Payments

The Ultimate Guide to Payment Processing for Restaurants

By Dana Krook

Illustration with title payment processing

How much cash do you have in your wallet right now? 

Chances are, not much. According to a recent survey by Travis Credit Union, the average American reports only carrying about $46.29 in cash in their pocket – and that’s if they are carrying any cash at all. Of those surveyed, only 16% reported “always” carrying cash.

These figures are expected to shrink even further thanks to COVID-19. The same survey found that half of people are using less cash than they were prior to the COVID-19 pandemic, and three in five don’t think they’ll go back to using it regularly when the pandemic ends.

Can you blame them? Walking around with cash now seems unnecessary with so many other, more secure, connected, and convenient options available – it’s just not practical anymore.

And that’s why payment processing is an important topic for any business – especially restaurants.

Let’s look at what happens when people dine out. A TSYS Consumer Payments study found that:

  • 74% of customers prefer to use either credit or debit cards at dine-in restaurants 
  • 81% of the money spent at full service restaurants in the U.S. was charged to debit, credit, or prepaid cards
  • 92% of full service restaurants now take cards

As a restaurant owner, you may have mixed feelings about an increasingly cashless society. On one hand, the increase of digital payments could:

  • Simplify your accounting processes
  • Reduce the risk of theft and robberies
  • Help you keep up with your competition
  • Increase your profit (people tend to spend more when they pay by credit card)
  • Make it easier for your servers to be tipped well (many payment terminals do the math for diners, allowing them to easily leave a percentage-based gratuity) 

BUT accepting digital payments doesn’t come without a price. 

In fact, mobile credit card processing can be the most costly business expense for a restaurant. That’s why it’s important to understand all your options before committing to a payment processing company – otherwise it might be “til debt do you part.”

To help you understand this complex topic, we’re breaking down everything you need to know about payment processing for restaurants, including:

  • What a payment processor is
  • Who’s involved in a single transaction (the main players)
  • How payment processors decide rates
  • Pricing models
  • Aggregators vs. merchant account providers
  • Integrated vs. non-integrated payment terminals
  • Tips on choosing the right payment processor for your restaurant

Yep, we’re covering it all. Ready? Let’s dig in!

Restaurant employee holding a payment terminal towards you
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What Is a Payment Processor?

If you want to accept credit, debit, and digital payments, you need to partner with a payment processor, also known as an acquirer. 

These companies provide merchants like you with payment terminals, the hardware that allows you to accept credit/debit cards and digital payments. And they become the middle person between the diner, the restaurant, the credit card network (e.g. Visa or MasterCard) and the issuing bank. Part of the payment processor service is to clear and route the transaction, then deposit money into your account.

In exchange for the services they provide, payment processors charge a fee. Rates vary among companies but are typically calculated per transaction and range between 1% and 4%. Some payment processors also add a fixed dollar amount per transaction, usually from $0.10 to $0.30. 

Payment Processing Players

If you’re thinking that’s a lot of different parties involved in one simple transaction, you’re right on the money.

To help you keep track of the major players (and because we’ll be referencing them throughout this guide), here’s a quick glossary to help you keep track:

  • Merchant: The business accepting payment (e.g. retailer, restaurant owner).
  • Payment processor: The company that provides the payment terminal, clears and routes each debit/credit card transaction, and deposits the money in the merchant’s account. 
  • Card brand network: Credit or debit card companies (e.g. Visa, MasterCard, American Express) that control where credit cards can be accepted and facilitate transactions between merchants and credit card issuers.
  • Issuing bank: The financial institution that issues credit and debit cards to consumers (e.g. Chase, Bank of America, TD Canada Trust). 

How Payment Processors Decide on Rates

Payment processors consider many factors before they give you a custom rate.

You can expect payment processors to assess your industry, your business and credit history, and your projected/established sales volume as part of the rate-selection process. Lower-risk, higher-volume businesses will usually have lower rates than restaurants just starting out.

For use of their services, payment processors charge three types of fees: flat, situational, and processing.

1) Flat Fees

Payment processors charge flat fees, which may include line items like:

  • Annual fee
  • Batch fee
  • Monthly fee
  • Network access fee
  • Online reporting fee
  • Payment gateway fee
  • Statement fee
  • Terminal fee

It’s important to review flat fees before you sign a contract with a payment processor. Otherwise, you could have one heck of a surprise on your monthly bills.

Some of these fees are negotiable, so it’s key to go through them carefully before signing anything. Make sure you compare with other acquirers’ fees to ensure you’re getting the best price possible. Some companies charge flat fees for features you may not use (i.e. paper statements) or charge lower, percentage-based processing fees (see below) but bury their real costs in these fixed fees. Careful consideration before you sign will help you avoid playing hide-and-seek with a payment processor.

