Merchant Services Definition
Merchant services is a broad term used to describe a range of financial services for businesses—most generally, the services a business uses to accept and process payments, otherwise known as merchant processing. However, the term merchant services can also encompass the behind-the-scenes process by which a business accepts payments, the companies businesses work with for this purpose, as well as the hardware or software involved with taking and processing payments.
The term “merchant services” can be confusing because it refers to a variety of financial services and processes. Traditionally, “merchant services” referred to accepting credit card payments. Now, the definition has broadened to encompass the various tools, companies, and payment processing methods used in your business. As a business owner, it’s essential to build your understanding of merchant services so that you can choose the right provider for your business.
If you need a crash course on merchant services 101, stick around. This guide will explain what they are, how they work, and how to choose the right merchant services for your business.
What Are Merchant Services?
Merchant services refer to the services and technology that a business uses to accept and process payments. You can further break down this definition into the following points:
- How merchant services work: The behind-the-scenes processes that are required for a business to take and accept a payment
- The tools involved: The technology, including hardware and software, that business owners may need to accept and process payments
- Merchant service providers: The companies who provide these services for business owners
- Pricing: How does pricing work for merchant services and what the cost might look like for small businesses
How Merchant Services Work
The process for merchant services begins when a customer hands you their credit card and ends when the funds are deposited into your business bank account. Your merchant services dictate how you accept payments, the type of payments you accept, and which provider you choose.
Typically, the transaction process follows the following steps:
- You swipe a customer’s credit card or enter the information into a credit card processing terminal.
- The payment processor transmits this data and checks with the customer’s bank before accepting or denying the information.
- If the customer’s bank approves the transaction, then you can accept the payment through your terminal and the purchase will be complete.
- Once the purchase is approved, the payment processor takes their fees (which we’ll discuss later) and deposits the remaining funds into your merchant account (the bank account required to accept credit card payments).
To facilitate this process, you will need a card processing terminal and the technology (which comes from a merchant service provider, also known as a payment processor) necessary for running debit or credit card payments. Without the companies that facilitate this process or provide this service to merchants, businesses wouldn’t be able to accept credit card payments from their customers.
As you might guess, the term “merchant services” doesn’t apply to cash payments—after all, you don’t need any “service” to take cash payments.
Merchant Service Products
As we mentioned above, much of your merchant processing will depend on how you’re accepting payments, the types of payments you’re accepting, and the provider you’re working with.
Therefore, the next essential part of what makes up “merchant services” is the different tools that enable businesses to accept and process payments from their customers.
A payment gateway is the software that works with your website or ecommerce store and allows you to take and process secure credit card payments online. Essentially, the payment gateway serves in the place of a credit card terminal in the process we described above.
Credit Card Terminals
In contrast, a credit card terminal is a device that allows you to physically swipe, dip, or tap a credit card when accepting in-person payments. This device will connect to your merchant service provider and facilitate the process required for you to take, verify, and receive payment.
Credit card terminals come in a variety of shapes and sizes—from simple magstripe swipers to handheld terminals.
Point of Sale Systems
A point of sale system typically consists of the software and hardware required to accepts payments, but it also helps manage a business’s day-to-day sales and processes, such as processing sales, running reports, tracking inventory, managing employees, reconciling tips and commissions, accepting gift cards, and setting up loyalty programs.
Since point of sale systems usually encompass everything a business needs to manage their sale and payment processes, “merchant services” and “point of sale” are often used synonymously.
Merchant Cash Advances vs. Merchant Services
Although you might hear otherwise—mostly from merchant cash advance providers themselves—merchant cash advances shouldn’t qualify as merchant services. It is true, however, that merchant cash advances and merchant services are inextricably intertwined. To get a merchant cash advance, your business will need merchant services.
However, merchant cash advances being considered within the broad merchant services definition isn’t ideal. Many merchant cash advance providers have begun to cross over into the merchant services industry—and vice versa—and, as a whole, merchant cash advances are one of the most expensive forms of business funding a company can offer.
So, if your merchant service provider tries to push a merchant cash advance onto your business, you’ll want to think twice before taking them up on this offer.
Merchant Service Providers
At the heart of the merchant services industry are merchant service providers, the companies that provide all of the financial and business services that we’ve described thus far. To help you choose a payment processing company, let’s first explore the difference between merchant account providers and payment service providers.
Merchant Account Providers
Merchant account providers provide businesses with merchant accounts and are considered the more traditional of the two types of merchant service providers. A merchant account is the bank account required to accept credit card payments. When you work with a merchant account provider then, you receive this account through them and they work with you to get your account set up.
