Retail Payment Processing: Ultimate Guide To Retailers

Image showing a credit card being processed in a retail store.

Retail payment processing is a constant pain point for retail business owners. Difficulties arise from not understanding the complex fees and pricing models, picking the right payment methods for their business, navigating security compliance, and choosing a payment processor that fits a business’s needs.

The world of payment technology also continues to evolve rapidly, with new innovations emerging. Without the proper knowledge, retailers may end up overpaying for payment acceptance, lacking key features, or failing to offer preferred customer payment methods.

By the end of this guide, you will be to: 

  • Understand what retail payment processing entails
  • Know how it works, the key fees, and pricing models
  • Grasp popular payment methods
  • Pick between integrated vs. non-integrated terminals 
  • Choose the best payment processor for your business needs

What Is a Retail Payment Processing?

Retail payment processing refers to the steps and technology required for retail businesses to accept and manage payments from customers. It encompasses the hardware, software, bank and processor relationships, and procedures needed to securely receive various payment types like credit cards, debit cards, and mobile wallets.

Imagine a customer visiting a local electronics store to purchase a new smartphone. The customer selects the desired model and proceeds to the checkout counter. The store’s point of sale (POS) system comes into play at this point. The cashier scans the product, and the POS system calculates the total amount due, including taxes. 

The customer decides to pay with a credit card. The cashier swipes or inserts the card into a card reader, and the card’s information is securely transmitted to the payment processor. The payment processor then verifies the customer’s available credit or funds and checks for any suspicious activity. Once approved, the processor sends an authorization code back to the store, indicating that the payment is valid.

The store completes the transaction by printing a receipt for the customer, who leaves with the purchased smartphone. Later, the payment processor communicates with the customer’s bank to initiate the funds transfer, which occurs within a few business days, settling the transaction.

In this example, retail payment processing involves various steps, including authorization, settlement, and reconciliation, ensuring a smooth and secure exchange of funds between the customer and the merchant.

How Does Retail Payment Processing Work?

Retail payment processing is the behind-the-scenes magic that makes buying things with your credit card or debit card at your favorite stores possible (and, typically, remarkably easy). It’s like the digital bridge that connects your money to the store’s bank account. Let’s break it down into simple terms.

1. The Customer’s Card: It all starts when the customer wants to buy something. They hand over a credit or debit card to the cashier, swipe, dip, or tap their card, pay with a smartphone or smartwatch, or input their card information online.

2. Data encryption: The machine encrypts your card information when you insert your card. Encryption is like putting your card details in a secret code that only the banks and the payment processors can understand. This keeps your data safe from potential hackers.

3. Authorization request: The card reader sends an authorization request to your bank or credit card company. This request includes the purchase amount and your card details. The bank or credit card company checks if you have enough money in your account or if your credit limit is sufficient for the purchase.

4. Bank approval: If everything is in order, your bank approves the transaction. They confirm that you have the funds or credit to make the purchase. This usually happens in a matter of seconds.

5. Transaction approval: Once your bank gives the green light, the payment processor (a middleman company that helps facilitate transactions) gets involved. They relay the approval back to the store’s payment system.

6. Receipt and payment: Your receipt prints out, and you get your items. At the same time, the payment processor starts moving the money from your bank to the store’s bank. This is the actual transfer of funds.

7. Settlement: At the end of the day, the payment processor gathers up all the approved transactions and sends them to the store’s bank. This is like settling the bill for all the day’s purchases.

8. Store gets paid: The store’s bank receives the money from the payment processor and adds it to its account. The store has now been paid for your purchase.

9. Your bank updates: On your side, your bank updates your account to reflect the purchase. Using a credit card will show as a pending transaction until it’s officially posted to your account, usually within a day or two.

10. Monthly statement: At the end of the billing cycle, you receive your credit card statement, which lists all your purchases during that period. You’re responsible for paying the credit card company back for your purchases.

Here are the terms that you need to understand when learning about retail payment processing:

  • Merchant account: A merchant account is a bank account specifically designed for businesses to accept credit and debit card payments.
  • Issuing bank: This is the shopper’s bank which distributes the funds for any authorized purchase.
  • Payment gateway: A payment gateway is a service that allows merchants to accept payments from customers online.
  • Payment processor: A payment processor differs from a gateway. It is a company that facilitates the transfer of funds between merchants and banks.

What Are The Retail Payment Processing Fees And Rates You Need to Know?

When setting up payment processing, retailers need to pay close attention to the various fees and rates they will be subject to. Being aware of these costs allows retailers to forecast their transaction costs and minimize fees where possible accurately.

Below are the main fees to understand:

  • Processing fees

 These are charged every time a customer makes a card purchase. There are two main types:

Interchange fees: These fees are charged by the card networks (Visa, Mastercard, American Express, and Discover) to the merchant for each credit or debit card transaction. Interchange fees are typically a percentage of the transaction amount plus a fixed fee.

