What’s a Merchant Service Provider? Do You Need It in 2022?

Learn everything you need to know about merchant service providers, including all the pros and cons. Find out if your business actually needs one.

A merchant service provider (MSP) is a company that provides the technologies and services which enable businesses to accept debit, credit card, and other alternative payment methods. In addition to payment processing services, merchant service providers also typically provide a host of other related merchant services that make it easier for merchants to optimize and manage their payments. This post will shed some light on this confusing industry segment by explaining the different types of merchant service providers, what they do, and why they are so essential for merchants. 

What is a merchant?

The word merchant may sound somewhat old-fashioned and bring about images of old-school traders sailing around the world to sell gold and spices. But today, it is a commonly used term within the e-commerce and payments industry to refer to any business that sells goods or services online or in person.

Merchant account definition

A merchant account is a business bank account that holds funds while authorizations are made to enable a business to accept credit and debit cards. When a customer makes a payment, a merchant account holds the payment on behalf of the merchant until the transaction is approved and then transfers the funds into a standard business account. There are two types of merchant accounts offered by merchant account providers - dedicated and aggregated.

A dedicated merchant account is established exclusively for one merchant with rates determined by sales volume, amongst other things. An aggregate merchant account holds funds from thousands of businesses under one account with rates fixed for all merchants.

What if you do not qualify for a merchant account?

Every business that wants to accept credit cards or debit cards needs a merchant account. However, getting approved for a dedicated account by a merchant account provider is not guaranteed and may be difficult for business owners with past bankruptcies or late payments on their credit report. The good news is those who don’t qualify for a dedicated merchant can usually still get a merchant account through a payment service provider or gateway provider. Payment service providers and some gateway providers offer an aggregated merchant account that groups merchants into one account. While you’ll still need to hit a certain standard, qualifying via a payment service provider for an aggregated merchant account is significantly less demanding.

What is a merchant service provider?

A merchant service provider, also sometimes referred to as a processor or acquirer, is a third-party entity that processes credit and debit cards for merchants. Many service providers also provide additional value-added merchant services such as intelligent payment routing, PCI compliance, fraud protection, and an assortment of merchant tools like customer reporting and analytics.

How many types of merchant service providers are there?

There are three main types of merchant service providers that provide services to businesses today. The most common include:

Merchant account providers

The core service offered by merchant account providers is a merchant account. A merchant account is a bank account that holds funds while authorizations are made to enable a business to accept credit cards and debit cards. Merchant account services are offered by banks, payment service providers, or payment gateways providers. Depending on which of the above merchant account providers you use, you'll get a dedicated or aggregated merchant account.

Payment service providers (PSPs)

A Payment Service Provider or PSP is a company that provides merchants with the technological infrastructure and services required to accept, manage and facilitate credit cards and other types of payments online and offline. In addition to processing transactions, PSPs provide other merchant services such as PCI DSS compliance, fraud protection, and customer reporting and analytics. They also allow merchants to accept payments without a dedicated merchant account, enabling them to save money on account fees and eliminating the hassle of applying for an account. 

Payment gateway providers

Payment gateway providers provide software applications (aka payment gateways) that allow merchants to accept and process transactions through their websites or through a Point of Sale (POS) in-store. Whether online or offline, payment gateways serve as the front-end interface between customers, payment processors, and financial institutions. They send payment data inputted by customers to the processor and then communicate authorizations with merchants and customers. 

Today, most payment gateway providers also offer other merchant services to help businesses customize their checkout, gain customer insights, comply with regulations, and protect against fraud. Some also provide merchant account services.

How to choose the best merchant service provider?

Choosing the right merchant service provider is a process that every business owner must complete to start accepting credit card payments. But with hundreds of providers on the market, choosing the best one can be a daunting task. To make your life a little easier, here are some of the most important things to consider.

Integration

Finding out what's required to set up and integrate with a payment provider from a technological and skills point of view is an important yet often overlooked consideration. The ideal option for all merchants, especially those with a small budget and little technical know-how, is to choose a merchant service provider that provides a solution that's quick and easy to set up and seamlessly integrates into your current website and other systems. 

Payment security and compliance

Creating a safe and secure environment for your customers is essential to maintaining their confidence in your business. You need to be sure that your merchant services provider is PCI-compliant and has advanced fraud protection measures in place, like encryption and tokenization and fraud management tools. This will help minimize the risk of data breaches and fraud, which can lead to costly monetary losses, fines and damages, and litigation fees. 

Fees

The fees involved with payment processing services and using a merchant service provider can really add up and put a dent in your bottom line. Keep an eye out for the following charges, and always remember that the best providers of merchant services are transparent and will not have hidden fees.

Setup fee: This is a one-time fee charged when you first sign up. 

Equipment fee: If you need to purchase any special equipment to process transactions, there may be an additional fee. 

