Merchant Services 101: Everything You Need to Know

If you want your customers to be able to use a credit card to pay for your goods and services — whether online or in-person — you’ll need a merchant services provider. Merchant service providers facilitate non-cash transactions between customers and businesses. If you have ever swiped a credit card at a store, you have dealt with a merchant services provider. The role of merchant services might be vital for your business, so here’s everything you need to know about these providers.

What are merchant services?

A merchant services provider acts as the money middle-man between customers and merchants. Merchant services can also be considered credit card processing because that’s what these providers do. Without a merchant services provider, your business can’t accept non-cash transactions. The provider transfers money between your customers’ bank accounts, also known as the issuing banks, and your own, also known as the acquiring bank.

Here’s what happens in the seconds after your customer swipes their card:

  1. The merchant services provider receives the sales information from the merchant, a.k.a. your business.
  2. It checks with the issuing bank that the sale can go through and receives authorization.
  3. The merchant services provider collects the money for the sale from the issuing bank.
  4. The money for the sale gets sent to the acquiring bank, which is your business’s bank account.

Down to business with merchant services

  • Fast and straightforward payment: Modern clientele expect to be able to pay using many methods. By using a merchant services provider, your customers can pay using credit, debit or electronic transactions. Operating as an all-cash business these days may put your bottom line at risk.
  • Maintain a secure environment: All businesses are obligated by law to protect customers’ data when they swipe a credit card. Remaining compliant with the Payment Card Industry Data Security Standard (PCI) is vital for the safety of your customers and the longevity of your business. A merchant services provider can offer you this customer protection.
  • Gives your business a POS system: A point-of-sale system is essential for many businesses. It consists of the terminal you use to accept card payments along with the software running it all. With a POS system, you can take payments, run reports, reconcile your end-of-day totals and more. It’s the lifeblood of running your business, and a merchant services provider should set you up with the hardware and software you need to make each sale.
  • Payment gateways: If you’re interested in making online sales, you will need what is called a payment gateway. Merchant service providers can give you this digital tool to expand your sales to the internet.
  • Mobile processing: Some merchant services providers allow you to connect your sales POS to a mobile phone app and process sales on the go. If you run a business that requires you to be out and about making sales, this could be the perfect solution. You can head to trade shows, farmers’ markets or public events knowing you can process payments using your phone.
  • Quick access to funds: A merchant services provider gives you the funds in your bank account within 48 hours. Some newer services, such as Stripe and Paypal, can give you the money even quicker than that, but they may charge an additional fee.

Pros of merchant services

The biggest plus of using merchant services is the opportunity to take credit and debit card payments, as well as to sell your products online. Many companies consider this option essential to maintaining their customer base and continuing to expand. Another significant benefit is keeping your business PCI compliant. Merchant service providers generally keep you in line with the law and secure your customers’ sensitive data against thieves.

Additionally, many merchant services providers can connect their POS system with online accounting tools so you can track payments and sales, as well as view late invoices. Some providers will also connect to your business accounting software like Quickbooks or Freshbooks.

Cons of merchant services

The most significant risk to your business using merchant services is the associated fees. All merchant services charge what they call a discount rate, which is a percentage of each credit card transaction. Visa, Mastercard and Discover set the discount rates for their cards, and the rates you get depends on which company you use, what services you sign up for and how you utilize those services. Card associations like American Express and Diners Club set their own rates.

Your rate also depends on the type of business you run. Industries such as warehouses, supermarkets, gas stations and fast food establishments have specially assigned rates. Look into the discount rates and all fees associated with using a merchant services provider before selecting one. Read the fine print so you don’t get stuck with unexpected charges, like a minimum processing fee or a PCI-compliance fee.

Are merchant services right for my business?

Merchant services can be perfect for a business that wants to expand its reach online or in-person. If you are looking to grow your business, offering multiple methods for payments is a fantastic start. Modern consumers expect companies to cater to their lifestyles, so any company that doesn’t want to stand in its own way might want to choose the best merchant services provider for them.

However, not every business needs a merchant services provider, and not all providers are best for every business. If you’re running a fully online store, one of the online companies like PayPal or Stripe may be the best for you. Setup is more straightforward, and fees can be lower, but do the math before making your pick. If your company operates only brick-and-mortar stores, a more traditional merchant services provider through a regular bank may be a better way to go. And, of course, if you prefer to run a cash-only business, there’s no need to look into merchant services providers at all.

The bottom line

Overall, merchant services providers offer many benefits to customers and businesses alike. They facilitate simple payments for the goods your business is trying to sell, as well as ensure the safety of your customers’ data. If you want to, for example, take your business online, a merchant services provider can help you do that. However, do your research. Take note of any fees associated with each provider you’re considering, and make sure you know the exact discount rate you would pay per transaction. That way, you won’t end up paying more than you expected due to higher rates and fees.

Tiffany Verbeck

Tiffany Verbeck is a personal finance freelance writer. She uses her master’s degree in writing to help businesses tell their stories better. Her full portfolio is available at