Guide to Credit Card Processing for Consumers & Merchants

In any credit card transaction, there are five major players: the consumer, the merchant, the issuing bank, the merchant's bank and the credit card companies themselves. Here's how it looks:

1. The consumer hands his credit card over to the merchant
2. A message is sent to the issuing bank, the bank that gave the consumer his credit card
3. Money is transferred to the acquiring bank, where the merchant has an account that allows him to take credit cards
4. Money is deposited to the merchant from the acquiring bank
5. A slight deduction is sent back to the issuing bank, which the issuing bank shares with credit card company networks such as Visanet or The Mastercard Network

We talked to Beverly Harzog, a personal finance expert, consumer advocate and author of Debt Escape Plan and other books on consumer finance.

The best place to start may be your bank, since you already have a relationship with it. Compare it to other processors, and ask these questions:

• A payment gateway
  This enables you to authorize transactions. You can find a payment gateway with a service such as Authorize.net or Sage.

• A readymade store platform
  If you're selling goods, consider setting up on a platform that allows you to accept payments as part of the format. Sites such as Etsy, eBay and Shopify are good examples.

• Combo payment gateway and merchant account
  You can set this up with a company like PayPal or Stripe, and it may involve fewer fees than setting up a merchant account separately, depending on the size of your business.

If someone makes a fraudulent purchase on your site, you are liable (not the credit card issuer). Here are three ways to be more cautious with your transactions:

If choosing a processor is making your eyes cross, there are services out there that allow you to make transactions using your smartphone or tablet, bypassing a merchant account. Using Square, for instance, you would enter credit or debit card details manually, or use the company's free magstripe card reader that plugs into your audio jack. You pay 2.75 percent of every swiped credit card transaction, or 3.5 percent plus 15 cents to enter the information manually, and the money is deposited into your bank account. There are no other fees.

Square reserves the right to shut down your account if you violate their terms of service or pose a high credit risk. Generally, Square is a better processing choice if your business is somewhat established, if your transactions are lower in average price point (under $100), if you aren't processing a huge volume of transactions, and if you're swiping or taking chip cards (not entering them manually).

There are other Square-like processors to consider, as well, such as Flint, PayPal Here and GoPayment.

• U.S. Small Business Administration, Marketing and Sales: Choose How You'll Accept Payments
• National Federation of Independent Business, What You Need to Know About Mobile Payments