2) Situational Fees

Payment processing companies also levy charges “per event,” which means when a specific action happens, including:

  • Cancellation fee
  • Chargeback fee (non-negotiable)
  • International fee (non-negotiable)
  • Liquidated damages fee
  • Monthly minimum fee
  • NSF fee (non-negotiable)
  • Set-up fee

Some of these fees are negotiable. Ask yourself: How does my business operate? How many of these events happen in any given month? Then use your answers to compare flat and situational fees between payment processors to help you find the right fit.

3) Processing Fees 

These fees make up the bulk of what you pay a payment processor – they have the most variables and are calculated on each transaction.

What’s involved in a credit card transaction?

When a diner pays their restaurant bill by credit card, it looks a lot like a simple transaction between them and the restaurant owner. Chances are, your customers are blissfully unaware that multiple entities are involved (and getting paid) every single time they use their credit card.

Here’s a look at the processing fees and credit card fees happening behind the scenes with every swipe (or tap).

Payment processor infographic

Each step is associated with a processing fee, usually a percentage. The payment processor is responsible for paying these fees out to the corresponding major player (see the glossary above).

To cover these costs, plus their own, the processor charges the merchant (that’s you) an overall processing fee that’s made up of three different types of fees:

  1. Interchange fee: Every type of credit card (e.g. Visa, Mastercard, American Express, etc.) has a published, percentage-based interchange fee that they charge a merchant every time one of their cardholders uses their credit card. It’s the cost of authorizing the charge. The interchange for a debit card (around 0.3%) is much less than a credit card (about 1.81%).
  2. Card brand fee: Every transaction, no matter what type of card, is also subject to a small, percentage-based fee paid to the card network (e.g. Visa, MasterCard, etc.) for each transaction. 
  3. Payment processor markup: Some payment processors apply a percentage-based or flat (or a combination) markup fee for doing the work of routing the money from cardholder to card brand network to issuing bank to merchant.

Let’s look at an example of a $100 restaurant check. 

payment processor fees infographic

In this scenario, the restaurant pays $2.50 of a $100 check in credit card processing fees.

Your payment processor will filter and summarize all of these rates and fees and you’ll see them as part of the processing fees on your monthly statement. 

One More Thing: Processing Fee Wildcards

While no merchant or payment processor can change a credit card’s interchange rate, there are three variables that come into play when payment processors set processing rates:

1. Type of credit card

Not all credit and debit cards are created equal. A student credit card with a low limit will have a lower processing fee than an international business card with plenty of perks. The rate is also dependent on the brand of the card. Some are higher than others (i.e. American Express).

2. Type of payment

As a restaurant owner, you can choose to offer many credit and debit payment types. Here’s how to accept credit card payments:

  • Manual: The server manually enters the credit card number.
  • Swipe: The customer swipes their card in the terminal and signs the receipt.
  • Dip and sign: The customer inserts their card into the terminal and signs the receipt.
  • Chip and PIN: The customer inserts their EMV chip card into the terminal and enters a PIN to complete the transaction.
  • Tap: The customer taps their EMV card on the terminal – no signing or PIN required. 
  • Digital Payments (Apple Pay, Google Pay, Samsung Pay): The customer uses their phone to authorize a restaurant mobile payment by hovering their device over the terminal. 

Generally, the more secure the form of payment, the less expensive it is to offer. For example, swiping cards through credit card readers costs more per transaction than mobile payments because the former is more open to fraud.

Similarly, EMV chip cards are more secure than traditional debit or credit cards. If you’re wondering what is EMV, it simply refers to the computer chips and technology used to authenticate card transactions. This technology was developed to replace magstripe cards, which are more vulnerable to fraud.

There are also security-related charges involved with taking orders over the phone, often called a card-not-present transaction. Card-not-present transactions carry a higher risk of fraud, so the ability to offer this kind of payment will cost more.

3. Type of retailer

Rates can also vary by business types.

In most cases, larger merchants have lower rates because they process a higher transaction volume and are able to better negotiate with credit card companies. This means that a big-name restaurant brand will have a lower interchange rate than a small, independent bistro because the bisto has a lower transaction volume.

Restaurant employee holding a payment terminal towards you
Tired of Paying Too Many Credit Card Processing Fees?

Find out which fees are negotiable and how to get the best price.

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Processing Fees: Pricing Models 101

Processing fees are complex and dependent on many factors.

To simplify, most processors offer one of four pricing models so merchants know what to expect:

  • Cost plus
  • Interchange differential
  • Flat fee
  • Tiered

Let’s go through these models, including their advantages and disadvantages.

Cost Plus

Also known as Interchange Plus or Interchange Pass-Through, this is the most popular pricing model – and is considered the most reasonable – thanks to its transparency and easy-to-understand terms and fees.

Essentially, this model makes the merchant responsible for the non-negotiable interchange fee (for the type of credit card) plus the payment processor markup (hence the name). This markup consists of a fixed percentage of the total check, the card brand fee, and a per-transaction flat fee.

