The process of accepting and processing payments are an integral part of small business daily operations. The whole process isn’t as simple as it seems—it’s all done and process via “merchant services” that allows you to accept payments and get paid for the transactions.
Merchant Services is used to mention to different financial services and processes—usually to accept and process payments. Earlier, it is referred to as a way to accept credit card payments. The payment technology has evolved and now the term includes all tools and processes involved with payment processing for small businesses.
Here is everything you need to know about what merchant service is and how it works, the types of providers and technology involved in merchant processing, and how to select the suitable merchant services for your small business.
What Are Merchant Services?
Merchant Services also called credit card processing is the process of managing electronic payment transactions for merchants. The process involves receiving sales information from the merchant, obtaining transaction authorization, accumulating funds from the bank, and sending the payment back to the merchant.
How Do Merchant Services work?
How merchant services work depends upon numerous factors including how the payment is accepted, the types of payments, and the provider, etc. The process starts when a merchant swipes a customer’s credit card to fulfill the transaction. The transaction is completed via a credit card processing terminal along with the technology to run debit or credit card payments through it. The process involves the following steps:
- The merchant swipes a customer’s credit card by entering the information into the processing terminal
- The payment processor reviews the customer data with the bank before accepting or denying the information
- Once the information is approved by the customer’s bank, the merchant can accept the payment via processing terminal and the transaction will be complete
- After the transaction is approved, the payment processor deducts its fees and transmits the remaining funds into your merchant account
A merchant service provider also called a payment processor, manages the process by providing services to businesses to accept card payments from their customers.
Merchant Services Products
The merchant service providers offer different tools as products for small business merchants to accept and process payments. The main products include the following:
- Payment Gateways (PGW)
- Credit Card Terminals (EDC)
- Point of Sale Systems (POS)
Payment Gateways (PGW)
A payment gateway is essential for merchants that are accepting online payments from their customers. A payment gateway is a software from your merchant service provider that works with your website, e-commerce store or Apps to enable you to obtain and process credit card payments online.
Credit Card Terminals (EDC)
A Credit Card Terminal also called an Electronic Data Capture Terminal (EDC) is essential for accepting in-person payments. It’s a physical device that merchants use to swipe, dip, or tap a credit card. Credit card terminals connect with the merchant service provider to facilitate the process to collect, authenticate, and actually obtain a payment.
There are different types of credit card terminals from traditional credit card terminals, wireless/portable credit card machines, debit card machines, smart terminals, and integrated credit card machines to mobile processing apps and virtual terminals.
Point of Sale Systems (POS)
A credit card terminal is part of a point of sale system that usually made up of the software and hardware required to accept payments, manage daily sales and processes of a business.
A point of sale system performs a variety of functions from accepting payments, processing sales, running reports, tracking inventory, managing staff, reconciling commissions, to accept gift cards and setting up loyalty programs.
Most businesses often use merchant services and point of sale synonymously since the point of sale systems typically includes everything you need to handle your sales and payment processes.
The Providers of Merchant Services
The merchant service providers provide all the financial services to small businesses in the merchant services industry. For merchants to accept credit card payments from customers need a payment processing company to obtain the tools (hardware and software) needed to facilitate the payment processing.
There are two discrete categories of merchant service providers: Merchant account providers and Payment service providers.
- Merchant Account Providers
As the name suggests, merchant account providers provide business owners with merchant accounts. This merchant account is the bank account required to accept credit card payments from the customers. Typically, merchant account providers set up the accounts and their functioning along with a POS system, payment gateway, or mobile credit card terminal.
Generally, merchant account providers necessitate extended and complicated application and set up process, with the lowest possible merchant processing fees. The best merchant account providers include Fattmerchant, Payment Depot, Payline Data, Dharma Merchant Services, Square and Braintree.
- Payment Service Providers
On the contrary, payment service providers accumulate funds from their dissimilar clients into a single merchant account and then allocate the funds from this account to each individual business bank account. They don’t typically include unique merchant accounts for their customers, which a merchant account provider does.
The payment service provider also provide numerous tools to enable a business to accept and process payments from its customers. The setup process is easy typically at a flat rate as compare to merchant account providers. The payment service providers are often related to account instability since there combine all of their customers’ funds into one account. The best payment service providers include PayPal, Stripe, Flagship Merchant Services, Payline Data, Ayden, BitPay and Square.
