At one time (say, five to ten years ago) there were big barriers to entry when it came to accepting credit cards. There were stiff application fees, lengthy applications, and detailed credit history checks. In most countries, it's still like that. But in the US, competition for the exploding ecommerce market has eroded those restrictions. The shift from a hardware-based to a software-based credit card processing system has also helped democratize things. Now, virtually any adult in the US can take credit card payments.

Credit Card Processing: Gateways and Merchant Accounts

What makes someone able to accept credit card payments? You may think that a business (or "merchant" in credit card parlance) can accept credit cards because of that little swipe terminal machine--or, in ecommerce, shopping cart software. In fact, those aren't truly essential, at least not nowadays.

Fundamentally, what allows a business or an individual to accept credit cards is a special bank account called a merchant account. Unlike a normal bank account, you can't write checks on a merchant account or make withdrawals at a cash machine. The merchant account is solely for accepting payments from Visa, MasterCard, and whatever other cards you sign up to accept. Depending on your merchant bank's rules, the money may be transferred electronically to your checking account at the end of every business day, or it may be held a week or two to cover possible returns by customers.

Of course, you still have to have some way of getting the actual payments from the customers to your merchant account. Nowadays, US merchant banks use a special kind of software called a payment gateway. The gateway resides on the bank's servers (or on the servers of a third-party company the bank has contracted with). By going to the gateway website, you, the merchant, can enter in customers' credit card information manually to process a payment. No swipe terminal required.

What about shopping carts? Shopping carts are essentially the cash registers of ecommerce. They don't actually process the payments. They just total everything up, take the customer's credit card information, then transmit it all to the payment gateway, which processes the payment. Since payment gateways and shopping cart software licenses are often sold together, even many merchants don't know that the two are actually separate. In fact, most shopping carts can work with a variety of different payment gateways. That's important since continuing competition in the credit card processing world means merchants want to be able to switch gateways if they can get a better deal down the road.

In short, the switch to a software-based system of payment gateways has made credit card processing much simpler, faster, and cheaper than ever before. Thanks to this payment revolution, any American with something to sell can now compete with any business of any size, offering potential customers the security and convenience of Visa and MasterCard.