The three main ways to accept credit cards
You have three realistic paths to accept credit cards: a payment processor (like Square or Stripe), a merchant account through your bank, or a point-of-sale system that bundles processing into the hardware. Most small businesses start with a payment processor because the setup is fastest and the monthly commitment is lowest.
A payment processor acts as the middleman between your customer's bank, your bank, and you. You don't own the relationship with the card networks (Visa, Mastercard, American Express) — the processor does. This means lower upfront costs but also less control over pricing and fewer negotiating options as you grow.
A merchant account, by contrast, is a direct relationship with your bank or a specialized merchant services company. You own the account and can negotiate rates once you have volume. The tradeoff is higher setup fees, longer approval, and usually a minimum monthly volume requirement.
Key Takeaways
- Payment processors like Square, Stripe, and PayPal are fastest to set up and charge per transaction rather than monthly fees, making them the most common choice for new small businesses.
- You will pay between 2.2% and 3.5% of each transaction plus a small per-transaction fee, depending on how customers pay (in-person card swipes cost less than online or phone orders).
- A merchant account through your bank or a merchant services company requires more paperwork and approval time but can save money once you process $10,000 or more per month.
- You need a business bank account, an EIN or Social Security number, and proof of business ownership before any processor will approve you.
- PCI compliance — the security standard that protects card data — is handled by the processor for most small businesses, but you still need basic safeguards like not storing full card numbers yourself.
Payment processors: the fastest route for new businesses
A payment processor handles the technical work of moving money from the customer's card to your bank account. You sign up online, connect your business bank account, and can start processing within days. Square, Stripe, PayPal, and Toast are the largest, but dozens of smaller processors exist for specific industries (restaurants, salons, nonprofits).
Processors charge you a percentage of each transaction plus a small flat fee. In-person card swipes (using a reader plugged into your phone or tablet) typically cost 2.6% plus $0.10 per transaction. Online payments or phone orders cost more — usually 2.9% plus $0.30. Some processors charge a monthly fee ($0 to $50) instead of or in addition to per-transaction fees. Read the pricing page carefully: the headline rate is rarely the full cost.
You will also need to buy or rent the hardware — a card reader for your phone, a countertop terminal, or a full point-of-sale system. Many processors offer free or cheap readers to get you started, then charge a monthly fee if you want to upgrade to fancier equipment.
Merchant accounts: lower cost at higher volume
A merchant account is a bank product. Your bank (or a merchant services company acting on behalf of your bank) opens an account specifically for card payments. The money from card sales goes into this account, then you transfer it to your operating account. This setup is more formal and takes longer — typically two to four weeks — but the per-transaction rates are lower once you have volume.
Merchant accounts usually charge an interchange rate (set by Visa and Mastercard, not your processor), a processor fee on top of that, and sometimes a monthly minimum or statement fee. The total might be 1.8% to 2.5% per transaction if you process $10,000 or more monthly. Below that volume, a processor is usually cheaper because you avoid the monthly minimums.
Your bank will ask for business tax returns, a business license, your personal credit report, and sometimes a personal may provide (meaning you are liable if the business defaults). Approval depends on your credit score and the bank's appetite for small business risk.
What you need before you can accept cards
Every processor and merchant account requires the same basic documents. You need a business bank account in your business name — not your personal account. You need an EIN (Employer Identification Number) from the IRS, or you can use your Social Security number if you are a sole proprietor. You need proof of business ownership: a business license, articles of incorporation, or a DBA (Doing Business As) certificate filed with your state.
You will also need to verify your identity with a government-issued ID and provide your business address. If you are a new business with no history, processors may ask for a personal credit check. Some will also ask what percentage of your sales will come from card payments versus cash or checks.
If you are a high-risk business (adult services, gambling, cryptocurrency, travel agencies, or others), approval is harder and rates are higher. Some processors refuse high-risk businesses entirely. If you fall into this category, search for "high-risk merchant account" and expect to pay 4% to 7% per transaction.
