Everything You Need to Know About Merchant Services Providers

By: Alexandra Sheehan

Today’s consumers have more choices than ever before. Which brands they do business with, where they interact with companies, even how they pay for products and services. Gone are the days of a cash-based society. We’re increasingly using cards and innovative payment methods, and businesses have to keep up.

Credit card payments grew 10% from 2015 to 2016, while debit cards came in with a growth rate of 6%. Accepting card payments doesn’t just open yourself up to more business. In fact, 43% of consumers actually prefer multiple payment and billing options.

So, how do you set your business up to accept credit card payments, and why is this so important? The answer is in merchant services providers, the companies which provide the tools and technology necessary to turn a card swipe into dollars in your bank account.

What are merchant services providers?

Merchant services providers are companies that provide tools (hardware and software) for businesses to be able to accept, process, and make payments. Merchant services providers focus on accommodating payment types which aren’t cash or paper check, so things like credit and debit cards, online payment, and mobile pay are where these companies come into play.

Types of merchant services providers

There are many different types of merchant services providers. Some offer multiple “types” as all-in-one solutions, while others specialize in just one or a select few.

Related: How credit card processing works >

Merchant account providers

Merchant accounts are bank accounts where money from credit card payments goes. The merchant account provider offers the bank account for the money which comes from credit card payments to be deposited to. The funds are then transferred from the merchant account to your other business bank account(s) where you hold money.

Some merchant account providers deliver both the payment processing and merchant accounts for small businesses, while others focus on just the account. First Data is one example of a merchant account provider. 

Payment services providers (PSPs)

PSPs offer the ability to accept and process credit and debit card payments. You can use a PSP with or without a merchant account. A PSP essentially acts as the liaison between the different entities involved in payment processing. Examples of PSPs include Payment Depot and Square merchant services.

Payment gateway providers

A payment gateway is what businesses use to accept online payments. It connects a website and the payment gateway provider’s processing networks to transfer the information and funds associated with the transaction. Payment gateway providers may also offer merchant accounts, to which online payments will be deposited. Or you can choose to use a merchant account you already have or will set up with another merchant service provider. Authorize.net is a good example of a payment gateway provider.

Credit card terminals

Credit card terminals are tangible tools that businesses which conduct in-person sales use to process payments. These terminals accept credit and debit card payments from a physical card. A credit card terminal connects to processing networks to communicate the transaction. You can choose to purchase or lease a credit card terminal from a merchant services provider.

Point-of-sale systems

A POS system is a hardware-software combination which processes credit and debit card payments. The POS is typically more robust than a credit card terminal; it often comes with additional features such as inventory management, customer relationship management, and RFID scanning. There are also mobile POS (mPOS) options which work on tablets and phones to give associates more mobility in-store. These are well-suited for pop-ups and event selling.

Examples of POS providers:

For more information about POS systems, check out these comparisons:

Virtual terminal

A virtual terminal is like a digital version of a credit card terminal or POS. Businesses use this software to input credit and debit card details to process transactions. It’s essentially like the consumer-facing payment process on an ecommerce site; only in this context, the seller enters the payment information.

Related: Quickbooks Credit Card Processing: Reviewing Intuit’s Merchant Services >

Online shopping cart

The online shopping cart software is consumer-facing and used on ecommerce sites so customers can enter their own payment information to make a purchase. It’s a self-serve version of the virtual terminal. Many merchant services providers have their own templates, and some also allow for customization to match your site’s look and feel (and optimize for conversions).

Some examples of online shopping part providers:

eCheck (ACH) processing

eCheck processing, ACH, and direct deposits are also a form of payment processing, and many merchant services providers will offer this in addition to whatever other services you’re using. This comes into play mostly in regards to payroll processing and alleviates the need to physically go to the bank and write or deposit checks.

Honorable mention: gift cards and loyalty program

Okay, so maybe gift cards and customer loyalty programs aren’t technically merchant services, but they are very similar and growing in popularity. The gift card industry is a $127 billion market, and nearly three-quarters of consumers purchase one during the holiday season — and 84% of consumers are more likely to make repeat purchases with a brand that offers a loyalty program. These are great ways to generate awareness and increase sales. Many POS systems, for example, have these features built-in.

Understanding merchant services pricing and fees

Merchant services fees can be confusing. There are many different fee structures, and companies aren’t always upfront about hidden charges you might be expected to pay.

Related: Here’s how to understand Square’s fees >

If you don’t understand the fees, you might end up overpaying, throwing your hard-earned money out the window. Typically, you’ll see four types of fee structures:

  • Flat rate: This is when you pay a set fee (typically a percentage) for every transaction. Often, companies will charge a certain amount of money for each transaction, plus a percentage of the transaction amount. This is one of the most straightforward pricing structures and is easy to get started with.
  • Tiered rates: These fees are applied based on the card type used for the transaction: qualified (standard credit and debit cards), mid-qualified (membership rewards and loyalty cards), and non-qualified (corporate and international cards). This is tricky because many providers advertise their lowest rate, though you may be responsible for paying higher fees for some transactions. This is better for B2B businesses.
  • Interchange plus: Major credit card companies (Visa, Amex, etc.) charge an interchange rate on every transaction. Merchant services providers will apply that fee, as well as one of their own. This often works out best for smaller businesses.
  • Membership fees: Sometimes referred to as direct interchange, a membership subscription model requires a flat regular fee (typically monthly or annually) for an unlimited number of transactions. This is an attractive option because payment processing fees are predictable and unchanging, and the merchant services provider won’t take a cut from your profit.

Related: Here’s how to understand PayPal’s fees >

Choosing a merchant services provider for your business

As you can see, there are tons of options out there, and we’ve only just scratched the surface with the examples listed above. The best place to get started is to compare merchant services provider review sites so you can get a feel for which ones are the highest-rated. Focus on these options first in your vetting process.

Beyond cost, perhaps the most important consideration is making sure it’s compatible with your other systems and tools — both ones already in place and ones you plan to implement. Incompatibility can lead to broken processes, data discrepancies, and haphazard business operations. It’s best to choose a tool which plays nicely with others.

Related: How to choose a credit card processor for your business >

Once you’ve narrowed down a list of options that will work logistically, go through this list of questions:

  • What are the additional fees in addition to processing fees? Think of things like monthly service fees, installation and setup, chargebacks, international payments, PCI compliance, batching, and early termination.
  • What’s the average wait time for customer service? You’ll want to know that support is accessible and helpful, not just another headache. Also ask about customer support fees.
  • Is there a minimum? What are the fees if I don’t meet that minimum?
  • What are the funding times? This should be 24–48 hours.
  • How often are fees debited? Can I choose this frequency?
  • What reports will I be able to generate?
  • What are your business development plans? Any new features in the works?

After you’ve gathered this information, do a cost-benefit analysis of your top choices. Sometimes it comes down to going with your gut — as long as all your necessary boxes are checked, of course.

Moving forward with the best merchant services for small business

“Best” is relative. The top choice for a merchant services provider(s) really boils down to your unique business needs and goals. What are your pain points, where are you going, and which options best accommodate those? Understanding how pricing works can ensure you find the most cost-effective but revenue-driving option for you.

If you’re shopping around for a merchant services provider and need help deciding which option is right for you, get in touch with the Payment Depot team and we’ll run a free analysis of your statement or proposal to help you figure out the best decision for your biz.