Interchange fee + % of total check + card brand fee + transaction fee = total processing fee

Here’s an example:

1.54% + 0.10% + 0.10% + $0.25 = 1.74% + $0.25 total processing fees

For a $100 restaurant check:

($100 x 1.74%) + $.025 = $1.99 total processing fees

Of the $100 check, you get: $98.01 

For restaurants that process high ticket items or do a lot of processing volume, cost plus pricing tends to offer the most equitable rate.

Interchange Differential

We know that each credit card has its own interchange rate set by each credit card company, and that these rates change slightly based on the type of card (i.e. a basic student card vs. a platinum card).

The interchange differential pricing model uses the difference between these two interchange rates as the basis for their pricing. This is what they call an interchange differential fee.

For every transaction, you pay the interchange rate, non-qualified fee (if it’s above a basic card or a CNP transaction), card brand fee, and – finally – interchange differential fee.

This model requires a restaurant owner to have a good handle on the types of cards their customers typically use AND the ability to translate a complex monthly statement – these statements are notoriously difficult to read.

Interchange fee + non-qualified fee + card brand fee + interchange differential fee = total processing fee


To break it down for you, here’s an example:

1.54% + 0.35% + 0.10% + 0.22% = 2.21% total processing fees

For a $100 restaurant check:

$100 x 2.21% = $2.21 total processing fees

Of the $100 check, you get: $97.79

Flat Fee

Under the flat fee or “fixed rate” pricing model, a payment processor will charge a percentage-based fee plus a dollar amount for each transaction. This pricing model is extremely simple and allows merchants to know exactly what to expect when it comes to transaction fees. 

However, payment processors often set the fee on the high side to hedge against different variations of the interchange rate. And if they find they’re losing money, they can bump up the rate.

% of total check + transaction fee = total processing fee

Here’s an example:

2.75% + $0.25 = 2.75% + $0.25 total processing fees

For a $100 restaurant check:

($100 x 2.75%) + $.025 = $3.00 total processing fees

Of the $100 check, you get: $97.00 

Though the flat fee or fixed rate pricing model is very common, it doesn’t generally offer the most equitable rate for restaurants.

Tiered

Tiered is typically used by larger retailers with a very firm grasp on how their customers pay. 

Tiered pricing is based on the value of the different types of credit cards in the marketplace. They usually lump them into categories like qualified, mid-qualified, and non-qualified, although different payment processors may create several more tiers.

For example, a student MasterCard would be in the lowest tier and a platinum MasterCard with lots of perks would be in a higher tier. The merchant pays a different rate depending on the tier the transaction falls into.

% of total check at a qualified/mid-qualified/non-qualified rate = total processing fee

Here’s an example:

1.74% = total processing fees for qualified cards

2.33% = total processing fees for mid-qualified cards

3.25% = total processing fees for non-qualified cards 

For a $100 restaurant check:

$100 x 1.74% = $1.74 total processing fees (qualified cards)

Of the $100 check, you get: $98.26

$100 x 2.33% = $2.33 total processing fees (mid-qualified cards)

Of the $100 check, you get: $97.67

$100 x 3.25% = $3.25 total processing fees (non-qualified cards)

Of the $100 check, you get: $96.75

If the merchant is aware of which cards fall into which tiers (they vary among payment processors), this model can be a reasonably easy way to resolve monthly fees. But some payment processors advertise their rates using the cost of the lowest tier, even if they know most transactions will fall into a higher tier.

It’s like being tempted by the price of the basic model when the store only sells the premium models – the old bait and switch. 

It’s also important to note that if you charge a credit card surcharge, also known as a checkout fee, this amount will vary based on your payment processor’s pricing model.

Restaurant employee holding a payment terminal towards you
Tired of Paying Too Many Credit Card Processing Fees?

Find out which fees are negotiable and how to get the best price.

Download Guide

Aggregators vs. Merchant Account Providers

Now that you understand what payment processors do, how they decide their rates, and what pricing models exist, there are a few more factors you’ll want to consider when selecting the right company for your restaurant.

Here we go.

There are two types of payment processing companies: aggregators and merchant account providers. Let’s assess the difference.

Aggregators

An aggregator is a payment service provider that registers merchants (like your restaurant) directly under its own merchant ID number and processes payment transactions through a single master account.

Aggregators are a popular choice for small businesses that process a low volume of transactions because they provide a streamlined payments solution and charge a flat fee per transaction. The main benefit of using an aggregator is that there’s no lengthy application process, so you can start accepting credit card payments quickly and easily. 

However, this quick setup comes at a cost. The main drawback of aggregators is that they charge higher payment processing fees because they assume liability for their merchant base. This means that if you process a high volume of transactions, paying a flat fee per transaction could mean you end up paying more than necessary.

