When a business accepts credit or debit cards for purchases, those transactions must go through a series of processes so money makes its way from the cardholder to the merchant making the sale.
- The customer enters their credit card number in an online shopping cart; or in person taps, swipes or inserts their credit card or debit card into a checkout device to pay for a purchase. (Or the customer may use a mobile wallet for the payment.)
- Information is transmitted by the payment processor to the card issuer. The transaction will be approved if the customer has sufficient funds or available credit and the transaction doesn’t appear fraudulent.
- Funds must make their way from the customer’s account (added to a credit card balance or debited from a bank account for a debit card) and credited to the seller’s merchant account.
- If a customer later disputes a credit card purchase, the dispute must be investigated and a refund may be issued to the customer (and taken from the seller’s account).
Merchant services is a broad term that refers to companies that facilitate electronic payments for sellers, including credit and debit card sales.
In addition to facilitating payment processing, these companies also provide important payment security functions and help process customer disputes.
In the payment processing world, a merchant is the business that has something to sell. Some sellers are wholesalers (selling in bulk to businesses that will resell their products) and some are retailers (selling directly to consumers). Ecommerce merchants, or ecommerce retailers, sell online.
Don’t assume that because you have a business bank account you have a merchant account. The former refers to an account where the business will receive deposits and make payments. The merchant account, on the other hand, is used for electronic payments such as credit or debit card sales, as well as ACH payments.
Think of it this way. If you operate a food truck, you don’t ask your customers to deposit money into your business bank account every time they make a purchase. Instead you use some type of service to accept payments, and the bulk of the money collected makes its way to your merchant account, and then to your business bank account.
It’s worth noting that the terms “merchant service providers” and “payment service providers” are sometimes used interchangeably. Payment Service Providers also provide merchants with the ability to process payments, but the term is usually associated with services that make it easy for merchants to accept online payments such as PayPal, Stripe or Square.
There’s a lot that happens between the point where a customer makes a purchase with a card or other payment technology, and when money finally makes it to the seller’s account.
Merchant account services may include:
- Point of sale (POS) system: This is the system that allows the customer to pay for a purchase, and can include a reader or terminal where customers tap, swipe or insert their card when making a purchase.
- Payment gateway: This provides authorization for credit and debit card purchases.
- Payment processing: Front-end and back-end processors provide services to authorize and settle payments.
- Automated clearinghouse (ACH) payment processing: These are transfers between financial institutions.
- Electronic Benefits Transfer (EBT) payments. Often referred to as “food stamps,” these payments must also be processed by merchants who accept them.
A business will apply for a merchant account with a merchant services provider or financial institution such as a bank. If approved for an account, they will then be able to accept online payments with a virtual terminal, or in-store using a POS.
Most merchant processors use one or more of these pricing methods:
- Monthly Subscription. This fee is charged each month regardless of sales volume. Accounts with higher monthly fees typically include more services, and may reduce transaction fees. There are some processors that charge no monthly fee, but this isn’t always the cheapest option.
- Interchange Plus Pricing: Interchange fees are fees that must be paid by the merchant’s bank to the card issuer’s bank. They are set by the card networks (such as Visa and MasterCard). They can vary depending on the type of transaction, type of card used (i.e. rewards card) as well as myriad other factors. With interchange plus pricing, that cost is marked up by a specific amount, which may be a percentage of the transaction plus a small amount, or just a small amount.
- Flat-rate Pricing: This type of pricing is common. The merchant services company will usually charge a percentage of the transaction amount plus an additional markup that varies depending on the type of transaction (online versus swiped or tapped in-person, for example).
- Tiered Pricing: Pricing is based on transaction codes that identify the type of transaction. The lowest-risk (and lowest cost) transactions are considered qualified transactions, while the highest risk (and highest cost) transactions are considered non-qualified. Mid-qualified falls in between. This type of processing can be confusing and opaque, as sellers often find out after the fact how a transaction has been priced.
- Additional Fees: There can be a whole laundry list of additional fees. For example, chargeback fees (when customers dispute transactions and get a refund) are often $25.
It can be hard to really compare costs, and for that reason, newer businesses may want to be careful about entering into long-term contracts until you have a strong track record that will allow you to shop for the best account.
When choosing a merchant service provider, these factors can help you narrow down your choices:
Are you a fit with the provider?
Some merchant services providers don’t work with brand new startups or businesses they consider to be high-risk merchants. Some are a better fit for businesses primarily with e-commerce stores, versus physical stores (or vice versa).
How many payments do you anticipate processing? (This will help the provider understand whether you will be considered a high-volume or low-volume merchant.) It’s important to find a credit card processing company that is happy to work with businesses like yours.
What are the costs?
Cost will be an important factor. As mentioned above, there are a variety of pricing models for merchant accounts. If your business is brand new, you may have a harder time figuring out which type of pricing is best for your business. You’ll have to estimate your volume of debit and credit card payments the best you can.
Established businesses can look at their current processing volume. A new provider will often provide a free cost comparison. In addition to processing fees, don’t forget to ask about other fees such as early termination fees and chargeback fees.
How will customer support work?
You may need help setting up your account, and if you run into problems— particularly with fraud— you’ll want to be able to reach out to someone. In addition to understanding when and how support is available (email, chat, or phone), reviews on sites like Trustpilot and TrustRadius can provide some insights into customer service.
What payment options do you want to offer?
Your customer base will determine the payment methods you want to offer. Do you just want to accept credit card and debit card payments? And if so, do you want to allow your customers to pay with Visa, Mastercard, American Express and Discover? What about crypto or other currencies?
Will all payments take place online or will you also want to accept in-person payments, contactless payments or mobile payments like Apple Pay or Google Pay? If so, what equipment do you need, such as portable card readers or full-feature cash registers? If you already have a POS system, will it still be compatible?
What security protections are offered?
Nothing can sink a business faster than fraud. It is absolutely crucial that you understand the fraud prevention and detection services merchant services provide. At a minimum, merchants need to comply with PCI standards to protect cardholder data and card information. For most businesses, it’s not a matter of whether you will be affected by fraud, but when and how much. Catching it quickly is imperative.
You must apply to open a merchant account. Credit card fraud is a significant and growing problem, and merchant processors need to avoid facilitating fraud. That means they will require documentation to help ensure your business is legitimate.
Some merchant processors streamline parts of the application process, but expect to be asked for various types of information when you apply. These may include:
Information about your business including:
- Legal name and DBA
- Business address and phone number
- Tax ID number/Employer Identification Number (EIN)
- Business license
- Articles of incorporation
- Business bank account statements
- Address verification (utility bill, for example)
- Industry
- Types of products or services you sell
- Sales volume
- How you’ll accept payments (in-person, online, by phone or a combination). Online transactions are more risky than in-person transactions, for example.
There may be a credit check, including personal credit score and or business credit. You may be turned down if you have an active bankruptcy, for example.
Merchant services companies may exclude certain industries (often referred to as “high risk” industries). Pharmaceuticals, travel and tourism, gambling, alcohol, investment schemes and other businesses are often flagged as high risk. High-ticket subscriptions, coaching programs or investment advice may also fall under this category.
New businesses without a track record can find it harder to get a merchant account and may be able to start with a service like PayPal that generally makes it easy to accept payments online.
