Understanding Merchant Services: The Ultimate Guide for 2022

Read our in-depth guide for crucial information any business owner needs to know. Find out which merchant services you’ll need and which may be unnecessary.

There are loads of things to wrap your head around when starting a new business – including a bunch of buzzwords and abbreviations that fly around when you’re trying to get your store up and running. It’s important to get a clear picture of what everything means, so you can determine exactly what your business needs.

Merchant service products and providers can open up opportunities for you to sell to a wider audience. The right ones can help you create a better consumer experience and build a loyal customer base. That said, not all of these services are worth paying for.

By helping you understand what these solutions are and the different types of products available – plus what they do and who provides them – this ultimate guide will equip you to make the right decisions about merchant services for your business.

What Are Merchant Services And Why Do You Need Them?

Simply put, merchant services are solutions that banks, payment processors, and other financial service institutions provide to retail businesses. Often, the term is used more specifically to refer to the services that enable you, as a business, to accept and process electronic payments from your customers.

These solutions include technology and tools like payment gateways, credit card processing terminals, and points of sale. Facilities like merchant accounts and services payment service providers (PSPs) offer also fall under the merchant services umbrella.

Merchant Service Products

Merchant service products are the pieces of hardware and software that you need to accept and process credit and debit card payments. For example, if you’re operating a brick-and-mortar store, you’d need a credit card reader. Online businesses may only need a payment gateway, while ‘brick-and-clicks’ would need both.

How you operate your business as well as the merchant service providers (MSPs) you work with will determine the types of products you need. 

Merchant Account

A merchant account is one tool that enables a business to accept debit or credit card payments in store or online. You can think of this account as a middleman between the issuing bank (the bank that provided the customer’s card) and your bank. 

When your customer swipes, dips, or taps their card, the sale amount is theoretically taken from their account and transferred to yours. In reality, though, you’ll likely have to wait 1–3 business days while the transaction is processed. During this time, the funds are stored in the merchant account.

The account you choose will have an effect on the types of transactions you can perform, how quickly you receive funds from sales, and other important operational factors. So it’s wise to do some research to find one that will suit your business.

Merchant accounts are often seen as the foundational merchant service product for any business that wants to accept electronic payments. But with a full-service platform like Pay.com, you can accept a variety of payment methods without having to go through the paperwork – and stress – required to open a merchant account.

Payment Gateways

Any business that wants to sell goods or services on the internet needs a payment gateway. This software creates a link between your website and your payment processor to enable you to accept payments online. It provides a secure portal where your customers can enter their credit card details to pay for their purchases.

When a customer enters their personal and credit card details into the payment gateway, their data is captured, encrypted and sent to the payment processor. The approval or rejection of the transaction will then be communicated between the merchant and customer bank.

Your payment gateway might be provided by your bank or you could get it from a payment service provider. The benefit of working with a provider like Pay.com is that you don’t have to sign up for a separate gateway. This simplifies your set-up and reduces costs.

Checkout Pages

An optimized checkout page is essential for ecommerce success. Many customers will abandon their shopping carts if the checkout process is too complex.

When it comes to checkout pages, simple is better. Reducing the number of steps between adding an item to a cart and entering payment details will improve the customer experience and potentially increase sales.

It’s a good idea to choose a provider that lets you customize your checkout page to match your own branding.

Analytics & Reports

Evidence-based decision-making is key for growing your business sustainably. Seems like good advice, but what does it really mean? To ensure that your business thrives in the long term, you need to use data to make choices about what to sell and how to sell it.

That’s where analytics and reports come in. These tools enable you to collect data about the customers who come to your website. An analytics application can track everything from how many of them there are to what they’re buying, where they’re finding your store, and how much time they spend there.

An analytics platform with integrated reporting software gives you the power to take the data you gather on your website and organize it in a meaningful way. This will help you to gain a better understanding of your business’s performance and enable you to make better decisions.

Mobile Payment Services

Payments performed via mobile devices such as tablets and smartphones fall into this category. While NFC- and RFID-enabled devices are the most popular methods of mobile payments, there are also mobile wallets and mobile money transfers.

