What Is A Merchant Services Provider and How Does it Work?

Starting a new business is going to require a lot of learning. You’ll be up to your neck learning new concepts and ideas that’ll help your business grow. One of the essential elements you’ll need to familiarize yourself with is an entity known as a merchant service provider

Even if you’ve never heard the term before, you’ve definitely encountered an MSP. 

Merchant services providers act as the middle-man between your customer’s electronic payments and your register. They allow you to accept debit/credit payments and ensure payment security for your customers and yourself. 

After the internet became a viable marketplace, merchant services began offering much more than countertop terminals that read cards. The eCommerce landscape now offers software that lets customers pay in full online. Some services also provide inventory management and thorough reports detailing the ins and outs of your whole company. 

Here, we give an in-depth look and explain the different types of merchant services, the payment gateways available, how the process works, and how to find the best merchant services provider for your enterprise. 

Different Types of Merchant Service Providers

Each service provider offers varying features but tends to fall into one of three main categories. The standard providers you’ll find are:

Merchant Account Providers (MAP)

Account providers are the most common merchant services provider. At a minimum, merchant account providers will: 

  • Set you up with a merchant account
  • Provide credit card processing services

Credit card merchant processing services ensure you receive funds when your customers pay with their debit or credit cards. 

All merchant account providers will give you access to a merchant account, but only the larger companies offer processing services. These larger companies are direct processors, and they process transactions via the various credit card networks. 

Square is one the most popular examples of a merchant account provider for small businesses.

Merchant Using Square Register
Example of Merchant accepting an EMV payment with Square Register

Payment Gateway Providers (PGP)

Payment gateways are essential for eCommerce businesses. A merchant account is sometimes included, but not always. You will need a merchant account to have a payment gateway. 

Payment gateways are a web service that lets credit and debit card transactions process over the internet. 

Payment Services Providers (PSP)

A merchant account is an excellent idea for most businesses and a requirement for accepting card payments. But there are variations, such as PSPs, which small business owners may find useful. 

PSPs offer merchant processing services for business owners that only bring in several thousand per month via debit/credit card transactions. 

PSPs like PayPal let you accept card payments, but you won’t have to worry about extensive contracts or account fees. For small businesses, those fees can add up, so the cost-savings are a significant benefit. 

These terms are why the smallest of businesses should be the ones using PSPs. 

On the downside, you won’t have an individual merchant ID, and you’re more susceptible to having your account frozen. 

What Is Merchant Services?

You’ll encounter an expansive range of products and services that not only accept credit card payments but manage inventory and track business growth.

What you need depends on the business you run. Every business needs a merchant account or payment service account, but some features will be irrelevant to you. If you don’t have an online store, you won’t need a payment gateway.

Below are some standard examples of merchant services:

Merchant Accounts

We’ve discussed merchant account providers, but you may still be asking, What is a merchant account

It’s merely the account you transfer funds from your customer’s credit/debit card payments. Your account provider transfers them into your desired business bank account. 

Every business that accepts credit or debit card transactions as payment needs a merchant account. Most merchant account providers have full-service accounts with a unique merchant ID. PSPs are still merchant accounts but don’t provide a merchant ID number. 

Merchant ID numbers allow your business to be identifiable in payment processing systems. It protects you from fraud and guarantees a bit more stability. 

Merchant Accepting Contactless Payment
Example of a contactless credit card terminal. Paying without contact reduces germs and speeds up the transaction.

Credit Card Terminals

In-store retailers need credit card terminals to read customer’s credit/debit cards. The hardware transmits card information to the provider’s processing network. 

There are two terminal options available:

  • Wireless
  • Ethernet/Landline Connectors

Wireless versions tend to be a little more bulky and expensive. Plus, you will need a wireless connection or may need a data plan to function. Corded models easily plug into a landline or Ethernet outlet.

You typically can lease the terminals or purchase them from your service providers. In general, you want to buy your terminal outright, as leasing will almost always be more expensive. 

You can purchase an EMV-compliant terminal as a baseline technology, but models that support NFC (Near-Field Communication) like Apple or Google Pay are becoming even more popular. A great example would be Square Terminal.

Customers are starting to use contactless and cardless payments more and more these days, especially after COVID.

Point of Sales Systems (POS Systems)

Point of Sale Systems put merchant processing and inventory management into one full-screen display terminal. 

The software and equipment can: 

  • Manage operations
  • Track inventory
  • Monitor sales
Server Processing Credit Card at POS
Integrating merchant services with the POS can help speed up operations.