PCI compliance and keeping card data safe
PCI compliance is a security standard set by Visa, Mastercard, and the other card networks. It requires that anyone handling card data protect it from theft and fraud. For most small businesses using a processor, the processor handles the heavy lifting — they are certified, they encrypt the data, and they store it securely.
Your responsibility is simpler: never store a full card number yourself, never send card information by email or text, and never write down card details on paper. If a customer gives you their card number over the phone, type it directly into your processor's system or read it to the processor over the phone — do not save it in a spreadsheet or notebook. If you use a point-of-sale system, make sure it is from a reputable vendor and keep the software updated.
If you process fewer than 20,000 transactions per year, you usually only need to fill out a straightforward self-assessment form once a year. Larger businesses need annual audits from a certified assessor. Your processor will tell you which category you fall into and what you need to do.
Comparing processors side by side
| Processor | In-Person Rate | Online Rate | Monthly Fee | Hardware Cost | Best For |
|---|---|---|---|---|---|
| Square | 2.6% + $0.10 | 2.9% + $0.30 | $0 | Free reader; $299+ for terminal | Retail, food trucks, service businesses |
| Stripe | 2.7% + $0.05 | 2.9% + $0.30 | $0 | Free reader; $299+ for terminal | Online stores, invoicing, subscriptions |
| PayPal | 2.7% + $0.10 | 2.9% + $0.30 | $0 | Free reader; $299+ for terminal | Existing PayPal users, marketplaces |
| Toast | 2.59% + $0.10 | 2.99% + $0.30 | $0 to $99 | $0 to $2,000 depending on system | Restaurants, bars, high-volume retail |
| Merchant Account (Bank) | 1.8% to 2.5% | 2.2% to 2.8% | $20 to $100 | $500 to $2,000 | Established businesses, high volume |
Rates and fees change frequently, so check the processor's current pricing page before deciding. The difference between 2.6% and 2.9% is small on a $100 sale but adds up to hundreds of dollars per month on $50,000 in monthly volume.
The approval process and timeline
With a payment processor, approval usually takes one to three business days. You fill out an online form with your business name, address, EIN, and bank account information. The processor checks your identity and your business bank account, then sends you an approval email with login credentials. You can start processing within hours.
With a merchant account, approval takes two to four weeks. The bank or merchant services company will request tax returns, a business license, and a personal credit report. They may call to verify your business is real. Once approved, they will send you a contract, terminal equipment, and instructions for setting up your account.
If you are rejected, ask why. Common reasons are a low personal credit score, a very new business with no track record, or a business type the processor considers high-risk. You can reapply after fixing the issue (waiting six months, building credit, or finding a processor that accepts your industry) or try a different processor.
Frequently Asked Questions
Do I have to use the processor's hardware, or can I use my own?
Most processors require you to use their certified hardware or software to maintain PCI compliance. You cannot plug a customer's card into random equipment and stay find. Some processors allow third-party apps (like a Square reader on an iPad running Square's app), but you cannot use a competitor's reader with a different processor.
What happens if a customer disputes a charge?
The customer's bank investigates and either sides with you or reverses the charge. If reversed, the money comes out of your account. You can dispute the reversal with evidence (a receipt, an email confirmation, proof of delivery), but the processor or bank makes the final call. Keep records of every transaction for at least 18 months.
Can I accept American Express and Discover, or just Visa and Mastercard?
All major processors accept all four card networks. Amex and Discover rates are sometimes higher than Visa and Mastercard, but most processors bundle them into one rate. Check the pricing page to see if Amex is listed separately — if it is, you will pay more when customers use Amex.
What if I only process a few transactions per month?
A payment processor is still your best choice. You pay only for the transactions you process, with no monthly minimum. A merchant account would cost more because of the monthly fee. Once you reach $10,000 or more per month consistently, revisit merchant accounts to see if the lower per-transaction rate saves you money.
Do I need to report credit card sales to the IRS?
Yes. Your processor sends you a 1099-K form at the end of the year showing total card sales. You report this on your tax return. Keep your own records too — the 1099-K is a backup, not a substitute for your accounting.