PayPal, Apple Pay, and Google Pay are all great examples of mobile payment methods. With these platforms, users are able to transfer funds to one another with low fees and fast transaction times. 

If you set up a merchant profile for your business, these channels can be used to facilitate purchases. Be sure that you understand all of the fees that a transaction will attract when deciding on a platform. These may include processing fees, send/receive fees, commercial transaction fees, and others. 

Virtual Terminals

Virtual terminals are useful for businesses that perform card-not-present transactions. If you make sales over the phone or via email (florists and take-away restaurants are good examples) a virtual terminal will help you to receive payment and keep your customer’s details secure

When you make a sale, you’ll enter the details of the transaction into the virtual terminal via the online dashboard. With Pay.com, you can manually enter a customer’s payment details or create a payment request link that you can send via email or SMS. 

Keep in mind that risks, like the increased threat of fraud due to the card-not-present nature of virtual terminal transactions, mean that these transactions can often attract high fees from MSPs.

Point-of-Sale (POS) Systems

The point-of-sale system, usually abbreviated to POS, is the station where sales are made. It comprises the software and hardware that’s needed to manage all of the transactions a business completes. 

In a brick-and-mortar store, the cash register is the main piece of POS hardware. It will usually include a terminal that can connect to the internet along with a cash drawer and receipt printer. Some may even have built-in credit card terminals. For online businesses, the point of sale will be a digital system that’s completely online.

On the software side, the POS can enable you to record sales, track inventory, and manage staff and customer information. But the capabilities your POS has will depend on the merchant service provider who supplies the system.

Credit Card Terminals

Also known as an electronic data capture terminal (or EDC terminal) or simply a payment terminal, these terminals allow businesses to accept one of the most popular payment methods: credit cards. These devices enable ‘card-present’ transactions by allowing you to swipe, dip, or (if they have contactless payment capabilities) tap credit and debit cards to accept payments. 

Terminals with near field communication (NFC) or radio-frequency identification (RFID), which enable contactless payment, can also be used to accept payments from customers via mobile devices like smartphones and smartwatches.

There are plenty of options when it comes to credit card terminals, but certain features will cost more than others. A mobile device with a touch screen might be nice, but it could be unnecessarily expensive if you don’t intend to use it anywhere other than at your cash register. It’s important to think carefully about what your business needs. 

What Are High-Risk Merchant Services?

High-risk merchant services are solutions for merchants whose service providers have identified their business as high risk. This classification is based on likelihood that your business will have high volumes of chargebacks, returns or fraud. 

When talking about high-risk merchant services, we’re mainly referring to merchant accounts. If your merchant bank believes that your business may be in danger of going bust, be unable to honor chargebacks or to fall prey to fraud, it will label you as high risk. 

The effect is that you’ll likely end up paying higher transaction fees and have stricter limits on transactions. Plus, your bank or payment processor will likely increase the amount of money you need to keep in your rolling reserve to protect themselves.

There are a variety of reasons why a service provider might label your business as risky. These include:

  • High-risk business or industry: Businesses and industries that MSPs view as having a higher chance of failing financially. Examples include online gambling businesses, subscription-based businesses and pharmaceutical businesses, among others.
  • New merchants: Without a solid track record to show that you’re able to sell your product or service without attracting too many returns or chargebacks, MSPs may not trust that your business is financially stable and label it as high risk.
  • Low credit score: Poor payment records, not having enough collateral for loans and previous bankruptcies all lower your credit score and lead MSPs to view your business as a risky entity.
  • High transaction volume: Both the value of sales and number of credit card transactions matter here. A business that processes more than $20,000 in sales per month, or that has an average transaction value of $500 or more, will be considered high risk.
  • International sales: Merchants that regularly sell products or services to customers who are outside of the USA, UK, EU, Canada, Australia, or Japan will likely be flagged as fallible.

What Are Merchant Service Providers?

