Understanding the Basics of Merchant Services

In the modern era, where digital transactions play a pivotal role in everyday business, merchant services have emerged as the backbone of commerce. These services empower businesses to accept card payments from customers, making transactions seamless and efficient.

However, for newcomers and even experienced business owners, merchant services can seem complex and intimidating due to their intricacies. This comprehensive guide aims to demystify the concept, providing a clear understanding of the basics of merchant services.

What are Merchant Services?

Merchant services refer to a broad category of financial services intended for use by businesses.

In a nutshell, they enable businesses to accept and process electronic payments, mostly through credit and debit card transactions. These services encompass a variety of processes, including payment processing, obtaining sales information, authorizing transactions, and the secure transfer of funds between a customer’s and merchant’s account.

The Role of Merchant Service Providers

Merchant service providers, also known as MSPs, are the entities that provide businesses with the tools and services necessary to accept and process card payments. They may be banks, independent sales organizations, or financial institutions.

MSPs offer a range of services such as payment gateway provision, point-of-sale (POS) systems, credit card terminal leasing, and online payment processors.

Key Components of Merchant Services

Merchant services are comprised of several components working together to facilitate seamless transactions behind the scenes. What seems simple on the surface is actually a detailed network of moving parts.

The Merchant

The merchant is the business accepting payments. If you’re processing payments, you’re a merchant.

Merchant Accounts

A merchant account is a type of bank account that allows businesses to accept payments in multiple ways, typically debit or credit cards. It acts as an intermediary between a business’s bank account and a customer’s credit card company or bank, holding funds from card sales before they’re transferred to the business’s bank account.

If you want to accept card payments, you need a merchant account.

Payment Networks

Payment networks are credit card companies, like Visa, Mastercard, American Express, and Discover, that transmit and settle card payments between banks.

Issuing Bank

The issuing bank is the actual bank that issued the customer’s credit or debit card they used to pay you.

Acquiring Bank

This is the bank that handles the merchant’s side of the transaction.

Payment Processors and Merchant Services Providers

Payment processors are companies that handle credit and debit card transactions. They communicate the payment information from the customer to the merchant, then transfer funds from the customer’s account to the merchant’s account.

Point-of-Sale (POS) Systems

A POS system is a combination of software and hardware that allows businesses to conduct and manage sales. They’ve evolved from simple cash registers to sophisticated systems that manage inventory, customer relationships, an sales analytics.

Payment Gateway

A payment gateway is an e-commerce service that authorizes card payments for online and offline businesses. It is the equivalent of a physical point of sale terminal located in most retail outlets. A payment gateway encrypts sensitive information, such as credit card numbers, ensuring that information passes securely between the customer and the merchant.

Check out our full list of merchant services terms if you want to learn more about terminology and common language.

How Payments Are Processed

When a customer pays with a credit or debit card, there’s a lot going on behind the scenes. While simple on the surface, there are a lot of moving parts that have to work in tandem nearly instantaneously.

In most cases, the steps include:

1. Transaction starts at the point-of-sale when the merchant enters the cardholder’s information into a terminal (in person) or payment gateway (through a shopping cart) connected to the merchant services provider
2. The payment gateway encrypts the cardholder information and sends it to the processor
3. The processor verifies that the funds are available from the issuing bank
4. Once approved, the transaction gets sent through the card network
5. The card network reimburses the processor for the transaction amount
6. The processor deposits the funds into the merchant’s account, minus process fees
7. The card network bills the cardholder’s issuing bank
8. The issuing bank pays the card network and charges the cardholder

Merchant services providers simplify the process for you as the merchant so you don’t have to worry about each of the individual steps involved. Instead, you simply charge your customers and get paid directly in your bank account a few days later.

Types of Merchant Services

There are a few main types of merchant services that businesses need depending on their payment needs:

• Storefront Point-of-Sale: In-person card payments using a terminal or POS system
• Mobile: Accepting payments on mobile devices with a basic card reader
• Ecommerce: Accepting online card payments through a shopping cart
• Keyed-in: Using a virtual terminal to key in credit card information

Most merchant services providers offer some combination of these services or partner with third-party platforms to deliver these services.

Understanding Fees and Pricing Models

Merchant services come with a variety of fees and pricing models. Common fees associated with these services include transaction fees, monthly fees, setup fees, and PCI compliance fees.

Transaction Fees

Every time a business processes a credit or debit card transaction, they’re charged a fee. There are different types of transaction fee structures, including:

• Interchange plus: The MSP charges a small percentage on top of the interchange rate
• Fixed-rate: Typically a percentage of the transaction plus a fixed amount (called an authorization fee). You’ll pay a different rate depending on where you accept the payment
• Wholesale: You only pay what the card network charges with no markups
• Zero cost processing: Also known as surcharging, you pass the credit card fee to your customers

The best structure for you depends on your average transaction size, business model, and volume.

Monthly Fees

Most MSPs charge a monthly fee for the services and software they provide. This fee covers the use of the payment gateway, customer service, account maintenance, and access to online reporting.

Setup Fees

Some MSPs charge a one-time setup fee when a business opens a new merchant account.

PCI Compliance Fees

Payment Card Industry (PCI) compliance is required for any business that accepts card payments. Some MSPs charge a separate fee for this, while others include it in their monthly or annual fees.

Chargeback Fees

Chargebacks happen when a charge is disputed. If this happens, a $15 – $30 fee may apply.

Other Misc. Fees

You may also be charged an early termination fee if you break your contract early, statement fees for monthly statement generation, gateway fees for using a third-party gateway, daily batch fees, and more.

Security in Merchant Services

Security is a critical aspect of merchant services. As they involve sensitive customer information, businesses and MSPs must adhere to stringent security standards to protect this data.

The Payment Card Industry Data Security Standard (PCI DSS) is a set of security standards designed to ensure all companies that accept, process, store, or transmit credit card information maintain a secure environment.

The Future of Merchant Services

With the rapid advancement of technology, merchant services continue to evolve. Mobile payment solutions, contactless payments, and e-wallets are becoming increasingly popular. Cryptocurrencies are also making their mark in the payment landscape, with some MSPs beginning to facilitate these transactions.

Conclusion

Understanding the basics of merchant services is crucial for every business owner in the digital age. As customer preferences shift towards electronic payments, merchants need to keep up with these changes to meet customer expectations and remain competitive.

Merchant services, with their myriad of components and processes, may seem daunting at first. However, once you understand their core elements and workings, they become less of a challenge and more of an opportunity to streamline operations and enhance customer experiences.

From facilitating electronic transactions, ensuring secure data handling, to adapting to the ever-evolving landscape of digital payments, merchant services unquestionably play a pivotal role in modern commerce. By leveraging these services, businesses can open new avenues of growth, efficiency, and customer satisfaction.