​Credit Card Processing For Small Businesses: A Detailed Guide

Here is all your need to know about credit card processing for small businesses. What it means, how it works and why you need it!

Credit cards have become an integral part of online payments. After all, there are 58 million credit cards in use in India.

In simpler terms? Merchants NEED to offer credit cards as a payment option in their checkout. 

After all, a lot of customers choose to abandon cards in case they can’t find their preferred payment option. 

This is a chance that most small businesses wouldn’t be willing to take.

The good news is that the right payment aggregator can help you accept credit card payments effortlessly. 

​Credit Card Processing For Small Business

Why is Credit Card Processing For Small Businesses Important?

Well, for starters: to maintain a steady cash flow

Most small businesses struggle with maintaining and forecasting cash flow. Allowing credit card payments can help you get faster payments.

What’s more, choosing the right third party payment processor can help you get faster settlements. 

It will ensure that you have no lag in buying inventory. Furthermore, it can improve your business forecasting by miles! 

Moreover, online credit card payments for small businesses allows funds to be quickly deposited into the merchant’s bank account. This is in huge contrast to payment options like cash on delivery or cheque. 

As a result, it offers faster access to funds required to pay bills, employees and vendors.

Interestingly, the significant rise in the popularity of the recurring bill model has made credit card processing for small businesses a necessity.

After all, 53% of software revenue is expected to be generated by the subscription model.

For merchants, finding low-cost credit card processing for small businesses could be tricky. 

So, this blog will act as your guide! 

It will help you:

  • Understand how credit card processing for small businesses works
  • Choose the best credit card processor for small businesses
  • Set up credit card payments for small businesses

What is Credit Card Processing For Small Businesses?

Let’s start with the basics, shall we?

When a customer buys a product from your online store they can pay using either:

  • Credit or Debit Cards
  • Digital Wallets like PayTM or Google Pay
  • UPI
  • Netbanking
  • Buy Now Pay Later/EMI, etc.

In simple terms, credit card processing is all about transferring the payment from the buyer’s account to the seller’s account.

The payment processor and the payment gateway communicate data to make sure that the merchant receives the payment. 

While this process happens within seconds, it involves several steps and players in between.

Players Involved in Credit Card Processing For Small Business

There are 5 major players in internet credit card processing for a small business.


  1. Cardholder
  2. Issuing Bank
  3. Merchant
  4. Acquiring Bank
  5. Payment Gateway


The cardholder is the initiator of the entire credit card processing cycle.

Issuing Bank 

In simple terms, the issuing bank is the customer’s bank account from which the transaction amount is debited.

The issuing bank is a registered member of the credit card associations such as Visa and MasterCard.

The main function of the issuing bank is to ensure the cardholder has sufficient funds to complete a transaction. Thereafter, it releases the funds after the approval.


A business owner sells goods or services and accepts payments through a payment gateway.

Acquiring bank

Also known as the merchant’s bank. It is an intermediary between the credit card system and the seller.

Once the transaction is approved after settlement, the merchant receives money in this bank.

Payment Gateway 

Payment Gateway is the intermediary between the two banks. (the acquiring and the issuing bank)

A credit card payment gateway is critical for business owners. It ensures that the customer’s sensitive credit card details are securely passed from the customer to the acquiring bank. 

Furthermore, a payment gateways play the following roles:

  • Integrates the payment environment
  • Captures the cardholder’s banking information
  • Forwards the information to the banks and credit card processor
  • Transmits the payment approval or decline message 

In other words, it acts as an interface between the merchant’s website and the acquirer.

Credit Card Processing for Small Businesses

Credit Card Processing for Small Businesses: Step by Step Guide 

Here’s how credit card processing for small businesses looks like in motion.

It involves 3 major steps.

Step 1 – Card authentication

Step 2 and 3 – Settlement  funding

Want to dive in deeper? 

Well, that’s what we are here for!

Step 1: Card Authentication

This is the first step in the three-step process of internet credit card processing for small businesses. 

Here’s how the authorization process usually goes.

​Credit Card Processing For Small Business
  1. The cardholder provides their card information while checking out. The payment gateway tokenizes and encrypts this data and sends it to the acquiring bank.
  1. Then, the encrypted data is forwarded to the payment processor. In turn, the processor routes this data to the customer’s bank (issuing bank) through the card association’s network.
  2. The bank verifies the customer’s identity and if the person has enough funds to complete the transaction.
  3. Lastly, the bank authorizes or declines the payment on the basis of the verification report. It is immediately reflected in the merchant’s payment gateway.
  4. Once the authorization/rejection from the bank is complete, the customer either completes the transaction or is redirected to a fresh payment page.

Related Read: Payment Page Design Examples and Payment Success Page

Now, it is important to note that customer identity verification avoids fraud and money laundering. 

This back-and-forth process takes place within 1-2 seconds.

Next, we move on to the second and third steps of credit card processing for small businesses. 

Step 2 and 3: Settlement and Funding

The second step in the payment process is called the settlement. It takes place after the transaction is approved. 