In addition, a merchant account provider provides you with the tools you need to accept payments—whether a POS system, payment gateway, or mobile credit card terminal.
In comparison to payment service providers, merchant account providers typically require a more involved application and setup process, but can also offer some of the lowest merchant processing fees. Some examples of merchant account providers include Payment Depot, Payline Data, Fattmerchant, and Dharma Merchant Services.
Payment Service Providers
Payment service providers aggregate all of the funds from their different clients into a single merchant account and then distribute the funds from this account to each individual business bank account. The major difference between payment service providers and merchant account providers is that payment service providers do not include unique merchant accounts for their customers.
Similar to a merchant account provider, however, a payment service provider can also offer a variety of different tools—POS hardware and software, payment gateways, and more, to allow a business to accept and process payments.
Generally, it is much faster and easier to set up and use a payment service provider. Moreover, these companies typically offer straightforward, flat-rate fees. However, these advantages are often paired with account instability, as payment service providers combine all of their customers’ funds into one account.
Big-name payment service providers include Stripe, PayPal, and Square.
Pricing is a critical factor in choosing merchant services that fit your budget.
That said, one of the biggest contributing cost factors will be credit card processing fees—the fees that a merchant service provider charges to process payments. Below, we’ll explore the three most common pricing structures for these fees, as well as one-time and incidental fees you might find when browsing merchant services.
Typically, a flat-rate pricing model will be a small percentage of the transaction value, plus a small flat fee per transaction. An example is Stripe’s flat 2.9% + $0.30 per transaction for online payments.
However, some merchant service providers will simply charge your business a small percentage of the transaction value, without the per-transaction flat fee, i.e., 2.9% per transaction.
With this fee structure, you’ll pay the flat-rate regardless of the type of card your customer uses, but the rate itself may differ based on how you accept a payment. For example, the flat-rate for accepting payments online (typically 2.9% + $0.30) can be higher than the flat-rate for accepting in-person payments.
This being said, the flat-rate pricing model is often used by payment service providers.
Interchange-plus pricing means you’re charged an interchange fee (the amount that your merchant service provider pays the credit card network) plus a set percentage or fee per transaction. The “plus” percentage or fee is the markup your provider is charging you to process your transactions.
This pricing structure is a bit less straightforward than flat-rate pricing, but your monthly statement will delineate each charge, what it costs, and why it costs you exactly what it does. As an example, Payment Depot charges interchange plus $0.15 per transaction for processing fees.
Because of the transparency associated with interchange-plus—you know exactly what is going to the card network and what is going to your merchant service provider—many consider interchange-plus the most affordable pricing structure.
Tiered pricing occurs when providers bundle their services into pricing tiers. Most often, these tiers are broken up based on the level of risk the processor is assuming with each purchase. A provider might have a different tier for credit card payments and one for debit card payments, as well as one for in-person transactions and one for online transactions.
Ultimately, the processor will decide which tier any sale falls into and how much it will cost you. Although tiered pricing will be easier to understand in comparison to interchange-plus, it will also end up being one of the most costly pricing models.
One-Time and Incidental Fees
Some merchant service providers may charge a variety of one-time and incidental fees. The specific fees you see will be unique to the provider; however, it’s important to recognize some of the most common fees—and which ones you should try to avoid:
- Account fees: These are the fees a provider charges on a monthly or annual basis for you to work with them.
- Minimum processing fee: Some providers charge a fee if you don’t process a certain number of transactions or amount of funds within a given period.
- Statement fee: This fee may be charged for your account statement, whether in-person or online.
- PCI-compliance fee: A PCI-compliance fee may be charged for your merchant service provider to ensure that you comply with credit card security industry standards.
- Account setup fee: Some providers will charge this fee to set up your account.
- Cancellation fee: Some providers will charge you a fee if you cancel your account before your contract has ended.
- Chargeback fees: If a customer disputes a transaction and receives a refund, some providers will charge you a fee for this “chargeback.”
- NSF fee: If your business bank account doesn’t have enough money to pay your provider, they may charge you an additional NSF, or non-sufficient funds fee.
It’s essential to thoroughly investigate all fees your provider charges and ask for clarification, if necessary. Many small business owners criticize merchant service providers for hidden fees that they did not know about when signing up for an account.
Typically, you should be able to avoid fees for statements, account setup, cancellation, and minimum processing—especially if you’re working with a payment service provider. If a company is not transparent with their pricing, consider speaking with a sales representative to request a final quote with a thorough price breakdown.