Merchant Processing Fees
Pricing is another important aspect of merchant processing services for small businesses to understand. The cost of merchant processing services for your small business will likely vary. Having said that, the opaqueness and the integrally complex attributes of merchant services pricing is a collective critique of the industry.
However, the cost of merchant processing services will depend on the factors like the provider you work with, service type, and how you use the services. Moreover, the overall cost will also include the processing fees along with the cost of tools (the POS system or payment gateway). Credit card processing fees are charged by the merchant service provider to process payments after the transaction is complete. This fee is distributed in different parties including the issuing bank, the credit card network, the receiving bank, and the payment processor. There are three main types of merchant processing fees in credit card processing:
- Transaction Fees
These fees are charged per transaction a merchant process with a credit card. Transaction fees include interchange rate, the assessment fee, and the payment processor markup.
- Interchange Rate – The interchange rate is a fee charged by the issuing bank to the receiving bank whenever a customer uses their credit card. Either the merchant pays some or all the interchange rate directly or via an interchange reimbursement, which is slightly lower than the entire interchange rate. This cost is non-negotiable and fixed irrespective of the processor you use. This is calculated as a percentage of the total sale amount. Each card network determines their own rates and it varies based on factors such as the card’s brand, card type, the risk card network considers with the merchant business and industry, and how the merchant accepts payment.
- The Assessment Fee – The card network charges a fixed fee, beside interchange rate or reimbursement, for every transaction. When the assessment fee added into interchange rate or reimbursement, it’s called the interchange fee. Each network has its own interchange fees that are revised twice annually. Just as lenders charge higher interest rates on small business loans for startups or risky businesses, the card network also charges high interchange fees to the businesses they consider risky. This cost is non-negotiable and fixed irrespective of the processor you use since it comes directly from the card network and is part of the overall interchange fee.
- Payment Processor Markup – This fee is charged by the payment processor along with the interchange fee. The markup depends on the individual payment processor with varied specific pricing plans. Irrespective of the processing plan, try to avoid long-term contracts so you can compare them and can switch when you grow big or it’s otherwise become beneficial. Always do thorough research and compare plans of different providers so you can choose the best option available.
- Flat Fees
Flat fees are the cost merchants required to pay on a monthly basis for working with a payment gateway or merchant services provider. There are two types of flat fees:
Recurring Flat Fees – The recurring flat fees include the following flat fees.
- Monthly or annual account fees
- Monthly minimum processing fee
- Terminal lease or rental fees
- Withdrawal fee
- Payment gateway provider fee
- Statement fees
- IRS reporting fee
- Payment card industry (PCI) fees
One-Time Flat Fees – This fee is negotiable and a payment processor can waive off this fee if you can negotiate sensibly. Some service providers charge more flat fees than others, and the most common one-time flat fees include:
- Account setup fee
- Terminal purchase fee
- Cancellation fee
- Incidental Fees
Similar to flat fees, incidental fees also charge by the payment processor and are a result of a specific incidence—meaning some months, you might not face any of these fees. Some of the most common incidental fees include:
- Account fees
- Minimum processing fee
- Statement fee
- PCI-compliance fee
- Account setup fee
- Cancellation fee
- Chargeback fees
- Non-sufficient funds fee (NSF)
- Cardholder dispute fees
- Batch payment processing fee
While selecting a merchant service provider, ask them for any hidden fees involved in the services before signing up for the account. While working with a payment service provider, you can avert fees for statements, account setup, cancellation, and minimum processing.
Selecting the Best Merchant Processing Services
With all the above information in mind, the next step is to select the best merchant processing services. With so many merchant service providers in the market, selecting one can be confusing especially one that will be the right fit for your business. Here are a few things to consider while selecting the best merchant processing services for your small business:
- Is your business will be accepting online payments or in-person payments?
- Is your business will be taking credit cards, debit cards, or contactless payments?
- Is your business needs a full POS system or a simple credit card terminal?
- Is your business only needs a payment gateway?
- Does your business need a unique merchant account?
- What merchant servicing costs your business can afford besides processing fees?
The Bottom Line
The merchant services industry is all-encompassing and multifaceted, but it doesn’t mean you can’t find suitable merchant services for your small business. If you’re able to understand your requirements and compare different services based on your requirements, you can actually find the best merchant service provider that will work for you