merchant services explained - woman taking credit card payment on an iPad

Merchant services explained

Sunday, November 30, 2014

When it comes to your business, accepting payments can be difficult. That’s because in today’s environment, customers expect your business to accept multiple payment methods. But how do you start to process credit cards and other payments? That’s where a merchant services provider (MSP) comes in. In this article, we’ll take a look at merchant services, including what they are, how they work, who provides them, and choosing the right merchant services for your business. First, let’s define merchants.

What’s a merchant?

To start, it’s important to define who merchants are. Merchants sell goods or services to customers. These are businesses or individuals who accept credit cards from their customers – whether in-person, online, or over the phone. Different types of businesses can fall under different merchant categories:

  • Retail merchants – sell goods or services in a store
  • ecommerce merchants – sell goods or services online
  • Wholesale merchants – sell goods or services to other merchants
  • Affiliate merchants – sell goods or services for other businesses

In today’s business climate, merchants could be exclusively one of these types. However, they could also be a combination of two types. For example, a merchant could be a retail and ecommerce merchant, selling both in a brick and mortar store and in an online store. 

When a merchant wants to accept credit or debit cards, they need a merchant account. A merchant account is a business bank account specifically put to use for accepting and making payments. These payments could be from customers or other businesses, or they could be payments to other businesses. In order to get a merchant account, a business needs to work with an MSP. This provider could be a bank or a third party payment processor, but working with a provider gives a small business the ability to accept many different payment methods, including credit and debit cards or electronic payments.

What’s a merchant cash advance? 

With a merchant cash advance, small businesses receive funds as a lump sum upfront from a merchant cash advance provider and repay the advance with a percentage of the business’s credit card sales. A merchant cash advance is not a business loan. It’s a cash advance based on the volume of your credit card receipts. 

MSPs each have their own set of tools, services, and fees. As a business, you should compare your options to determine which one is best for your business. Let’s take a deeper look at the role of MSPs.

What are merchant services providers? 

As mentioned above, MSPs can help businesses like yours accept payments. But they do much more than that. Here’s a list of the common services of MSPs:
  • Credit card payment processing – MSPs can help your business process payments from Visa, Mastercard, American Express, and Discover cards. They’ll help business owners like you accept credit cards both in-person and online.
  • ACH and check processing services – MSPs can help you process ACH payments and even help you process paper checks from your customers.
  • Payment gateways – For those who need help accepting online payments through an online store or ecommerce site like Shopify, an MSP can offer a secure payment gateway to help you take online payments.
  • Point of sale systems – A point of sale (POS) system is a combination of hardware and software that allows merchants to stay on top of their business. Hardware can include cash registers, debit or credit card terminals (including EMV chip-enabled readers), and more. POS systems can be a central hub for your business, allowing you to not only take payments but also process sales, perform invoicing, keep track of inventory, and more.
  • Loyalty programs – MSPs can help your business set up and maintain loyalty programs that reward your customers for certain purchases.
  • Online transaction processing – In addition to payment gateways, online purchases also require more effort behind the scenes. MSPs can offer tools that help your business process transactions and manage customer orders to help you stay on top of your orders while updating inventory at your business.
  • Virtual terminals – For businesses who accept payments on the go, an MSP can also provide virtual terminals, or a way for you to turn your smartphone or tablet into a mobile POS (mPOS) system. Utilizing a card reader, your smartphone or tablet can accept payments right on the spot.
  • Payment security – MSPs can help your business ensure payment data is safe and secure. They shoulder the responsibility of fraud and help ensure your payment system is payment card industry (PCI) compliant. They do this by using processes like tokenization and fraud prevention.
As you can see, MSPs go beyond just payment processing. They can help keep your business running. Of course, MSPs do charge to help your business. In fact, they typically charge a few different ways, although there are a few common structures they use. The basis of many fee structures is credit card processing. Let’s take a look at the most common processing fee structures.

Flat rate processing

In this pricing model, the MSP charges the merchant a fixed percentage, or flat fee, for each transaction. Transactions are usually split up into card present (in-store), card not present (ecommerce), and manually entered (mail and telephone orders) transactions. In each category, the transaction type determines the flat fee. The issuing bank and credit card issuer have no bearing on the fee. In other words, the rate is based on the method used to charge the card.

Interchange plus pricing

In this pricing model, the MSP charges the merchant the interchange rate (the amount that your provider pays the credit card network) and then adds on their fees, typically a percentage of each transaction plus a fixed fee per transaction. For example, a small business would pay the payment processor the base interchange fee plus a set percentage of the transaction. Some payment processors also add a fixed fee to each transaction in this pricing model. As always, it’s best to contact your payment processor for their exact pricing.

Tiered pricing

In this pricing model, the MSP divides transactions into various buckets and charges a different rate for each tier. Transactions get placed into different buckets based on factors, including the type of payment and method of payment. There are three tiers in this model – qualified, mid-qualified, and non-qualified:

  • Qualified – this tier is the safest tier for transactions. It consists of swiped or inserted debit card and non-reward credit card transactions. As you can imagine, these transactions are the least risky for the reasons listed above.
  • Mid-Qualified – this tier of transactions consists of transactions not fully qualified. These could be rewards credit cards, loyalty cards, and keyed-in cards (instead of swiped or inserted).
  • Non-Qualified – this tier of transactions has the highest rates. Higher rewards credit cards, corporate cards, or cards used in ecommerce transactions are all cards that fall into this category.

No matter the pricing model you decide on, each MSP may also charge you other fees. Some of the most common fees include: 

  • Chargeback fees – the fees you have to pay to return the customer’s money to their account
  • Set-up fee – a one-time fee to get your account started with the payment service provider
  • PCI compliance fees – the cost of adhering to the standards set by the Payment Card Industry Data Security Standard
  • Assessment fees – the fees you have to pay directly to the card networks for using their cards
  • Monthly minimum fees – charges you have to pay if your business fails to complete a minimum number of transactions
  • Statement fees – the cost of printing and mailing credit card statements
  • Non-sufficient funds (NSF) fees – fees you have to pay should you not have enough money in your bank account to cover the credit card processor’s charges
  • Equipment costs – either as an initial cost or as a rental fee, depending on your business’s situation
It’s easy to see how MSPs can help set your business up for success. But how do you choose the right partner for your business? Let’s talk about a few factors you should consider when choosing an MSP for your business.

How to choose merchant services for your business

Choosing the right MSP for your business can be tricky, and there are some key considerations you’ll need to think about to find the right solution for your business.
  • How will you accept payments? Are you taking payments from customers at a physical store, online, or both?
  • What types of payments will you accept? Do you need access to technology that allows you to accept credit cards, debit cards, and contactless payments? 
  • How much hardware or software do you need? Depending on your business, do you need a full , or could you just use a virtual terminal to accept mobile payments? If you only run an ecommerce store, then you’ll just need a payment gateway.
  • Do you need a dedicated merchant account? Is your business looking for a merchant account through a bank or other financial institution, or do you need a payment processing partner who can get you up and running quicker? 
What type of pricing is best for your business? Once you’ve taken a look at your transactions, you’ll have a better idea of the pricing structure that best suits your business and your budget. By answering these questions, you’ll put your business in the best position to succeed by narrowing down your search for the right MSP. 

Merchant services are an important tool to help keep your business moving. By finding a partner that fits your needs, you can set your small business up for success. In this article, we discussed merchants, merchant services, MSPs, and more. We hope you’ve found valuable information from this article that will aid your business in finding the right partner.

Ready to work with a payment processor who can help tailor merchant services to your needs?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.