​Credit Card Processing For Small Business

Now here’s how the settlement process usually works: 

  1. Here’s what happens after the merchant receives the authorization.
    The payment gateway sends approval for the reconciliation of payment to the payment processor.
  1. On successful reconciliation, the applicable fee is deducted from the transaction amount by the payment processor.
  2. Thereafter, he amount is deposited to the merchant’s acquiring bank. Usually, the transactions are batched for a day before proceeding with the settlement process.

    But why aren’t funds settled straightaway?

    Well, It’s because processing in batches reduces the total processing costs. This comes in handy since most merchants record multiple sales in a day.
  3. Then, the card network deducts the transaction amount from the issuing bank and sends this amount to the payment processor.
    The payment processor, in turn, submits these funds to the merchant’s acquiring bank.
  4. Lastly, the customer’s issuing bank deducts the total amount from the customer’s account. Thereafter, the bank sends an invoice or account statement to the cardholder, which is known as the credit card statement.

    The customer is required to settle the credit card outstanding within the stipulated date.
    In case if the customer fails to do so, interest charges are levied by the bank.

It’s important to note that the merchant receives funds only after the settlement. This settlement process can be standard or instant.

​Credit Card Processing For Small Business

Choosing the Best Credit Card Processing Company for Small Businesses?

Choosing the best merchant credit card processing for small businesses can be hard.

After all, you want low-cost credit card processing for your small business. However, high transaction success rates are equally important.

​Credit Card Processing For Small Business

Thankfully, it is possible to have the best of both worlds.

Let’s show you how.

To make an informed decision, you need to consider the following requirements:

  • Are you going to accept international payments?
  • Are you going to provide digital wallets such as Paytm as a payment option on the checkout page?
  • Do you want to offer options such as “Buy now, Pay later” for added customer convenience?
  • Does your business need multiple EMI options with high average order value?
  • Do you use the recurring bill model for subscriptions?
​Credit Card Processing For Small Business

Now, let’s have a look at some of the major checklist pointers in detail.

Multiple Payment Instruments

There are 2 major benefits of having a larger pool of payment for your business. 

  • Customers can choose the preferred method
  • Lower card abandonment rates

You may be an SME looking for the best mobile credit card processing for small businesses. On the other hand, you could be an established brand looking to scale your business further. 

Either way, providing multiple payment modes paves the way for easy adoption of your products/services.

Now, the commonly accepted payment options in India are:

  • Debit, credit and prepaid cards
  • NetBanking options
  • UPI
  • Digital wallets
  • Pay later and cardless EMI

Choose carefully to ensure that your credit card processor offers these payment modes as options.

International Payment Support

If you run an eCommerce business, an international payment gateway becomes a necessity. 

Most banks and payment gateways are hesitant to offer international payments and levy hefty deposits and setup fees.

However, payment gateways like Cashfree Payments support multiple currencies with easy onboarding for international payments. 

PayPal is the most trusted and preferred choice for international payments due to its widespread adoption and secure payment. 

​Credit Card Processing For Small Business

Moreover, adding PayPal as a checkout option can greatly increase your conversion rates.

Also, the ability to pay in their local currency would be beneficial for both the buyer and seller to avoid exchange disputes as the customers know the exact amount they are paying. 

Payment Settlement Cycles

The best merchant credit card processing systems offer faster settlement cycles and real-time reconciliation.  

Usually, T+1 or T+2 days is the industry norm for the funds to reflect on your merchant account. However, choosing a payment gateway with a fast settlement cycle ensures you have a strong cash flow for your business operations.

​Credit Card Processing For Small Businesses

Related Read: Integrated Payment System: All You Need To Know

Transparent pricing structures

Many payment systems claim “low-cost credit card processing for small businesses” but do not hold their bargain. 

With industry standards of 2-3% per transaction, negotiate a transparent pricing structure, especially if you are a small business.                                

​Credit Card Processing For Small Business

Excellent Customer Support

When things go south, you need a reliable partner whom you can call right away to solve it.

If you are a small or medium business, the slightest payment issues could seriously impact customer experience. 

Here are 2 small tips that could go a long way when it comes to payment systems.

  • Ensure that your patent gateway offers 24/7 support in the form of live chat, emails, etc. 
  • A dedicated account manager could help you at the time of onboarding and when you go live.

Moreover, try to check out the call waiting times and resolution scores beforehand, if you can.

Integration Support For Payment System 

As a small business, you may be using a third-party platform such as Magento, Shopify or WooCommerce. 

It’s also possible that you’ve built your online store on PHP, Ruby or Python. 

Either way, ensure that your payment gateway offers: 

  • Plugins for the most popular payment platforms 
  • Detailed integration guides for major computing languages like PHP, Ruby and so on. 
​Credit Card Processing For Small Business

Swift Onboarding

Lots of payment gateway platforms promise onboarding within a few minutes. However, the truth is that opening a fully functional account can take up to 2 days. 

There are various formalities involved in opening a merchant’s account with a payment gateway. Moreover, there are several documents that need to be verified for the merchant’s account to be validated.

Confirm these details beforehand to avoid a poor onboarding experience. 


While offering easy credit card processing for small businesses and choosing a payment gateway may sound challenging, it does not have to be. 

Payment gateways work with banks, credit card networks and regulatory bodies, enabling your business to provide flexible payments to customers.