Merchant service fees: These fees are charged by the merchant’s payment processor to cover the costs of processing payments. Merchant service fees are typically a percentage of the transaction amount plus a flat fee.

  • Flat fees

Monthly or annual fees:  Payment processors may charge retailers monthly or annual fees for access to their services, such as account maintenance or access to additional features. 

PCI compliance fees: Retailers must comply with Payment Card Industry Data Security Standard (PCI DSS) requirements. Some payment processors charge fees for PCI compliance services and assessments.

  • Situational fees

Cross-border transaction fees: When retailers accept payments from customers in other countries, they may incur cross-border transaction fees, typically higher than domestic transaction fees.

Chargeback fees: Chargeback fees are incurred when a customer disputes a transaction, and the retailer is required to refund the money. These fees can vary widely among payment processors.

Early termination fees: Some payment processing contracts may include penalties for terminating the agreement before its agreed-upon term. These fees can be substantial but are avoidable with due diligence during the contract signing.

Refund fees: These fees are charged by the merchant’s payment processor for each credit or debit card refund.

Setup fees: Charged by the merchant’s payment processor to set up the merchant account and begin processing payments, these fees are also avoidable.

Pricing Models For Retail Payment Processing

The three main pricing models for retail payment processing are interchange-plus, tiered, and flat-rate:

Interchange-plus pricing

Interchange-plus pricing is the most common pricing model. It is also known as cost-plus pricing.

With interchange-plus pricing, the merchant pays the payment processor a percentage of the transaction amount (called the interchange fee) plus a markup fee. The markup fee is set by the payment processor and can vary depending on the processor.

For example, let’s say a merchant processes a $100 transaction with a Visa credit card. The interchange fee for this transaction might be 2.5%, so the merchant would pay $2.50 to the card network. The payment processor might charge a markup fee of 0.5%, so the merchant would pay a total of $3 to the payment processor for this transaction.

Tiered pricing

Tiered pricing is a pricing model that divides transactions into different categories, with each category having a different pricing rate. The categories are typically based on the card type used, the transaction amount, or the merchant’s location.

For example, a tiered pricing plan might have three categories: qualified, mid-qualified, and non-qualified. Qualified transactions would have the lowest pricing rate, mid-qualified transactions would have an intermediate pricing rate, and non-qualified transactions would have the highest pricing rate.

This structure offers less transparency since retailers likely don’t know what determines the category into which transactions are placed.

Flat-rate pricing

Flat-rate pricing is a pricing model where the merchant pays a fixed percentage of the transaction amount to the payment processor, regardless of the type of card used or the amount of the transaction.

For example, a flat-rate pricing plan might charge 2.9% + $0.30 for every transaction. This means that the merchant would pay $2.90 plus $0.30 for every $100 transaction, regardless of the type of card used.

The best pricing model for a merchant will depend on their specific business:

  • Merchants with high-volume, low-margin businesses may benefit from interchange-plus pricing, as they can negotiate lower markup fees with payment processors.
  • Merchants with low-volume, high-margin businesses may benefit from tiered pricing, as they can pay lower rates for qualified transactions.
  • Merchants with new or growing businesses may benefit from flat-rate pricing, as it can provide a more predictable cost structure.

What Are The Types of Retail Payment Methods?

Below are some of the most popular and efficient retail payment methods used globally: 

Cash Transactions

Popularity: High, though diminishing

Pros: Anonymity, no transaction fees, universally accepted

Cons: Security risks (theft), not suitable for high-value transactions, lack of electronic record

Best for: Small, immediate transactions

Cash is the oldest and one of the most widely used payment methods. It’s simple, quick, and doesn’t require any third-party mediation. However, cash handling can be difficult. Carrying large amounts poses a risk of theft, and there’s no recourse if the cash is lost or stolen.

Debit Card Payments

Popularity: High

Pros: Immediate transfer of funds, secure digital record of transaction

Cons: Risk of overdraft, limited to available funds in the account

Best for: Everyday transactions where funds are readily available

Debit cards directly link to a bank account and enable immediate money transfer from the customer to the retailer. This method provides the convenience of a card payment but limits spending to the existing account balance, unlike credit cards. They usually come with security features such as PIN authorization and sometimes even biometric verification.

Credit Card Payments

Popularity: Very high

Pros: Enables high-value transactions, security features, rewards

Cons: Risk of accruing debt, potential for high-interest rates

Best for: High-value transactions, online shopping, and where cash flow is a consideration

Credit cards are similar to debit cards in terms of convenience but offer the ability to borrow money up to a certain limit. This makes them suitable for high-value transactions and instances where immediate payment isn’t feasible. Security features like CVV, two-factor authentication, and sometimes biometrics add layers of safety.

Mobile Wallet Payments

Popularity: Increasing rapidly

Pros: Convenient, fast, often includes rewards and loyalty points

Cons: Dependent on smartphone and internet connection

Best for: Quick, contactless transactions, eCommerce

Mobile wallets like Apple Pay, Google Pay, and various others store a digital version of debit or credit card information, enabling contactless payments via a smartphone. Payment is quick and usually just involves scanning a QR code or tapping the phone to a compatible terminal. It’s convenient but relies on having a charged smartphone and sometimes an internet connection.