Many tablet-based models don’t even need a full computer. Optional features account providers can include for POS systems are: 

  • Check scanners
  • Cash drawers
  • Tablet mounts
  • Printing devices

Some POS companies will also be your merchant account provider, so you’ll have a complete all-in-one system. An example of this would be Harbortouch, a POS system owned and operated by Shift4, a payment company.

Mobile Payment Systems (mPOS)

mPOS systems let you use your smart device (like a cellphone or tablet) as the processing terminal. A card reader accessory will attach to your phone, and an app will transfer information to your provider.

If you have the financial means to upgrade your mPOS system, opt for ones that include:

  • EMV compatibility
  • Wireless Bluetooth connection

It’s not mandatory but will show customers your business embraces the future. 

Virtual Terminal

Unlike a POS System’s hardware, virtual terminals like Virtual Merchant Services make your computer the card processing terminal via online software. 

You’ll be able to enter customer details by hand or by an optional USB card reader. It is the perfect option for remote billing, mail order, or telephone operational sales businesses that lack an eCommerce site. It’s also useful if you need to accept payments through a mobile device on the fly.

You’ll end up paying a little more for a virtual terminal transaction when a card is manually entered and no physical card is present because there is more risk involved.

Payment Gateway

This simple software is a tool of communication between your eCommerce store and your provider’s network. Essentially, a payment gateway allows you to receive payments online. A service like Authorize.Net is one example. 

You can expect to pay an additional monthly fee for gateways since not all merchants need one. With payment gateways, you get: 

  • Customer info database
  • Recurring billing
  • Encryption or other security features to protect customer data
Couple Making Online Payment
You’ll need a payment gateway so customers can make payments to your online store.

Online Shopping Carts

Online shopping carts let eCommerce stores customize website features and create a shopping experience that matches their brand. 

You’ll have to make sure your services provider is compatible with your desired shopping cart software.

eCheck Processing (ACH)

This optional feature lets you scan checks and immediately confirm your customer’s funds are available. Most providers offer this feature.

Cash Advances and Small Business Loans

Merchant services providers tend to offer small business loans and merchant cash advances. This lending is a way to get money for your business up front with the understanding that future sales will pay back your loans.

How the Transaction Process Works

The merchant processing services, also known as card-based transactions, involve a seven-step process:

  1. Customer Begins Transaction: The customer will swipe or insert their card at the terminal system.
  2. Info Sent: Transaction data like the payment total, card number, and bank info transmit from the merchant software to the merchant services provider network.
  3. Card Network Connection: Here, the services provider transmits the info to the associated card company.
  4. Card Company to Bank Connection: The card company now sends this information to your customer’s bank.
  5. Bank Verification: The customer’s bank ensures the consumer has funds and approves the transaction. If there are insufficient funds, it will reject the payment. The approval or rejection data transmits back to the connected card.
  6. Card Confirmation: The connected card will confirm the transaction and notify the services provider.
  7. Transaction Complete: The merchant will finalize the transaction, generating a receipt for the customer.

The approval process can vary between immediately after transaction approval, at the end of the business day, or when the merchant closes. It depends on your business and your merchant account provider’s policies. 

Helful Tips

Tips for Selecting a Merchant Service Provider

To accept credit card payments, you’ll require a merchant account. There are loads of merchant account providers around, but you’ll want to research several critical aspects before selecting one. 

By evaluating these features, you can estimate your total costs. You also can ensure you’re working with an ethical company. 

1. Know that cheaper does not mean better in the world of merchant services. 

Don’t fall into this trap! Low merchant processing rates may seem nice on the surface, but credit card processing companies are infamous for sliding in undisclosed monthly and annual fees. 

These pricey additions span across most services provided, with providers shoehorning them in as a means of “maintaining” your merchant account.

So don’t only focus on processing rates! It’s the total costs that matter.

The overall costs you’ll need to consider include:

  • Account fees
  • Processing rates
  • Chargebacks
  • Other miscellaneous fees

Different merchant services providers may use other processing rate models, which can make pricing comparison difficult. 

Processing fees aren’t the best for deciding on a provider. Instead, it would be best if you examined plenty of other aspects before making a decision. 

2. Go with merchant account providers that are transparent (and reasonable) about their fees. 

Merchant accounts won’t be cheap, especially if your company is brand new. You’ll have to pay the typical processing fee for each transaction. However, merchant account providers are notorious for their constant “surprise” fees that pay for your account maintenance. 

So make sure your merchant account provider has a fee system that is transparent and reasonable. For the sake of simplicity, reasonable fees are ones that provide a necessary service. The cost of this fee should be on par with said service. 