You may have figured this one out already. But, for clarity, merchant service providers are the companies that provide the infrastructure that allows businesses to accept credit and debit card payments, and other payment methods. That includes merchant accounts, POS systems, payment gateways, credit card terminals, and all manner of other hardware and software. 

Different MSPs perform different functions in the merchant service space, so it’s a good idea to have an understanding of who they are and what they do.

Merchant Account Providers

Merchant account providers do exactly what their name suggests – they provide the merchant accounts that enable businesses to accept credit and debit card payments. They hold money from card transactions until they’re cleared and can be deposited in your business bank account.

Most banks will offer merchant accounts as part of their services. Other MSPs like PayPal and Shopify also provide merchant accounts. To open a merchant account, you need to have a business license, tax ID, and a business bank account. 

Besides this basic function, these MSPs can also offer processing services to ensure that the payments due to you land in your business account. What’s more, they can provide hardware and software like credit card terminals, POS systems and other merchant services. 

It’s important to keep in mind that while all merchant account providers can set you up with a merchant account, not all of them offer processing services.

Payment Service Providers

Sometimes known as aggregators or third-party processors, PSPs are the companies that process electronic payments. Because these providers allow you to accept card payments in person and online, you can eschew the merchant account by working with a PSP.

Rather than opening individual accounts for all of the merchants they support, PSPs aggregate their clients’ accounts. All merchant funds collect – or aggregate – in one account with individual sub-accounts for each of their clients.

Let’s say that you choose Pay.com as your PSP. When a client makes a payment, we verify their card details and ping the issuing bank to confirm whether there are sufficient funds in their account. When we get the green light from the issuing bank, we initiate the transfer to your Pay.com account. Simple.

There are a variety of advantages to using a PSP. They’re generally quick and easy to set up, with lower costs compared to merchant accounts. Plus, you’ll often receive funds faster. That said, there isn’t a lot of flexibility when it comes to negotiating terms and costs can increase if you’re lumped with high-risk merchants.

Payment Gateway Providers

If you’re planning on selling products or services over the internet, you’ll need a payment gateway. Which means you’ll need a payment gateway provider.Payment gateways encrypt and transmit credit card details to facilitate the transaction and route funds from the buyer’s account to yours. 

Payment gateway providers usually offer standalone gateway services. If you work with a PSP like Pay.com, a payment gateway will be included as part of your payment infrastructure.

How Much Do Merchant Services Cost?

Like any other resources that you need to run your business (think rent, insurance, and courier costs), you’ll need to pay for merchant services. The cost will depend on the type of service, the provider you use, as well as the terms of the agreement you have with your MSP.

Whether you’re operating a brick-and-mortar store, an online outlet, or a brick-and-click, you need to know about potential costs and understand how these fees are structured.

There are three main pricing structures for merchant services: flat rate, interchange, and tiered. 

Flat-Rate Fees

Flat-rate fees are fixed fees. This means that the amount you pay to your MSP is set and isn’t affected by the value or volume of transactions that you carry out. Some MSPs may also charge a fixed percentage of each purchase. This is usually anything from 1.75% to 3%.

Typical flat rate fees include:

  • Merchant account fee: Standard bank fees that you pay to your merchant account provider to keep your account open.
  • Payment gateway fees: An amount paid to your payment gateway provider to make use of their software.
  • Minimum monthly fee: If your agreement is structured around revenue, your merchant account provider may charge a fee for not reaching the minimum threshold.
  • Processing commitment fee: Similar to minimum monthly fees, processing commitment fees kick in if you commit to making a specified number of card transactions per month and don’t reach the threshold.

Interchange Fees

Issuers charge merchants interchange fees for using their cards. Like flat-rate fees, they’re fixed (usually a percentage of the transaction plus a per-transaction cost). These fees cover the credit risk and handling costs that they incur because of card transactions.

The interchange fee is calculated based on a variety of factors, including the type of card (i.e. debit or credit), how it was used (online or in person), the card category (standard, rewards, secured), and the type of business you run. There are hundreds of interchange categories, all of which will affect the final fee.