RFID Self-Checkout

Popularity: Growing, especially among enterprise-level retailers

Pros: Speed, convenience

Cons: Limited to participating retailers, potential for accidental or fraudulent activity

Best for: Quick shopping trips, especially for a small number of items

RFID (Radio-Frequency Identification) self-checkout systems allow customers to bypass traditional checkout lines by automatically reading RFID tags on purchased items. The total is then deducted from a linked payment method. While convenient and fast, this method is not yet universally accepted and can sometimes result in accidental or even intentional unpaid items.

Offering diverse payment options caters to customer preferences. However, retailers must balance processing costs, security, and operational needs when supporting different payment types.

Integrated vs. Non-integrated Payment Terminals

Integrated and non-integrated payment terminals are two different ways to process payments.

Integrated payment terminals

  • The payment terminal is built into the point of sale (POS) system
  • Allows for seamless transactions – cashier can switch between taking orders and accepting payments within the same system
  • Transaction information is automatically captured and stored in the POS reporting
  • Requires compatibility between the POS and payment processing capabilities
  • Often comes bundled together as a complete POS hardware/software package

Non-Integrated payment terminals

  • The payment terminal is a completely separate device from the POS system
  • Cashier must enter the amount to be charged manually into the terminal after ringing up in the POS
  • Does not automatically capture transaction data for reporting
  • Requires manual reconciliation between terminal and POS
  • Allows flexibility to work with any processor or switch providers easily

Key Differences between Integrated and Non-Integrated Payments

  • With integrated terminals, transaction data flows between the POS and payment terminal. With non-integrated terminals, the POS and payment systems remain completely separate.
  • Integrated systems allow faster checkout, while non-integrated terminals require cashiers to handle an additional device.
  • Changing processors is more difficult with integrated systems because it likely means replacing the entire POS. Non-integrated terminals make it easy to switch payment processors.
  • Upfront hardware costs are usually lower for non-integrated since the POS and payment terminals are separate. Integrated bundles may have higher initial costs.

For most modern retail operations, an integrated payment terminal is preferable because of seamless transactions and reporting. But budget-conscious retailers or merchants who want to easily change processors may opt for non-integrated terminals.

How to choose the best retail payment processing for your business?

How to choose a retail payment processor

  • Type of payments: Make sure the processor accepts various types of payments – credit/debit cards, online payments, and mobile payments.
  • Reliability: Check uptime statistics. Downtime costs money.
  • Security: Must be PCI compliant. Extra features like tokenization and encryption are beneficial.
  • Fees: Understand the fee structure. Check for hidden fees like termination fees, monthly minimums, or statement fees.
  • Scalability: Make sure the processor can handle your growth – more transactions, international transactions, etc.
  • Integration: Should easily integrate with your existing business software like POS systems, accounting software, and eCommerce platforms.
  • Customer support: 24/7 support is ideal.
  • Reviews: Read reviews and maybe even talk to other businesses using the same processor.
  • Contract terms: Evaluate contract length and what happens if you want to switch or cancel.

How to Reduce Retail Payment Processing Fees

  • Negotiate rates: Some processors will negotiate rates, especially if you have high transaction volumes.
  • Batch processing: Send transactions in batches rather than one by one to reduce fees.
  • Avoid manual entry: Manually-entered transactions often incur higher fees. Use a card reader.
  • Minimize chargebacks: High numbers of chargebacks can increase fees and put you at risk of losing your account. Have clear policies and good customer service to mitigate this.
  • Regularly review statements: Check your monthly statements for any extra or hidden fees you weren’t aware of.
  • Switch to a lower-cost plan: If you notice you’re paying high fees but not taking advantage of specific services, switch to a cheaper plan that suits your needs.
  • Use a payment gateway: If you also sell online, using the same payment gateway for online and in-store can sometimes net you lower overall fees.
  • Compare and switch: If another processor offers better rates, consider switching. Just watch out for termination fees from your current processor.

How KORONA POS Can Help Retailers Optimize Retail Payment Processing

While KORONA POS is not a retail payment processing solution, it is a POS solution serves as a crucial intermediary that can guide retail business owners in selecting the most suitable payment processors.

KORONA POS has partnered with some of the best in the retail payment processing industry to offer you a range of trustworthy and efficient options. Beyond that, the solution streamlines your store operations through robust inventory management, real-time analytics, and seamless integrations, making your day-to-day management simpler and more effective.

Ready to optimize your retail operations and secure the best rates in retail payment processing? Book a demo with us today to find out how KORONA POS can serve as your all-in-one business solution.

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Writen By

Mahougnon Martial Amoussou

Passionate about SEO and Content Marketing. Martial also writes about retail trends and tips for KORONA POS. He loves NBA games and is a big fan of the Golden State Warriors.