Fees should be transparent and available before signing up. Don’t become the victim of the fine print. 

Typical fees you can expect from merchant account providers are: 

  • Activation/Application Fees: Some merchant services providers may charge a fee at the beginning of your service. It should be a one-time deal. Avoid merchant account providers that charge this fee. 
  • Recurring Account Fees: These can be annual or monthly. Almost every merchant service provider will charge a fee for account maintenance. You’ll have to judge what’s reasonable here but look at the services they provide and the merchant processing services you need.
  • Chargebacks: If your merchant processing has to refund a charge, you’ll face a chargeback. Returned items, technical errors, or even fraud can result in a chargeback.
  • Monthly Minimums: This is the total amount you must reach in processing charges. You’ll have to pay the difference if you fail to meet the minimum. If you have a small or seasonal business, opt for merchant account providers that don’t require monthly minimums.
  • PCI Compliance Fee: This is an annual fee you pay to ensure your business remains PCI compliant. It protects your customer’s data, like their names and credit card information.
  • Early Termination Fees: Some merchant service providers charge early termination fees to dissuade you from switching companies. These fees can be expensive and lock you into an individual provider. However, some merchant account providers work with you on a month-to-month basis.

3. Choose a provider with fair processing rates. 

Every merchant services provider will charge a processing fee. The processing rate is the percentage of a payment that goes to your merchant account provider. 

There are a few different pricing models companies use:

  • Interchange-Plus Pricing: This is the most transparent pricing model and usually less expensive overall. The issuing bank and credit card association takes a small fee (the interchange), and your processor takes a percentage (the plus). The formula is typically interchange + X%. 
  • Direct Interchange: Here, the merchant will charge a single monthly fee without a percentage rate. This scheme is better for big, high volume businesses.
  • Flat-Rate: Best for new and small businesses. Every transaction gets charged an unchanging percentage rate and typically a per-transaction fee. Your provider completely discloses these rates on their website.
  • Tiered Rates: With this model, transactions fall into three levels. There are qualified transactions, mid-qualified transactions, and non-qualified transactions. Your charges depend on a wide range of criteria like the payment entry and items purchased. It isn’t easy to guess what you’ll be paying with tiered rates.

4. Check out the company’s website and advertising gimmicks to get a feel for them.

A good, trustworthy merchant processing services company will be transparent on their website. After all, merchant providers are not exempt from unfair and deceptive marketing practices. 

To ensure you’re working with an ethical company, check to see if their website features: 

  • Articles or blog posts that outline the ins-and-outs of credit card processing
  • Varied and precise options to reach out to customer support (email, online chat, and telephone number)
  • Full transparency about their rates and recurring fees
  • Legitimate, positive testimonials from their merchant clients
  • No “lowest rates on earth” fluff and frill

If their website is full of nothing but gimmicky nonsense, it’s best to turn away and find someone else. 

5. Understand the fairness of contract terms. 

The merchant processing industry has gained an infamous reputation for its contracts. They’re often long, binding, and difficult to cancel—even when the contract time is over. 

Thankfully, merchant service providers have begun moving away from these low standards. Many are now offering month-to-month contracts. 

A month-to-month or no contract will be in the best interest of most business owners. At the very least, with any contract, there should be no early termination fees. This gives your business more power over your transaction processing. 

6. Remember that high-quality customer support works in your best interest. 

Service for your transactions is vital. You never know when your credit card terminal will give out or when you’ll face a glaring chargeback. You’ll want a customer support team you can trust at your side for these unfortunate incidents. 

The top providers should host an in-depth FAQ on their website for minor issues. It will help you fix issues on your own if you’re dealing with a problem after business hours. 

Most merchant account providers have tech support through phone or email. Website chat functions are also becoming the norm. If phone support is available 24/7, know that merchant processing companies will outsource support agents. Therefore, you may not be able to contact someone who can solve your problem. 

The best option you could hope for is a merchant services provider that assigns you a dedicated merchant account representative. 

7. Don’t be afraid to ask questions. 

Asking merchant account providers questions can help you make your decision on the best provider for you. Consider questions like:

  1. How quickly can hardware replacements arrive?
  2. What are your processing limits?
  3. What are your funding times?

Conclusion

The services your business requires from a merchant account provider will depend on, well, your business! 

Whether you need a payment gateway for your eCommerce market or a terminal for your retail spot, you want a merchant account provider equipped to handle your needs. Always go with a reliable service provider that is transparent with you from the get-go!

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