Every business needs a way to, well, do business. One of the first things you need to set up is a way to accept payments from customers, and this often involves choosing a reliable merchant service provider. And there’s a lot more to that decision than you might think.
There are lots of moving parts and pieces when it comes to payment processing, and there are more entities involved than you might think. One crucial piece? Merchant account providers.
What Is a Merchant Account Provider?
A merchant account provider is a company that provides businesses with a bank account that enables them to accept credit cards and debit card payments. When a credit card transaction happens, the customer’s card deposits money into the merchant account. The money is then transferred to the merchant’s business account. The merchant account is the middle ground between the customer and the business, and the merchant service provider is the company that gives businesses these products and services.
Definition of a Merchant Account
A merchant account is a specialized type of bank account that allows businesses to accept credit and debit card payments from their customers. This account is a crucial component of payment processing, acting as an intermediary between the business and the credit card companies. When a customer makes a purchase using a card, the payment is first deposited into the merchant account. From there, the funds are transferred to the business’s bank account. Establishing a merchant account typically involves working with a merchant account provider, which facilitates the entire process and ensures that businesses can smoothly accept credit and debit card payments.
Importance of a Merchant Account for Small Businesses
For small businesses, having a merchant account is essential to accept payments from customers who prefer using credit and debit cards. Without a merchant account, a business would be unable to process these transactions, potentially limiting its customer base and sales opportunities. By enabling businesses to accept credit and debit card payments, a merchant account can significantly boost sales and revenue. Additionally, it provides a secure and reliable method for managing finances, ensuring that payments are processed efficiently and funds are transferred promptly. In today’s market, where cashless transactions are becoming the norm, having a merchant account is indispensable for small businesses aiming to stay competitive and meet customer expectations.
How a Merchant Account Works
A merchant account operates by facilitating the acceptance of credit and debit card payments from customers. When a customer makes a purchase, the payment is processed through the merchant account, which verifies the customer’s card information and ensures the transaction is valid. Once the payment is confirmed, the funds are transferred from the merchant account to the business’s bank account. This process involves a series of steps, including authorization, batching, and settlement, all managed by the merchant account provider. The provider typically charges a processing fee for each transaction, which usually consists of a percentage of the transaction amount plus a small flat fee. This fee structure ensures that businesses can accept credit and debit card payments while covering the costs associated with payment processing.
Who Needs a Merchant Account Provider?
Any business that wants to be able to accept credit card payments and/or debit card payments will need to use a merchant service provider to help them set up their accounts to accept payments. And while there may be some cash-only businesses out there, it’s a dying breed. In 2021, the number of cashless transactions worldwide surpassed a whopping 1 trillion. This number is expected to reach over 2 trillion by 2027.
Consumers use cash for just under a fifth of their purchases, with debit and credit card payments accounting for more than half of purchases in 2022. In fact, credit cards were the most preferred mode of payment for consumers in 2022. With the rise in the desire for contactless payments, this is expected to continue to increase.
If you don’t provide your customers’ preferred payment processing options, they may look elsewhere.
While merchants who accept in-person payments may have the option of going cash-only if you plan to sell online, you’re going to need to accommodate different payment types—and that includes debit card and credit card processing. Essentially, any business that wants to sell online or process online transactions needs an account provider.
Merchant Account Services for Small Business Owners
Merchant account services extend beyond just banking. A merchant service provider offers a number of other complementary products and services:
Cashback
Cashback is when a customer pays with a debit card, charging an amount higher than the transaction value so the merchant can give them cash in return. This is a nice convenience to offer customers, as it eliminates the need to go to the ATM for cash and pay any potential withdrawal fees.
Point of sale (POS)
The point of sale POS is critical for in-person payments. Post-pandemic trends show that customers are returning to in-person shopping and are increasingly using digital payments for in-store payments. 73% of respondents to a survey conducted by McKinsey said that they used digital payments for in-store purchases in 2023. This is a huge jump from 65% reported in 2022. Further, this trend is much more significant among Gen Z shoppers.
Today’s systems offer inventory control, email marketing, and other business management features. You can use the POS to swipe and/or manually enter card information to accept card payments. With additional features, you can also send invoices, email receipts, and promo codes.
A mobile POS is also helpful for businesses that sell on the go—at markets, fairs, events, etc. You can turn any compatible mobile device into an entire POS terminal.
Accept payments online
Though in-person payments still prevail, ecommerce growth has been catapulted during the COVID-19 pandemic. Even after the lockdowns were lifted, more than 90% of consumers used at least one form of digital payment in 2023.
