Merchant services enable businesses to accept, process, and manage payments, which may result in smoother transactions and improved customer experiences.
- Merchant services enable businesses to accept multiple forms of payment, including credit cards and digital wallets.
- These services include tools like merchant accounts, payment gateways, and POS systems that work together to process payments.
- Costs may vary based on transaction volume, business type, and the specific services selected.
- Choosing the right provider may help improve efficiency, enhance customer experience, and support long-term business growth.
What Are Merchant Services?
Merchant services are a suite of systems and tools that allow businesses to accept payments, both in person and over the internet. This capability provides companies with the opportunity to expand payment capabilities and move business beyond the boundaries of cash.
How Do Merchant Services Work?
At a high level, merchant services connect a customer’s payment method to the business’s bank account. When a customer pays, the system transmits the payment details and verifies the transaction, after which it transfers the funds to your account. Funds reach the business’ bank typically within a few business days or sometimes fewer.
Who Uses Merchant Services?
Any business that wants to accept non-cash payments may use merchant services. This includes:
- Retail and eCommerce: Brick-and-mortar stores use merchant services for their payment terminals, while online brands may need options for accepting and verifying payments made online.
- Restaurants and hospitality: Point-of-Sale (POS) systems at tables, payment kiosks, and other customer convenience locations may enable companies to deliver better customer service.
- Service providers: Merchant services may help doctors' offices, contractors, and even freelancers receive payments without unnecessary delays.
- Subscription as a Service (SaaS): Merchant services may also help companies manage recurring payments more easily and may reduce delays or provide better support for declined payments.
Key Components of Merchant Services
Several different tools and services work together to help make accepting payments smoother.
Merchant accounts
A merchant account works to route funds from card transactions and deposit them into the business’ depository account.
Point-of-Sale (POS) Systems
POS systems combine hardware and software to process in-person transactions. These components include things like card readers, terminals, and the software that enables each sale. In addition to handling payments, many systems are compatible with software to support inventory tracking, real-time sales reporting, and customer management features such as purchase history and loyalty programs, helping businesses keep day-to-day operations organized.
Payment Gateways
Payment gateways let businesses accept online payments by transmitting customer payment information between the business’ website and its payment processor. When a customer enters payment details, the gateway sends the data for authorization to the payment processor, who then routes the request to the card network and/or issuing bank. The approval or a decline response is returned in reverse, typically in seconds, to complete the transaction.
Mobile Payment Solutions
Mobile payment solutions extend a business’s reach into the field. These tools and services enable a company to accept payments converting a mobile device or tablet into a payment device, instead of a full POS system.
Virtual Terminals
Companies that take payment virtually or over the phone may also benefit from virtual terminals. These provide the business an ability to manually enter customer payment information through a web-based interface, allowing businesses to process transactions without a physical card reader. Virtual terminals are often used for situations where the customer is not physically present.
Additional Features
Many merchant services providers offer or are compatible with additional tools that may support business operations, such as:
- Gift card and loyalty programs
- Reporting and analytics dashboards
- Recurring billing and invoicing
- Integration with accounting or inventory systems
How Merchant Services Work: Step-by-Step
Let’s go through the process of accepting payments through merchant services.
Process From Customer Payment to Business Funding
This is a simplified overview of what happens from the card swipe or tap to the moment funds arrive in your bank account.
- A customer initiates a payment for business’ goods or services using a card or digital method.
- Merchant services transmits the transaction information to the card network branded on the card. .
- The card network submits the transaction authorization request to the cardholder’s card issuing bank, who issues an approval or decline.
- The response is routed in reverse back to the merchant. If approved, the transaction is authorized. If declined, the merchant receives a decline notice.
- If transaction was approved, the card issuer routes funds from the cardholder account via the payment networks to the merchant acquiring bank. The merchant services provider then routes funds to its business customers.
- Funds are typically deposited into the business’s designated bank account, within one to three business days.
Benefits of Merchant Services for Businesses
Merchant services offer these tools to help reduce confusion and extend payment services beyond the usual boundaries of cash. Here are a few examples of those benefits.
Increased Sales Opportunities
Accepting multiple payment methods may help businesses capture more sales, including from customers who prefer cards or digital wallets over cash.
Enhanced Customer Experience
Providing multiple simple payment options may give customers a better experience overall with checkout, no matter how or where they’re completing the transaction.
Streamlined Business Operations
Many merchant services tools integrate directly with a business’s existing financial tools. This integration may make it easier to report to accounting and inventory systems..
Better Cash Flow Management
At its core, merchant systems streamline the payment process. Faster payment processing and predictable deposit timelines may help businesses better manage cash flow and plan for expenses.
Costs and Fees Associated with Merchant Services
Merchant services do typically require fees and may incur some related costs.
Common Fee Types
The cost breakdown usually involves a combination of a per-transaction fee and a monthly fee for providing the payment processing and other services. Some common fees include:
- Interchange fees: These are set by the payment networks and card issuers.
- Transaction fees: These are charged per transaction. For example, 2.60% of gross sale + $0.10 per swipe for standard or chip debit and credit cards and 3.45% of gross sale + $0.15 per transaction online, manually keyed, or payments entered through a virtual terminal.
- Equipment or hardware costs: Providers may sell or rent equipment for card payments or other hardware.
Factors That Affect Pricing
The final costs to accept payments may vary depending on:
- Transaction volume and average ticket size
- Time between sale and delivery of goods or services
- Payment types accepted (in-person vs. online)
- Contract terms and service features
How to Choose a Merchant Services Provider
It may help to consider a few different angles to choose the right merchant services provider.
Key Criteria
Merchant services may vary in their specific tools and pricing structure. To choose the right one, it may help to ask about:
- Overall cost and fee structure
- Available features and integrations
- Industry-specific capabilities
- Customer support and service reliability, especially if you frequently do business outside major metro areas
- Ease of use and scalability
Questions to Ask Potential Providers
Additionally, asking strategic questions about the tools and services may help narrow down your choice of provider. Some possible questions to consider are:
- What fees will I pay for services?
- Are there any additional fees for equipment?
- How are the fees structured?
- Can your system integrate with my existing financial suite? If not directly, what do I need to do so?
- Do you offer support? How often? What channels can I use to reach you?
Expand What’s Possible With Payments
It may be helpful for businesses to assess their individual needs for payments as part of the overall context of their financial picture. This might help them choose a provider able to support their needs through streamlined, easily integratable solutions with minimal disruption. Once that takes place, businesses may, in turn, support customers through a wide variety of payment options while protecting everyone’s information.
By understanding how these solutions work and what integrations and protections are available, companies can choose a merchant services provider that supports their operation and offers a long-lasting relationship.