Monthly/service fee: Many providers will charge a monthly fee for their services, sometimes called a service fee. 

Transaction fee: Charged for each transaction every time you process a payment. 

Credit card processor fee: This is a fee charged by the company that processes your credit card payments. It is separate from any fees charged by your merchant account provider.

Minimum processing fee: These are also known as monthly minimum fees - they are charged when a merchant’s total transaction processing fees do not meet the minimum amount agreed to in the contract.

Statement fee: Covers the printing and mailing costs associated with delivering a monthly merchant statement that details customer transactions and fees.

Cancellation fee: Some providers charge a fee for terminating your contract early. 

Chargeback fee: This is charged when a merchant receives a chargeback. The amount varies depending on the provider you work with. 

Maybe you would also like to read: Credit Card Merchant Fees Explanation and Comparisons 

Type of contract

Every merchant service provider will make you sign a contract, which includes different terms and conditions. Before finalizing anything, make sure you understand the following:

  • How long is the contract?
  • What happens if you want to change providers before the contract has expired? Will you need to pay any termination or cancelation fees?
  • Besides cancellation fees, what other fees are there?
  • Are there any volume caps, limitations, or other minimum or maximum limitations around the number of transactions?

Support

The speed and quality of support you'll receive will vary significantly from provider to provider. It’s critical to check what levels of support each provider offers and online reviews from customers to see if the level of support matches what the provider promises to provide. Payment related issues can arise at any time, so it's best to sign up with a provider with 24/7 customer support via phone, email, or chat. If the provider is slow or can only be reached at limited times, you may miss out on sales and alienate your customers!

Reliability

Processing uptime is critical to your business success because the more transactions you process, the more money you’ll make and the better the customer experience. You should always check the track record of each provider and see what systems they have for combatting outages when they occur that can help reduce the impacts on your business.

What products and services do merchant service providers offer? 

Merchant service providers offer a range of products that enable businesses to accept and process payments efficiently and in a way that’s convenient for their customers. Products include: 

Credit card payments

Merchant service providers offer credit card processing terminals to enable in-store purchases. A credit card processing terminal is a device that allows customers to make payments by swiping or tapping their credit or debit card. By having a credit card terminal, merchants provide an alternative to cash and make paying for purchases quick, easy and secure for customers. 

Contactless payments

To enable contactless payments, merchant service providers offer contactless-enabled devices that can process credit and debit card transactions and payments made from mobile devices which host digital wallets like Apple Pay.

Mobile payments

Merchant service providers offer contactless-enabled devices that enable customers to pay using any smartphone or tablet with NFC capabilities that host a digital wallet, such as Apple Pay or Google Pay.

Virtual payments

A virtual terminal is a software application that allows merchants to accept payments via credit card without the need for a physical card. 

Point of Sale (POS) systems

A Point of Sale system or POS comprises hardware and software equipment that enables merchants to accept and process transactions. While all POS systems serve the same basic purpose, many also perform other vital functions such as inventory and staff management, sales tracking, and much more.

Payment gateways

A payment gateway is a software application that allows merchants to accept and process transactions. The primary purpose of a gateway is to authorize and settle transactions between customers and merchants.

Maybe you would also like to check: Online Payment Methods

What are the features offered by a merchant service provider?

Today's merchant service providers offer many features to help businesses. While the number and type of features differ depending on the provider being used, merchant service providers generally provide value-added features that help merchants accept, process, settle, and manage their payments better. 

Payment acceptance Payment processin Settlement and reconciliation Payment management
Web and mobile checkout/payment gateway Smart routing for processing optimization Financial and transaction reporting Dashboard to track transactions and balances
Point Of Sale Systems (POS) Payment authentication (SCA, 3D Secure) Reports and customer analytics
methods including cards, mobile payments, e-wallets, bank transfers, etc. authorization integrations and support
Multi-currency and localization Fraud protection
PCI DSS compliance Dispute handling


Points to consider before choosing your merchant service provider

Merchants, especially those just starting out, have to make crucial decisions every day. Choosing a merchant service provider is perhaps one of the most important because it can have a massive impact on your business’s success. Here are a few things to consider before running out and choosing a provider that can increase your chances of making the right decision.

Industry

The industry you operate in is an important factor to consider before choosing a provider because it dictates which customers you serve, how you serve them (online/offline), and what payment preferences your customers have. The best merchant service provider for your business will ideally specialize in your industry and understand your business model, the general payment process and payment timeframes, popular payment methods, and customer needs and expectations.

Business size

Small, mid-sized, and large businesses all have different needs when it comes to payments. For example, suppose you run a small or medium-sized business. In that case, it’s best not to work with a merchant account provider that usually works with larger companies with big budgets and in-house engineering teams. It’s better to choose a provider that provides more hands-on support and understands the needs of smaller merchants with smaller budgets.