Online transactions, by nature, require cards—a customer isn’t going to mail in cash for an online payment. And if you plan to invoice online to minimize in-person interactions, the same applies.
Related: Can You Accept Credit Cards Online Without a Merchant Account?
Virtual terminal
A virtual terminal is an online payments program that enables merchants to process payments and transactions without the use of a physical POS or terminal. It essentially turns your compatible device, a smartphone for example, into a POS.
Anti-fraud
Fraud is the top payment-related challenge retailers face. You always think it won’t happen to you, but fraud is a very real risk—and a costly one at that. Many merchant services providers also have anti-fraud services, including end-to-end encryption, tokenization, and two-factor authentication.
Payment gateway
A payment gateway is a virtual platform that interfaces between the merchant, the customer’s bank, and the customer’s credit card processing company and enables online payments. If you have no plans to process payments online, you won’t need a payment gateway. But to process online payments, you’ll need access to a payment gateway, and many merchant services account providers have them for an additional fee.
ACH payment processing
ACH, or eCheck, payment processing allows you to take a photo of a paper check to verify available funds before accepting it as a form of payment. You can also deposit the check funds virtually, eliminating the hassle of a trip to the bank or ATM. This is another feature that comes in handy for fraud protection. Not all merchant services account providers offer ACH payment processing, so be sure to check if it’s something you need.
Business funding
Many merchant service account providers also offer funding options, including merchant cash advances and small business loans. Even if you don’t need extra capital right now, consider your goals for the future. If you anticipate needing funds, it’s worth considering as part of your merchant account provider search.
Types of Merchant Account Providers
There are several types of merchant account providers, each offering unique features and benefits tailored to different business needs. Understanding the various options can help businesses choose the right provider to handle their payment processing efficiently.
Traditional Merchant Account Providers
Traditional merchant account providers are typically banks or financial institutions that offer merchant accounts to businesses. These providers often require businesses to have a good credit history and a stable financial situation to qualify for a merchant account. While traditional providers may charge higher fees compared to other types of providers, they often offer more comprehensive services and support, including dedicated account management and advanced fraud protection.
In contrast, online payment processors like PayPal and Stripe provide a more streamlined and cost-effective solution for businesses to accept credit and debit card payments. These providers usually do not require businesses to have an established credit history or financial stability, making them accessible to startups and small businesses. Additionally, they often charge lower fees than traditional merchant account providers. However, the trade-off may be fewer services and less personalized support.
When selecting a merchant account provider, businesses should carefully consider their specific needs and requirements. Comparing the fees, services, and support offered by different providers can help ensure that they choose the best fit for their operations. Researching the provider’s reputation and reading reviews from other customers can also provide valuable insights into the reliability and trustworthiness of the provider.
How Much Do Merchant Account Providers Charge?
Merchant service provider fees vary depending on a lot of factors. Businesses typically pay a fee for each transaction, as well as any other applicable monthly fees to their account and service agreement.
When evaluating options for your business, you’ll want to make note of the following charges:
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Application fee: To open a merchant account, you first need to apply. In some instances, there are fees associated with the application process that the merchant account provider passes on to the merchant.
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Setup/installation fee: If you’re approved and agree to the terms, some providers will also charge a setup or installation fee. These fees may vary depending on who’s doing the implementation—you or the provider.
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Equipment costs: You might already own compatible hardware. If you don’t, you’ll either need to purchase it on your own or from the merchant account provider. Many providers also offer the option to rent equipment, which may come with upfront and ongoing costs.
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Monthly fee: Monthly fees could be applied to a variety of things. At Payment Depot, the monthly fee gains merchants access to wholesale credit card payment processing rates.
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Statement/account/service fee: Look out for charges like statement fees, account, or service fees. Many providers sneak these in as hidden fees.
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Transaction charges: A merchant service provider may charge a fee for every transaction processed with credit and debit cards.
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Credit card payment processing rates: Credit card processing fees may apply to each credit card transaction. These are charged as interchange, flat rate, tiered, or wholesale.
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Minimum payment processing fee: Some merchant services account providers require a minimum amount for each of your credit card transactions. If you don’t meet the minimum, you might have to pay extra.
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PCI compliance fees: This is another hidden fee that merchant service account providers look to pass on to the merchant. Avoid providers who charge these fees. At Payment Depot, PCI compliance is included with your monthly membership.
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Chargeback fees: Acquiring banks charge merchants a fee each time a chargeback is processed. It covers administrative expenses.
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NSF fee: The not-sufficient-funds charge applies when customers use a card linked to an account without enough balance to cover the purchase.