Assessment fees go hand-in-hand with interchange fees. They’re levied on a merchant’s total monthly sales and are paid directly to the payment network (credit card company) in exchange for being able to accept their cards.

The table below shows the average interchange and assessment fees for the four major credit cards.

Payment Network Average Interchange Fee Average Assessment Fee
Visa 1.15% + $.05 to 2.4% + $.10 .14%
Mastercard 1.15% + $.05 to 2.5% + $.10 .1375%
Discover 1.35% + $.05 to 2.4% + $.10 .13%
American Express 1.43% + $.10 to 3.3% + $.10 .14%

Tiered Fees

Tiered fees are essentially interchange fees that are grouped together by a payment processor. They’re also known as bundled fees. And they’re complicated. 

Unlike the arrangement where you pay interchange fees directly to the payment network, a tiered pricing model is set up so that you pay your payment processor and they pay the credit card company. Payment processors then group different interchange fees together into “qualified,” “mid-qualified,” and “non-qualified” tiers. 

This usually means that your business bank statements are much easier to read. The problem? You’ll likely end up paying much higher fees – especially if most of your transactions fall into the mid- or non-qualified tiers. And, because there’s very little transparency with the bundling, it’s nearly impossible to tell where your transactions will sit.

For small business owners, it’s best to avoid tiered for bundled fee structures. Go for an MSP that offers a flat rate and as small a mark-up as possible on the interchange fee charged by the issuer.

The Bottom Line: How to Choose a Merchant Service Provider For Your Business

Price is usually up front and center when you consider which suppliers and providers you are – or aren’t – going to work with. But there’s far more to choosing a merchant service provider than simply considering costs.

One factor you’ll want to look at is track record. This doesn’t only mean how long an MSP has been in business, but also how it’s served its customers in the past. Providing reliable, secure products that perform optimally and keep your customer’s information safe from potential attacks are two important things to think about. Variety is another.

Choosing a provider like Pay.com, that can offer a bundle of services, will give you more time to focus on what matters – selling goods and services, and growing your business.

Although cost shouldn’t be the only consideration when choosing an MSP, it is an important one. Opt for a provider who is able to equip your business with the right tools at the right price. When you have that balance, your business is more likely to succeed.

FAQs

What are some examples of merchant service providers?

Merchant service providers are companies that provide the infrastructure businesses need to make electronic sales. Examples include big banks, payment platforms like PayPal or Venmo, and payment service providers like Pay.com.

What merchant services does a small business need?

The merchant services you need will depend on the type of business you run. Brick-and-mortar stores need POS systems and credit card terminals, while online shops need ecommerce solutions like payment gateways. ‘Brick-and-click’ businesses will need both.

How can I accept payments on my website

There are three things you need to accept payments on your website: an online shopping cart, a payment gateway and a payment service provider (PSP). With a PSP like Pay.com, setting your website up to accept payments is quick and easy, even if you aren’t technically inclined.

What’s the difference between merchant services and a merchant account?

Merchant services are the solutions that allow merchants to accept digital payments. Merchant accounts, on the other hand, are bank accounts where funds from the proceeds of sales are stored while your bank and your customer’s bank verify the transaction.

What’s the difference between merchant service providers and payment processors?

While merchant service providers work directly with your business to help you complete electronic transactions, payment processors work behind the scenes to ensure that funds are transferred among the right bank accounts following a sale.

What is a merchant services report?

Also known as a merchant statement or merchant account summary, this report details all of the transactions, sales and fees that a merchant account attracts each month.

How do merchant service providers make money?

Merchant service providers make money by charging fees for the solutions they provide. Merchants are typically charged a fixed fee plus a percentage of each transaction for using merchant services.

Meet the author

Nicole Forrest

Nicole Forrest is a writer and editor who has been using storytelling to help build brands for more than a decade. With a special interest in fintech and a passion for creating compelling content, she focuses on making complex topics easy to understand.

Ready to boost revenue for your business

Sign Up