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A Beginner’s Guide to Merchant Services

Leah BuryApril 12, 2021

Reviewed By: Amplify

Merchant services is a broad term used to describe a range of financial services for businesses. It generally includes 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. It might also refer to the vendors that companies use to process payments and the hardware or software involved with taking and processing payments.

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. In this article, we’ll help you build your understanding of merchant services so that you can choose the right provider for your business.

How Merchant Services Work

The transaction process begins when you swipe a customer’s credit card or enter the payment information into a processing terminal. The processor then transmits that data to the customer’s bank to check before accepting or denying the information.

If the bank approves the transaction, you can then accept the payment on your end through the terminal, and the purchase will be complete. After that transaction, payment processors take their fees and deposit the remaining funds into your merchant account, which is the account required to accept credit card payments.

Merchant Service Products

There are many different technologies and products associated with merchant services. Here are a few of the things to consider before collecting payments from your customers.

  • Credit card terminals: As described above, the terminal is a device connected to your merchant service provider. It facilitates the process required for you to take, verify, and receive payments.
  • Payment gateways: This is the software that allows your website or an eCommerce platform to process secure credit card payments online. These are basically virtual terminals.
  • Point of Sale system (POS): A POS system consists of the software and hardware required to process payments. It also helps manage a business’s day-to-day sales processes. A POS system can also run reports, track inventory, accept gift cards, manage loyalty programs, and reconcile tips or commissions.
  • Mobile payment technology: This software enables mobile payments for a product or service through a portable device like a cell phone. This technology is perhaps most popular for sending money to friends and family with apps like Venmo.

Providers of Merchant Services

The companies that provide merchant services fall into two categories: merchant account providers and payment service providers.

Merchant account providers

These providers offer and service merchant accounts. A merchant account is a bank account that is used to accept credit card payments. This account is not the same as a business checking or savings account.

If you work with a merchant account provider, you set up this account through them, and they then provide you with the tools you need to provide payments. This could take the form of a payment gateway, a POS system, or a mobile credit card terminal.

Merchant account providers charge for all of their services. You can expect a one-time setup fee, monthly maintenance charges, fees for hardware and tools, and transaction fees.

These providers require a relatively involved application and setup process. The service charges associated are much higher than payment service providers, but in return they offer lower merchant processing fees. Because a large volume of transactions is needed to balance out the overall cost of service, only large businesses typically choose to work with a merchant account provider.

Some examples of merchant account providers are Payline Data and Dharma Merchant Services.

Payment service providers

Payment service providers (PSP) offer various tools for payment processing, including POS systems and credit card terminals. PSP tools are generally faster and easier to set up. A PSP can collect transaction fees in two ways: either as a percentage of each transaction or as a fixed cost per transaction.

When PSP process payments, they aggregate those payments from all of the businesses they service into one account, and then distribute individual funds directly into the bank account of each business. The PSP does not hold or service any business accounts or merchant accounts.

The transaction fees with a PSP are typically higher than an MAP, but their service and hardware fees are much lower. Payment service providers typically work with small businesses who don’t need a lot of card terminals or POS systems, but who do need to process card payments.

Some examples of payment service providers include Fiserv, Square, and PayPal.

Merchant Account Providers vs Payment Service Providers

You might be asking yourself: which service provider would I need? The answer is relatively straightforward: it all comes down to volume. To put some context around which providers would be better suited for you, here are some real-world examples.

A nationwide grocery store that processes a very high volume of payments would benefit from a merchant account provider, who has lower transaction fees. They would have a single merchant account serviced by a MAP.

A local food truck – even a busy one – wouldn’t have anywhere close to the volume or hardware need that a grocery store would, so they would use a PSP. The payments would be transferred into a business checking or savings account with their financial institution. Their financial institution might even have a preferred PSP that they work with directly, making the overall experience even more seamless.

Choosing the Right Merchant Service Provider

As you search for the right merchant service provider for you, there are a few things to consider. Of course, one of the most important things to understand is the types of pricing models. Beyond that, you should consider these things.

Prices and Fees

Pricing is a crucial factor to consider when finding a merchant service provider that fits your budget. It can help to consider volume, the cost of processing payments, and the overall cost of the service itself.

Make sure your rep is reputable

It is essential to do your research, be smart, and establish a level of trust with the provider you choose to go with. Look for reviews and testimonials from other businesses to see what companies have provided good experiences. You might also ask your fellow business owners how they feel about their current merchant services provider.

Know how much customer service will be available to you

Determine how much customer service you think you may need. If you are new to retail, you may want to go with a company that provides a high customer service support level. Reputable processors will offer 24/7 tech support for no additional charge. Your time is valuable, so you want to find a provider that makes customer happiness and support a priority.

Be up to date with equipment and software

Figure out exactly what kind of equipment and software you will need. If you plan to take credit card transactions via a credit card terminal, you want to ensure that the terminal is up to date with EMV (EuroPay, MasterCard, Visa), also known as chip technology equipment.

If you are getting new equipment from your provider, ask what the equipment’s cost will be, and always discuss the option to get free equipment in exchange for a reasonable contract term.

Understand the terms of your existing contract

If you have an existing contract with a merchant service provider, try to figure out if they have been charging you fairly. If they have been overcharging, a new, trustworthy service provider may help you pay out your early termination fees, like splitting it with you if you sign a contract to ensure they recoup their investment.

In some instances, it may be worth riding out an existing contract if there is only a short time remaining. If a new provider offers savings that outweigh the exit fee, enter a month-to-month agreement with the new processor, and pay out of pocket.

Research Merchant Services

Like many aspects of your business, your choice of merchant services provider can have long-lasting ramifications on your success. Before you enter into an expensive contract, do a little bit of research. If you’re a small business, a payment services provider might be just the right fit.

Merchant Services that Connect You

Amplify partners with Fiserv, a comprehensive payment service provider. Take your small business to the next level!

Leah Bury

Leah is a financial writer based in Austin, Texas. Her articles include advice on investing in real estate, starting small businesses, and optimizing savings. Leah also does some freelance graphic social media work for local creatives.