Markets of operation

It’s essential to understand what markets you operate in and which you plan to expand into in the future. By doing so, you can narrow down your search to merchant service providers that specialize in these markets. Such providers should be able to provide the most popular payment methods used in these markets and insights regarding the payment process and customer needs and expectations. 

Budget

There’s no point in using merchant service providers with fee structures that don’t match your transaction volumes or budget. That's why it's important to research the actual fees associated with payment processing services and using a merchant service provider and whether such costs can be negotiated with increased payment volumes. Take into account the following and be aware that there are often hidden fees you won’t notice:

  • Set-up fees
  • Transaction fees
  • Min/max transaction thresholds
  • Currency conversions
  • Cancelation fees
  • Chargebacks
  • Dispute management
  • Software/hardware equipment, e.g. (POS systems) 

Pros and cons of using a merchant service company

Merchant service providers have increased in popularity over the last few years, and with good reason. Having a merchant service provider facilitate the transactional aspects of your business is extremely handy and is almost a necessity today. However, they are not without their drawbacks. Let’s take a look at the main pros and cons of using a merchant services provider. 

Pros Cons
✅ Easy setup ✖ Fixed pricing
✅ Quick approval ✖ Higher transaction fees
✅ Reduced administrative processes ✖ Limits on transaction size and processing volume.
✅ Accept multiple currencies and payment methods ✖ Account stability (higher risk of freezes or termination)
✅ Add new payment methods easily ✖ Longer settlement periods
✅ Comply with payment industry standards and regulations ✖ Confusing fee structures
✅ Prevent fraud ✖ Customer support
✅ Customer analytics tools for business insights
✅ Simplified accounting (transaction reporting)

Merchant account and service provider difference

A merchant account is a business bank account offered by a merchant account provider that enables merchants to accept credit cards and debit card payments. A merchant service provider refers to a company (e.g., merchant account provider, payment service provider, or payment gateway provider) that processes merchants’ credit and debit card payments. In addition to payment processing services, many merchant service providers also offer other services such as merchant accounts, intelligent payment routing, PCI compliance, fraud protection, and financial tools for payments management.

Who is the best merchant service provider?

There is no single best provider of merchant services because each merchant has different requirements and values different features. In our opinion, Pay.com is an excellent option for merchants that need a full-service payment gateway to run and optimize their payment operations. 

With Pay.com, merchants can:

  • Accept multiple payment methods and easily add new ones.
  • Create custom-designed web and mobile checkout pages.
  • Securely store customer payment information and preferences to create a faster and more personalized payment experience that increases conversion rates.
  • Comply with PCI DSS standards, 3DS2, and other regulations.
  • Increase approval rates and minimize transaction fees by automatically selecting the most cost-effective route for every transaction.
  • Make business decisions based on customer data and insights.

Related Content

FAQs

How to choose a good merchant service provider?

After you’ve developed an understanding of your business requirements, do some research and put together a list of different types of merchant account, payment gateway and payment service providers. After doing this, look at what merchant services each provider offers in terms of payment security and compliance, reliability, and support services. You should also make sure you understand all the fees and the type of contract you’re getting into.

What do you need to consider when choosing a merchant service provider?

There are several essential things to consider when selecting a merchant service provider. These include your industry, business size, reliability, fees, and ability to scale.

What is a merchant in online payment?

A merchant is a common term used within the e-commerce and payments industry that refers to any business that sells goods or services online or offline.

What is a merchant service provider?

A merchant service provider is a company that processes credit and debit card payments for merchants. Many service providers also provide value-added merchant services such as intelligent payment routing, PCI compliance, fraud protection, payment security, and merchant tools like customer reporting and analytics. There are three types of merchant service providers including merchant account providers, payment service providers and payment gateway providers.

Which merchant service provider is the best?

In our opinion, Pay.com is one of the best merchant service providers. Pay.com is a full-service gateway service that enables merchants to accept multiple payment methods, including major credit cards, PayPal, Google Pay, Apple Pay, Klarna, Paysafe, and more. Pay.com also provides a host of value-added services such as fraud protection, PCI compliance, and merchant reporting and analytics tools.

Is PayPal a merchant service provider?

Yes. PayPal is a merchant services provider.

How do merchant service providers make money?

Merchant service providers primarily make money through setup fees, transaction fees, monthly fees, and other types of fees.

Are merchant services legit companies?

For the most part, yes. However, not all providers of merchant services are created equal. Some have more experience and better features and services than others. It’s therefore essential to do your homework and weigh up your options before signing up with a provider.

Meet the author
Emily Kirschenbaum
Emily is a content writer with a special interest in fintech and business. She loves sharing her knowledge to help small businesses take their first steps towards success.

Ready to boost revenue for your business

Sign Up