With aggregators, you may also have to wait a bit longer before your funds are deposited into your account. It’s ultimately up to the aggregator how long they keep your funds, but generally you can expect to be paid within one to three business days from the transaction. However, this isn’t set in stone and you may have to pay an additional fee (usually 1%) if you want to get immediate payments in your bank account.

Merchant Account Providers

Larger or higher-volume businesses may do better with a merchant account provider, which assigns each business a dedicated merchant ID. A merchant account provider also provides the hardware to accept payment, and offers more customized service with a representative assigned to your business who can help you grow your business – one-on-one attention rather than just one part of a large group.

Merchant account providers can track and provide protection that helps prevent any interruptions. And while most aggregators charge a flat fee per transaction – which means you will pay much more for cards with a lower interchange rate – merchant account providers are more likely to provide a pricing model where you pay exactly what the card costs (i.e. cost plus pricing).

Just looking at the element of cost, you can think about this way:

Aggregators = flat fee pricing = higher cost for lower tier/lower interchange rate cards

Merchant account providers = cost plus pricing = lower or exact interchange cost for lower tier/lower interchange rate cards

Integrated vs. Non-Integrated Payment Terminals

Another consideration when choosing a payment processor is an integrated payment solution or a non-integrated solution.

Understood in the simplest terms, an integrated payments solution speaks to your POS, while an unintegrated payments solution doesn’t.

Integrated payments work with your POS software, simplifying your accounting processes and greatly reducing the risk of human error. This means that when someone goes to make a payment in your restaurant, your POS will automatically sync this information to your payment terminal, prompt the customer to make the payment, and then automatically communicate this back to your POS to complete the sale – a seamless process.

If you’re using non-integrated payment terminals and a customer goes to make a payment, your counter staff or server has to manually enter the check amount into the terminal and print a receipt for your records. The staff member then has to manually mark the purchase as paid and record the sale in your POS – and you just have to hope they punch in those numbers right every time because even small data entry errors could cost you.

More and more restaurant owners are looking for the convenience and effectiveness of integrated payment systems, most of which offer more advanced payment options, including tap and digital payments such as Apple Pay.

Tips on Choosing the Right Payment Processor for Your Restaurant 

Selecting a payment processor is a big decision. A good partnership empowers you to offer choice and flexibility to your customer AND keeps your own costs down.

The flipside? A bad relationship with a payment processor could lock you into an expensive contract that’s too complicated to understand AND subject to change at any time.

It’s smart to approach the process the same way you would choose a contractor or employee for your business. Research many options, interview candidates, and compare services and costs.

Based on everything we’ve just covered, here are some questions to ask along the way:

1) How competitive are their rates? 

Shop around and be sure to compare apples to apples. Some payment processors offer low transaction fees, but have higher flat fees to compensate. Look at the big picture and value transparency over complexity.

2) Does the merchant ID approach make sense for your business? 

Aggregators may make sense for smaller restaurants, while larger businesses with higher volume could benefit from working with a restaurant merchant services provider.

3) Does their pricing model fit your needs?

Assess what works best for you and compare payment processors that offer the same model so you can get a clear sense of the difference between companies.

4) Is there a potential for hidden costs?

Ask them to outline exactly what you’ll be charged for and be sure you have a good understanding of your terms of agreement, including the length and scope of your contract. 

5) Do they integrate with your POS software?

If you’re looking for efficiency, it’s helpful to partner with a processor with hardware that integrates with your existing system.

6) How’s their customer service and support?

Whether it’s a hardware malfunction or a question about your statement, you need a payment processor that’s easily accessible. 24/7 service is ideal.

7) How long are you locked into a contract?

Contract length and scope will vary among payment processors. Above all else, look for flexibility and transparency. It’s not a bad idea to have a financial advisor or accountant look over the contract to assess the potential for hidden fees and other surprises.

8) What’s their reputation like?

When you’ve narrowed it down to a few payment processors, check in with some of their current customers to see if they’re happy with their service.


Choosing the right payment processor – one that offers a pricing model and features that fit the size and volume of your restaurant – can feel complicated. And, yes, it does require going over the details and making sure you understand how each processor makes money (from you).

But the time you spend getting it right will be worth every minute (and every penny!).

Finding the right payment processor for your business is a true investment – one that will help you deliver a great customer experience while saving you time and money. 

We can help make the whole process that much easier!

Restaurant employee holding a payment terminal towards you
Tired of Paying Too Many Credit Card Processing Fees?

Find out which fees are negotiable and how to get the best price.

Download Guide


Photo of Dana Krook
by Dana Krook

Dana is the former Content Marketing Manager at TouchBistro, sharing tips for and stories of restaurateurs turning their passion into success. She loves homemade hot sauce, deep fried pickles and finding excuses to consume real maple syrup.

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