What Are Merchant Services? The Essential Guide for Small Businesses

There’s a whole glossary worth of terminology about payment services in the retail industry. New retailers often wonder, “What are merchant services?” The answer isn’t too complicated, but there are a lot of moving parts.

Merchant services is an umbrella term that’s used to refer to a wide range of payment processing functions. It refers to your merchant account, where you’ll process eCommerce transactions and those at your physical point of sale.

In this article, we’ll take it back to the basics by clearly defining merchant services. We’ll review payment methods, pricing models, and how to choose the right merchant services provider for your small business. 

Let’s delve in.

How Does Credit Card Payment Processing Work?

Credit card payment processing is pretty intuitive, right? Wrong. Credit card processing involves multiple entities, and each card transaction has a unique journey. 

Your customer might pay with their debit card, credit card, or a payment gateway for eCommerce transactions. All of these require a merchant account and a payment processor to process card payments.

In-person payments require your customer to swipe, tap, or manually enter their card information at your POS system/card reader. Your payment processor then sends the payment data to your customer’s issuing bank to verify funds. Once funds are verified, the money is sent to your merchant bank account. The process usually takes between 2 to 3 business days.

But there’s another way to process payments that’s quickly growing in popularity. NFC or near-field communication payments are also called contactless payments. The most common are Apple Pay and Google Pay. The main difference is that customers can pay with a single click for online payments. And they just have to hold up their phone to share payment data at your point-of-sale system.

Electronic payments work pretty similarly for card payments like Visa, Mastercard, Discover, or American Express. Except, instead of swiping, your customer enters their card information manually at your payment gateway.

What Are Merchant Services?

Merchant services refer to everything you need to begin processing payments at your SMB or retail store. Your business needs may be unique, but all business owners need to partner with a financial services provider in order to process payments.

Your payment solutions provider fulfills a wide range of functions that vary depending on the payment options you offer. Your processing fees will also vary by provider and transaction type. This is true whether you process credit card payments, debit card transactions, gift cards, or NFC payments.

Common Merchant Services Offerings

As discussed, the term “merchant services” refers to a wide range of functions to help business owners process payments. Let’s review some of the most common terminologies.

• Payment processing: This term references all of the financial services and customer support required for retailers to process payments. Payment processing refers to the whole she-bang, whether payments take place through an in-person or virtual terminal.

• Merchant account: This is the account that you have with your payment services provider. The term “merchant account” may also be (incorrectly) used to refer to your merchant bank account or receiving bank.

• Point of sale (POS): Your POS is comprised of hardware such as your physical cash register. It also refers to all of the software that comprises your SMB’s payment processing suite. Software functions include things like inventory tracking, report generation, PCI compliance adherence, employee scheduling, etc.

• Payment gateway: This refers to the software you use to accept online payments on eCommerce transactions. It’s not a physical piece of hardware like your POS and card reader. Instead, it’s the digital verification system that interfaces between your merchant bank and your customer’s issuing bank to transfer funds.

• Card readers: Card readers are small mobile data entry machines. They’re usually handheld, whereas POS stations are stationary. You can use card readers to shorten line wait times at your physical store. Or to take payments on the road for mobile businesses.

• Virtual terminals: This is your online checkout page. It’s where customers enter their payment data for verification and transference of funds.

• Loyalty programs: Loyalty programs are how you incentivize repeat purchasing at your SMB. It may be cashback on certain purchases, a gift with purchase, or a points system. What matters here is finding the right software, right off the bat, to run your loyalty program efficiently.

Merchant Services Costs and Fees

Each merchant services provider has a slightly different fee and payment structure.

Tiered pricing structures are best for large businesses. Tiered pricing charges a monthly fee, rather than or in addition to your transaction fee. Tiered pricing structures break transactions into three main buckets—qualified, mid-qualified, and non-qualified. You’ll pay the highest fees on non-qualified transactions.

Interchange-plus pricing is great for SMBs. With interchange-plus pricing, you’re charged a flat rate transaction cost and an interchange fee. The interchange fee is fixed and is charged by the credit card processing company. With interchange-plus pricing, you’re only paying for the credit card processing that actually transpires. So you don’t wind up paying for services you don’t use, or paying more if you don’t meet transaction minimums.

Payment aggregators are businesses like Stripe, PayPal, or Square. Payment aggregators make it easy to get up and running in just a few minutes. But there’s a catch: payment aggregators also have higher processing fees and fewer security measures. They can also shut down or suspend your account at the slightest suspicion of fraud.

But those aren’t the only variables that impact pricing. You’ll also be charged different rates for card-present and card-not-present transactions. Companies also charge differently for chargeback fees, which fall between $15 and $50 a pop. And you’ll want to keep your eyes peeled for hidden fees, such as termination fees, terminals, card reader rentals, etc.

How to Select a Merchant Services Provider for Small Businesses

Choosing a merchant services provider is one of the most important decisions you’ll need to make for your small business. It’s also one of the most research-heavy. Only one payment services provider has an A+ BBB rating and saves customers an average of $400 a month on credit card processing.

Payment Depot’s membership-based pricing structure is perfect for SMBs since you only pay a monthly fee regardless of the number of transactions you make. We are also PCI compliant, highly secure, and won’t shut down at a moment’s notice. With Payment Depot, your customer’s payment data is secure, payment processing is affordable, and you have complete peace of mind. See how Payment Depot can help your small business achieve its financial goals today!