How to Choose Merchant Services for Your Business
Clearly, “merchant services” can be confusing and overwhelming—there are many different processes, products, companies, and stakeholders involved in merchant services for small businesses.
How do you choose the right merchant processing service for your business? Here are some points you want to be mindful of when exploring your various options:
- How you’re accepting payments: Will your business accept payments solely online, or will you be taking in-person payments too?
- Type of payments you’re accepting: Are you going to be taking credit cards, debit cards, and contactless payments?
- Type of hardware or software you need: Do you need a full POS system or a simple credit card terminal? Do you only need a payment gateway?
- Payment service provider vs. merchant account provider: Does your business need a unique merchant account? Would you prefer to be able to set up your account quickly and easily online?
- Pricing structure: What kind of pricing structure do you prefer? What costs will you need to pay besides processing fees? What does your budget look like?
Answering these questions helps you understand exactly what you need from your merchant processing services. With these qualifications established, you can compare different providers and see which one will be able to best fulfill your needs.
Top Merchant Service Providers for Small Businesses
Ultimately, it will be up to you to decide which payment processing company is best for your business—but depending on your needs, any of these options may be able to serve you well.
Best for Online Processing
If you need online processing, you’ll want to look for merchant services that offer payment gateways. As a reminder, payment gateways will allow your business to process online card payments from your customers securely.
With Authorize.Net, your business will be able to process online payments from all major credit card networks. Should you opt for this payment gateway option, your online business won’t have to worry about opting out of in-person payment systems because it’s built specifically for ecommerce merchant service needs.
Plus, with one of the most secure payment data protocols on the market, Authorize.Net will be able to simplify your business’s PCI compliance and ultimately grant the peace of mind that comes with knowing your customers’ information is secure.
Alternatively, if your business is operating in a B2B structure, then you might want to consider Veem as your go-to online payment processor.
Veem is changing B2B bank wires for the better. In fact, Veem has managed to make secure, free money wires available to small businesses everywhere.
So, if your business is operating through remote, large transactions, then Veem could very well be the most cost-effective and convenient merchant service provider for your business.
Best for In-Person Processing
If your business relies on in-person transactions, then your business’s merchant services should—at the very least—be able to process payments through credit card magstripe readers, if not through credit card chip and contactless payment methods, as well.
Plus, the very best merchant services for in-person transactions will be full point of sale systems with features like inventory and employee management.
Although these options may seem costly, considering the need for both software and hardware, their all-in-one nature makes them some of the most cost-effective choices on the market.
Square point of sale systems come in many shapes, sizes, and costs. In fact, with a Square account, your business will have the choice to opt for a completely free point of sale hardware and software package.
With the free Square magstripe card reader, along with the free Square Point of Sale software, you’ll be able to convert a smart device (like an iPad or iPhone) into a powerful point of sale.
Therefore, if your business already has a smart device, the only cost you’ll have to take on for Square’s merchant services will be the payment processing fee of just 2.6% + $0.10 for in-person payments.
Similar to Square, Clover is a point of sale system with a few different options. Clover offers two software plans as well as a variety of hardware choices, including fully functional systems that don’t require a smart device.
Although Clover POS doesn’t offer a free plan, their software starts at $14 per month with processing fees of 2.7% + $0.10 per in-person transaction, making it an affordable and functional solution.
Moreover, if you’re looking for a POS system through a merchant account provider, many companies work with Clover to offer point of sale solutions.
The merchant services industry is wide-ranging and complex, but that doesn’t mean you can’t find the right solution for your business. If you break down your merchant services needs and preferences and carefully explore each company’s price and features, there’s no doubt you’ll be able to find a credit card processing company that will work for you.
It’s important to remember, however, with all of the companies, products, and processes that make up merchant services, there is a lot of room within the industry for confusion and uncertainty. Therefore, don’t be afraid to ask questions, wait before deciding, and keep looking if a merchant services company doesn’t seem like it’s the right fit.
- PaymentsJournal.com. “How Digital Payments Help Both SMEs & Online Lenders“
- Paymentdepot.com “Everything You Need to Know About Interchange-Plus Pricing“
Maddie Shepherd is a former Fundera senior staff writer and current contributing writer for Fundera.
Maddie has an extensive knowledge of business credit cards, accounting tools, and merchant services, but specializes in small business financing advice. She has reviewed and analyzed dozens of financial tools and providers, helping business owners make better financial decisions.