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Cancellation fees: This is the amount large or small business owners are charged to cancel or terminate their contract or account with a provider. Read contracts closely to determine cancellation fees that may apply if you end a contract early. An early termination fee can be hidden in fine print.
Top Merchant Services Account Providers to Consider
There’s more to choosing a merchant service provider than simply price. You’ll want to consider things like other accepted payment methods, third-party integrations and platform compatibility, and even customer reviews to find out from others’ experiences. Some of the top options to consider include:
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Payment Depot: Payment Depot charges affordable and transparent interchange plus pricing, ideal for businesses with lower volumes or smaller purchase amounts.
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Square: Square offers a full range of merchant account services, though the company’s recent changes in its pricing make it a little more expensive than before.
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Helcim: Helcim charges a monthly fee and is ideally suited to growing and established businesses.
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FlagshipMerchantServices: One of the first to axe hidden monthly fees, though Flagship isn’t transparent about its pricing.
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PayPal: One of the most user-friendly and easiest to set up, though known for freezing merchant funds and siding with the customer.
Related: Payment Depot vs. PayPal: Which is the Best Payment Processor for Your Business?
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Stripe: Stripe is a highly customizable platform that requires technical resources, making it ideally suited to enterprises and larger businesses.
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Fiserv: Expensive hardware and account fees but affordable processing rates for taking credit card payments.
How to Choose a Merchant Account Provider
With, what seems like, endless options and deals it can be a disheartening task, BUT choosing a merchant account is such an important part of your business! It’s so easy to choose something that doesn’t suit your needs or ends up costing an arm and a leg.
Follow these steps to choose the merchant service provider that is best suited to your company.
Assess your business needs
Understand your business requirements, including transaction volume, industry type, and preferred payment methods. This information guides you in selecting a merchant account provider capable of handling your workload efficiently, complying with industry-specific regulations, and supporting the payment methods preferred by your customers. Matching your business requirements with the provider’s capabilities ensures smooth payment processing and enhances customer satisfaction.
Do your research
Research. Research. Research. I can’t emphasize enough how important it is to do your research when you’re choosing a merchant account. Explore various merchant account providers to compare their offerings, reputation, and reliability.
So many companies in the industry get away with overcharging because people fail to read the fine print. The original offer they advertise is usually only the tip of the iceberg when it comes to pricing.
Hidden in the fine print are the higher rates, extra processing fees, and stipulations you didn’t even realize you needed to think about. Being uninformed about credit card processing services and your merchant services payment processor is the quickest way to lose your hard-earned money. Be sure to read, thoroughly, all of the documents you’re given!
Consider fees
Evaluate the provider’s fee structure, including setup fees, transaction fees, and monthly service charges. Look for transparent pricing to avoid surprises and hidden costs that can impact your bottom line. Ensure you understand the terms of the fees and how they apply to your business operations.
Comparing fee structures across different providers allows you to choose the one that offers the most competitive pricing and aligns with your budget while providing the necessary services and support for your business.
Review contract terms
Reviewing contract terms is crucial. Scrutinize details like contract length, termination fees, and any restrictions or limitations. Understand the commitment you’re making and the consequences of early termination. Look for flexible terms that accommodate your business needs and growth plans.
Beware of hidden clauses or ambiguous language that could lead to unexpected expenses or limitations on your operations. Clarify any uncertainties with the provider before signing to ensure you’re comfortable with the terms and confident in your decision.
Evaluate security measures
When evaluating security measures, prioritize providers with comprehensive safeguards for protecting sensitive financial data. Look for features such as encryption, tokenization, and PCI compliance to mitigate the risk of fraud or data breaches. Assess the provider’s track record and reputation for security, including any certifications or audits they undergo.
Additionally, inquire about fraud prevention tools and protocols they offer to further enhance security. Choosing a provider with robust security measures helps safeguard your business and instills confidence in your customers’ data protection.
Check compatibility
Ensure the provider’s services align with your business operations by verifying compatibility with existing systems and support for preferred payment methods. Seamless integration streamlines processes and enhances efficiency. Also, supporting diverse payment options ensures convenience for your customers, promoting satisfaction and loyalty.
Assess customer support
Assessing customer support involves testing responsiveness and expertise. Reach out to the provider with inquiries or issues to gauge their ability to assist you effectively. Look for prompt, knowledgeable support representatives who can address your concerns promptly, ensuring smooth operations and timely resolution of any issues that may arise.
Read reviews and get recommendations
Gather feedback from fellow businesses and online reviews to assess the provider’s reputation and reliability. Insights from other users can offer valuable perspectives on the provider’s performance, customer satisfaction levels, and overall trustworthiness, aiding in your decision-making process.
