You need a payment processor, a merchant account, and a way to physically accept or securely transmit card data

Accepting credit cards means three separate things have to happen: the customer's card gets read or their number gets entered, that information travels securely to a bank that verifies the funds, and the money lands in your business account. You cannot do any of those steps yourself. Instead, you choose a payment processor — a company that handles the verification and security — and they connect you to a merchant account, which is the bank account where payments deposit.

The processor charges you a fee for each transaction, usually a percentage of the sale plus a small flat amount. Those fees vary widely depending on how you accept the card (in person, online, over the phone), what kind of business you run, and how much you process monthly. You will also see monthly fees, setup fees, or equipment fees depending on which processor you choose.

The good news: you do not need a separate business bank account to start, though most processors require one eventually. The bad news: if you process a high volume or have chargebacks (customers disputing charges), your fees rise or your account gets closed.

Key Takeaways

  • Payment processors like Square, Stripe, and PayPal handle the security and verification; you choose one based on how you accept cards and what you pay in fees.
  • In-person payments through a card reader or terminal usually cost 2.6% to 3.5% per transaction, while online payments cost 2.9% to 3.5% plus 30 cents.
  • You will need a business bank account to receive deposits, and most processors require one before you can process significant volume.
  • Chargebacks and fraud happen; processors protect you with dispute tools and fraud detection, but repeated problems can result in account closure.
  • Monthly fees, equipment costs, and setup charges vary by processor, so comparing total cost over a year matters more than looking at per-transaction rates alone.

How payment processors work and what they cost

A payment processor is the middleman between your customer's bank and your bank. When someone hands you a card or enters their number online, the processor encrypts that data, sends it to the card network (Visa, Mastercard, American Express, Discover), and the network checks with the customer's bank to confirm the funds exist. All of this takes seconds. The processor then deposits the money into your account, usually within one to three business days.

You pay for this service in three ways. Interchange fees are set by the card networks and go to the customer's bank — you cannot negotiate these. Processor markup is what the processor keeps, and this is where you can shop around. Assessment fees go to the card networks themselves. Together, these usually run 2.6% to 3.5% of each transaction if you accept cards in person, or 2.9% to 3.5% plus 30 cents if you accept them online.

On top of per-transaction fees, many processors charge a monthly fee (usually $10 to $30), a setup fee (often waived), or equipment fees if they provide a card reader or terminal. Some processors waive monthly fees if you process a minimum amount each month. The math changes depending on your volume: a processor with no monthly fee but slightly higher per-transaction rates might cost less if you process $500 a month, but more if you process $10,000.

Choosing between in-person, online, and phone payment methods

How you accept the card determines which processor works best and what you pay. In-person payments use a physical card reader (a small device that plugs into your phone or tablet) or a terminal (a standalone machine). The reader or terminal encrypts the card data before it leaves your location, which is the most secure method and usually costs the least. Square, Toast, and Clover all offer card readers starting around $29 to $99.

Online payments happen on your website or through an invoice link. The customer enters their card number into a form, and the processor's encryption protects it. This method costs slightly more per transaction because the processor takes on more fraud risk — they cannot see the customer or the card in person. Stripe and PayPal are popular for online-only businesses.

Phone or mail payments are the least secure because you or your staff manually enter the card number. Processors charge the highest rates for these, and you absorb more fraud risk. If you take phone orders, use a processor's phone payment system rather than writing down card numbers yourself — the system encrypts the data as it is entered.

Many small businesses use a mix: a card reader for in-person sales and an online payment link for remote customers. Most processors let you do both with one account.

What you need to set up a merchant account

Before you can process payments, you need a few things in place. First, a business bank account — processors deposit money there, and they verify your identity and business legitimacy through the account. You do not need an account open before you sign up with a processor, but you will need one before they activate your account or before you process significant volume. If you are a sole proprietor, some processors accept a personal account initially, but they will ask for a business account eventually.

Second, you need to prove you are a real business. This usually means a business license, an EIN (Employer Identification Number) from the IRS, or a Social Security number if you are a sole proprietor. Processors verify this information to prevent fraud and money laundering. The verification process takes a few days to a week.

Third, you need to understand your processing agreement — the contract that spells out fees, what happens if you have chargebacks, and when the processor can close your account. Read the section on termination and chargeback liability. Some processors reserve the right to hold funds in reserve if they see fraud patterns, and some close accounts without warning if chargebacks exceed a certain threshold.

