Payments Intro

EPOS basics header

Payments 101

We’ve published a whole payment guide on this topic; so if you want to really understand the topic, head there

But if you want to keep it simple, here’s the important stuff. To accept cards at your store, you need a payments provider. Your payment processing provider is separate to your EPOS software provider. However, you may want to ensure your software is integrated with your payment provider. The easiest way to do this is to choose your software provider first, and then choose your payments

How to choose Payment Provider

You have a choice between two types of provider. Contract, and pay-as-you-go

The pay-as-you-go providers are much more convenient. They’re sometimes more expensive; but not always – it depends on how much you process, your average transaction size, and your foreign or business card intake.

This article will take you through how to make a decision; and then what “next steps” you need to take in either decision. 

 

Pay-as-you-go versus Contract

traditional payments versus acquirers

Pay-as-you-go providers are more convenient than contract; so some merchants decide to go with pay-as-you-go even when they work out as more expensive. (In the above image, the card readers on the right come with pay-as-you-go processing arrangement whereas the reader on the left would come with a traditional contract.) 

The advantages of pay-as-you-go are as follows:

1) You can start and stop processing whenever you like. A contract is just that – you’d be signing up for a 2-4 year rental fee in addition to a minimum processing fee. 

2) The card readers are cheaper. You can buy a card machine for pay-as-you-go for between around £10 and £50; whereas contract readers will charge you £15 per month every month for the duration of your 2-4 year contract. 

3) They work out the box. If you sign a contract with a traditional provider, it involves identity checks – you may have to prove an address, and provide ID. It can usually take 1-2 weeks of paperwork and checking. A pay as you go reader will work immediately out of the box. 

4) The rates are simpler. Contract rates will be different for different cards, including higher rates for foreign and business cards. Pay-as-you-go providers absorb those differences.

5) You’re billed before the money enters your account. Contract fees are billed to you monthly – as a bill. Pay-as-you-go providers deduct the money before it enters your account. Pay-as-you-go readers have what’s called a “headline rate” – usually 1.75%. If you have negotiated a cheaper rate contingent on processing volumes, you’ll be charged the headline rate before the money gets to you, and the difference will be reimbursed to you at the end of each month. 

6) The card readers are better looking. Although we think traditional card reader manufacturers, have noticed this, and may be about to up their game…

Understand more about pay-as-you-go providers.

With a contract…

1) You’re in a contract. It will be 2-4 years long. You’d have to buy out of the contract if you wanted to leave; which is usually the terminal rental fee until the end of the contract period. \

2) The rates are complex. Most providers will offer a “blended” rate; which might only show you part of what they’re billing you. We’ve published advice about how to run a tendering process for your contract provider here.

3) You’ll need to prove your identity. Have a passport or ID to hand; and you’ll need to provide documents which establish proof-of-residence. 

Understand more about traditional processors.

 

Which is cheaper for me?

man reaches into his wallet for debit card

This depends on three factors. Your average transaction size, your monthly turnover, and your foreign/business card intake.

Average Transaction Size

This is the most important single factor in how much you pay. That’s because the rates are formatted differently.

Contract rates are typically done in percent formats. For example, 0.75% + 4p is a percentage + format.

Pay-as-you-go rates are typically done as flat percentages. For example. 1.25% is the rate you might get from a pay-as-you-go provider.

To figure out which is cheaper in this example, we need to know which is cheaper – the difference between those percentages (1.25 – 0.75 = 0.5%) or 4p. 

If 4p was 0.5% of the value of a purchase, the purchase would be 200 x 4p, or £8. So comparing these rates, if the average transaction size is ABOVE £8 the contract provider would be cheaper; if the average transaction size is BELOW £8, the pay-as-you-go provider is cheaper.

People often think pay-as-you-go is for smaller merchants, which is true – but for large merchants with low average transaction sizes (such as big coffee shop chains) pay-as-you-go providers can still work out cheaper.

Card Volume

Card volume is the second most important factor in how much you pay. Both contract and pay-as-you-go providers offer better rates to customers who process more by card.

That said, contract providers are probably more sensitive to size, and offer punitive rates for small stores. If you’re very small (and you process less than around £6,000 per month) a pay-as-you-go provider is likely to be better suited to your needs.

Business and Foreign Card intake

This isn’t usually as important a factor; unless you’re somewhere that takes a lot of foreign and business cards. If your store is in an airport, for example, this would be crucial. 

Contract providers offer different rates for different cards. Their rates are higher for cards which are business cards; exclusive or high-reward cards; or foreign cards. Pay-as-you-go providers absorb card rate differences. Therefore, if you take lots of foreign cards, pay-as-you-go is better value. 

Read more about how to understand your rates in chapter one of our payments guide. 

 

Our Guide…Beginner's guide to payment processing

We’ve written a full guide to help demystify payments. If you’re looking to understand how payments work, or just how you can get set-up on the best rate; this guide is for you.

Chapter 1 – Understand your fees (payfac or acquirer?) 

Chapter 2 – Should I Even Accept Cards?

Chapter 3 – Other Ways of Taking Payment

 

Chapter 4 – Payment Facilitators

Chapter 5 – Acquirers

Chapter 6 – How do Payments Actually Work? 

 

Chapter 7 – When can I negotiate?

Chapter 8 – E-commerce 101 

Chapter 9 – Everyone in Payments & What They Do

 

The Next Step: Get Payment Processing Quotes