer's card is declined?
The processor will tell you the card was declined and usually give you a reason code (insufficient funds, card expired, fraud block, etc.). You can ask the customer for a different card or payment method. No fee is charged for a declined transaction.
Can I negotiate the fees my processor charges?
You can negotiate the processor's markup (the part they keep), but not the interchange or assessment fees — those are set by the card networks. If you process high volumes (over $100,000 a month), you may have leverage to negotiate a lower rate. Most small businesses cannot.
What if I want to switch processors later?
You can switch anytime. There is no contract with most modern processors like Square or Stripe. Your old processor will not transfer your history or customer data, so you will need to keep records separately if you need them for accounting or disputes.
Do I need a business license to take credit card payments?
No. You can open a merchant account as a sole proprietor with just a Social Security number. Some processors ask for a business license or EIN, but most do not require it. Check with your processor before signing up.