Comparing major processors for small businesses

Square is popular for retail and service businesses because the card reader is cheap, the per-transaction rate is straightforward (2.6% in person, 2.6% + 30 cents online), and there is no monthly fee. You can also use Square's point-of-sale system to track inventory and customers. The downside: if you process high volume, you might find better rates elsewhere.

Stripe is built for online businesses and developers. Rates are 2.9% + 30 cents for online payments, and you can customize how payments work on your website. There is no monthly fee, but Stripe is less friendly if you need in-person payments or phone support.

PayPal Payments is free to set up and charges 2.99% + 30 cents for online payments. It integrates with PayPal's ecosystem, which is useful if you already use PayPal for invoicing. In-person payments cost 2.7% with their card reader.

Toast and Clover are full point-of-sale systems aimed at restaurants and retail shops. They cost more upfront (equipment and monthly fees), but they include inventory management, staff scheduling, and customer data. Use these if you need a complete system, not just payment processing.

Smaller processors like Helcim and Gravity Payments exist too, and some specialize in high-risk businesses (CBD, e-cigarettes, adult services) where mainstream processors refuse to work. If you are in a high-risk category, search for "high-risk merchant processor" rather than trying Square or Stripe.

Protecting yourself from chargebacks and fraud

A chargeback happens when a customer disputes a charge with their bank, claiming they did not authorize it or did not receive what they paid for. The bank pulls the money back from your account and charges you a fee (usually $15 to $100). If chargebacks happen too often, your processor can freeze your account or close it entirely.

You can fight a chargeback by providing proof: a signed receipt, an email confirmation, a tracking number showing delivery, or a photo of the customer receiving the service. Keep these records for at least 90 days. Most processors give you a window (usually 7 to 10 days) to submit evidence before the chargeback is final.

To prevent chargebacks in the first place, be clear about what you are selling. Use a business name on the charge that customers recognize. Send receipts or confirmations immediately. For online orders, use a processor that offers fraud detection and address verification. For in-person sales, ask for ID if the signature does not match the card.

Some processors offer chargeback protection or fraud insurance, but these are add-ons that cost extra. For most small businesses, good record-keeping and clear communication prevent most chargebacks without paying for extra protection.

Setting up your first payment account step by step

Start by choosing a processor based on how you accept cards. If you take payments in person, Square or Toast. If online, Stripe or PayPal. If both, Square or Clover. Visit their website and click "get your free guide" or "Sign Up."

You will be asked for your name, business name, business address, and Social Security number or EIN. Have your business license handy. The processor will verify this information with the IRS and sometimes a credit bureau. This takes a few days.

While you wait, open a business bank account if you do not have one. Most banks can open an account in a day or two with a business license and ID. You will need the account number and routing number when the processor asks for deposit details.

Once your account is verified, the processor will send you a card reader (if you chose in-person payments) or give you a link to add to your website (if you chose online). Download the app or log into the dashboard, and you can start processing payments immediately. Your first few transactions may take longer to deposit while the processor watches for fraud, but after that, deposits arrive on your normal schedule.

Frequently Asked Questions

Do I need a business license to accept credit cards?

Most processors require proof of a legitimate business, which usually means a business license or an EIN. A sole proprietor can sometimes use a Social Security number instead, but processors increasingly ask for an EIN. Check with your local government about whether you need a license for your type of business — many do not require one for freelancers or home-based services.

What happens if a customer does a chargeback?

The bank pulls the money back from your account and charges you a fee. You have about 7 to 10 days to submit proof that the transaction was legitimate — a receipt, confirmation email, or delivery tracking. If you provide good evidence, you usually win. If you do not respond or have no proof, you lose the money and the fee.

Can I use a personal bank account instead of a business account?

Some processors allow it temporarily, but they will ask you to open a business account before you process significant volume. It is easier to open a business account from the start — most banks do it in one or two days and charge little or nothing.

Which processor is cheapest?

It depends on your volume and how you accept cards. For in-person payments under $5,000 a month, Square is usually cheapest because there is no monthly fee. For online payments, Stripe and PayPal are similar. For high volume (over $10,000 a month), call a processor directly to negotiate custom rates.

What if I get rejected by a processor?

Processors reject applications for high-risk businesses, poor credit history, or a history of chargebacks. If you are rejected, try a processor that specializes in your industry. If you are in a high-risk category, search for "high-risk merchant processor" — they charge more but will work with you.