Consider additional services
Consider additional services provided by the merchant account provider, like fraud protection, chargeback management, and analytics tools. Assess their relevance and value for your business needs. These supplementary services can enhance security, streamline operations, and provide valuable insights for optimizing performance and mitigating risks.
Make an informed decision: After thorough research and consideration, choose a merchant account provider that best meets your business needs, offers competitive pricing, and provides reliable service and support.
Consider Which One Would Fit Best with Your Business
Not all credit card processing companies are created equal, so it’s extremely important to ask yourself this question when choosing a merchant account. Each company features different rates, but a lot of companies only offer their lowest rates on certain types of transactions. This is where you need to map out what type of transactions you do and if the majority of yours would still qualify for that good deal, otherwise, you’ll be paying double or triple the original advertised rate.
Further, business owners should ask themselves whether this company is one they enjoy doing business with. Has your experience been positive so far? Would you want to go to them for customer support? If you can’t answer yes to these questions, there’s no deal that makes up for poor service.
Unlike most merchant services providers, Payment Depot has a significant amount of positive feedback and very few complaints from merchants. In fact, Merchant Maverick reports that many merchants have even taken the time to post positive comments about Payment Depot merchant services.
Moving Forward With Payment Depot
Choosing the best merchant account provider can keep your large or small businesses safe and profits in your pocket. Payment Depot offers interchange plus pricing tailored to your business needs and no set-up or cancellation fees. With Payment Depot and our transparent pricing model, you’ll gain a clear line of sight into your payment processing costs, helping you save money and make well-informed business decisions.
Need to do some research about merchant services and credit card processing, just in general?
Here are a few links to get you started with selecting a credit card processing company and payment processors:
Get in touch with the Payment Depot team and we’ll run a free analysis of your merchant account options to help you find the best payment processing fit for your business.
Quick FAQs about Merchant Account Providers
Q: What is a merchant account provider?
A merchant account provider is a company that enables businesses to accept electronic payments, such as credit and debit card transactions. They provide a bank account known as a merchant account, which acts as an intermediary between the customer’s bank and the business’s bank, facilitating the transfer of funds.
Q: Why do small businesses need a merchant account provider?
Small businesses need a merchant account provider to accept credit and debit card payments, which are the preferred payment methods for most consumers. Merchant account providers offer the necessary infrastructure to process transactions securely and efficiently, helping businesses expand their customer base by accommodating various payment options.
Q: What are the benefits of using a merchant account provider?
Merchant account providers offer numerous benefits, including faster payment processing, improved cash flow, fraud protection, and access to additional services like mobile payment solutions and analytics tools. These services can help businesses manage transactions more efficiently and enhance customer satisfaction.
Q: How can a business choose the right merchant account provider?
To choose the right merchant account provider, businesses should assess their specific needs, including transaction volume, payment method preferences, and industry requirements. Evaluating providers based on their fee structures, security measures, compatibility with existing systems, and customer support can also guide businesses in making an informed decision.
Q: What are some common fees associated with merchant account providers?
Common fees include application and setup fees, monthly service charges, transaction fees, equipment costs, and additional fees for PCI compliance or chargebacks. It’s crucial for businesses to read the fine print and understand the fee structure to avoid unexpected costs.
Q: What security features should a merchant account provider offer?
Merchant account providers should offer robust security features such as encryption, tokenization, and PCI compliance to protect sensitive financial data. Additional fraud prevention tools, like two-factor authentication and end-to-end encryption, are also essential to safeguard transactions.
Q: Can merchant account providers offer additional services?
Yes, many merchant account providers offer additional services, such as mobile payment solutions, virtual terminals, cashback options, and funding services like merchant cash advances. These services can help enhance business operations and customer convenience.
Q: What is a payment gateway, and do I need one?
A payment gateway is a virtual platform that facilitates online transactions by connecting the merchant, the customer’s bank, and the credit card processing company. Businesses planning to process online payments will need a payment gateway, which many merchant account providers offer.
Q: How do merchant account providers help with fraud prevention?
Merchant account providers help prevent fraud by implementing security measures such as encryption, tokenization, and constant transaction monitoring. These features reduce the risk of data breaches and unauthorized access, ensuring safe and secure payment processing for businesses.
Q: What should businesses consider regarding contract terms with merchant account providers?
Businesses should review contract terms carefully, considering the length of the contract, termination fees, and any restrictions. Understanding these details helps avoid unexpected costs and ensures the agreement aligns with the business’s operational needs and growth plans.
