Do you feel overwhelmed by the various merchant service options available? Not sure which one is the best fit for your business?
You’re not alone.
Many business owners have trouble deciding which merchant services provider to pick, especially with so many different factors to consider – pricing, integrations, available payment processing options, and data security measures, to name a few factors.
And since a large percentage of Americans prefer credit and debit card payments over cash, choosing the right merchant services provider is crucial for your small business.
In this article, we’ll break down exactly what merchant services are, how they work, what benefits they can bring, and how to make the right decision when choosing a provider for your small business.
Merchant Services Definition
Merchant services is a blanket term for financial services that enable merchants to accept and process electronic payments from their customers.
This term refers to all payment-related hardware and software tools that business owners need to process credit/debit card payments, in both their online and brick-and-mortar stores.
A “merchant” is a person or entity, typically a business, that sells goods or services for profit. The term applies to a wide range of businesses, from small sole proprietors to large corporations.
How Do Merchant Services Work?
Merchant services providers are responsible for facilitating payments between businesses and their customers, and they handle the back-end process of each transaction.
Here’s an example of how it works:
- The customer initiates a transaction and chooses the payment method, such as swiping a credit/debit card on the POS terminal or using an online payment gateway.
- The merchant’s POS terminal or online payment gateway captures the payment data and securely transmits it to the merchant services provider.
- The merchant services provider encrypts the payment data and sends it to the card network (e.g. Visa or Mastercard) or the payment network (e.g. PayPal, Square, or Stripe).
- The card/payment network forwards the payment data to the issuing bank.
- The bank verifies the cardholder’s identity, available funds, and transaction details, and sends a response code to the card/payment network.
- The card/payment network relays the response code to the merchant services provider, which interprets the code and either approves or declines the transaction.
- The provider sends an approval/decline message to the merchant, which shows on the payment terminal or online checkout page.
- If the transaction is approved, the provider deducts the transaction amount from the customer’s account and deposits it into the merchant’s account.
- The merchant can then generate a receipt and finalize the transaction.
This process occurs smoothly and quickly, enabling the business to provide a convenient payment experience for the customer.
The above example illustrates the behind-the-scenes process for credit card and online payment processing, but there are other types of merchant services.
We go into detail on other types of merchant services in the next section.
What Services Do Merchant Services Providers Offer?
Here are the most common services offered by merchant services providers:
Credit Card Processing
Credit card processing is offered by most merchant services providers. It allows businesses to accept and process credit and debit card payments from customers.
Point of Sale (POS) Systems
POS systems include hardware and software solutions that enable businesses to accept electronic payments at the point of sale.
Card readers, terminals, and mobile devices allow small businesses to securely process transactions. Some providers offer additional functionality, such as sales tracking and inventory updates.
A payment gateway is an interface that enables businesses to securely process online transactions through their website or mobile app. These tools encrypt payment information, protecting sensitive customer data from unauthorized parties.
Loyalty Programs and Rewards
Loyalty programs and rewards systems help businesses incentivize repeat customers and build long-term relationships with them.
These programs can include point-based systems, discounts, or other rewards that encourage customer loyalty.
Some merchant services providers offer ecommerce support to online businesses.
This support can include shopping cart integration, fraud detection and prevention tools, website customization, sales analytics, marketing tools, and more.
Check Processing System
Aside from credit and debit card payment processing, providers may include check-processing systems.
Check processing systems allow businesses to accept paper checks as a form of payment and deposit them. This service typically involves scanning the check and sending the image to the bank for processing.
Virtual terminals are software solutions that allow businesses to process credit and debit card transactions without physical equipment. Business owners can use them to process payments from their computers or mobile devices.
Virtual terminals are an excellent solution if you operate on the go or don’t have a physical location.
For example, virtual terminals are a good choice for restaurants that take phone orders, freelancers that work remotely, or consultants that bill over the phone.
Why Do Businesses Need Merchant Services?
Merchant services are essential for businesses that want to streamline their payment processing.
Here’s exactly how they can help:
- Accepting electronic payments: merchant services enable businesses to accept electronic payments from their customers, including credit and debit cards, mobile payments, and online payments.
- Expanding customer base: by accepting electronic payments, businesses can attract customers that prefer to pay with credit cards, debit cards, or other electronic payment methods.
- Enhancing security: merchant services typically include security measures such as data encryption, fraud detection, and prevention tools to protect business owners and their customers from fraudulent transactions.
- Improving cash flow: electronic payments are usually processed immediately, which can help businesses improve their cash flow by receiving funds faster than they would with traditional payment methods.
How Much Do Merchant Services Cost?
Merchant services fees can vary substantially depending on the provider.
Here are three common merchant services pricing models:
With a flat rate, you are charged a percentage of the transaction plus a small fixed fee – regardless of the number of transactions your business processes.
This pricing model is a good option for businesses that process a high volume of transactions and want a predictable cost for their payment processing services.
For example, retail businesses, ecommerce businesses, and subscription-based businesses often opt for flat rates.
By choosing a flat rate, you’ll be able to focus on growing your business without worrying about fluctuating fees.
The cost-plus model includes two types of costs – the interchange fee and the markup fee.
The interchange fee is what the payment card network charges for processing a transaction, while the markup fee covers the provider’s services.
The merchant services provider shows the expense associated with each transaction and card type, and implements a markup based on the business’s total sales and transactions.
The monthly payments and interchange fees will vary depending on the types of cards accepted.
Although cost-plus pricing may seem complex due to these fluctuations, it offers business owners the most transparency and control, allowing them to reduce merchant costs.
By implementing it, businesses can gain insights into their payment processing costs and adjust their pricing and strategies accordingly. Additionally, cost-plus pricing allows for more accurate financial planning and budgeting, helping small business owners better manage their expenses.
Because of the transparency, cost-saving opportunities, and control offered to small business owners, the cost-plus model is Gravity’s preferred pricing structure.
Tiered Pricing Model
The tiered pricing model means different rates for different types of transactions, based on factors such as the size of the transaction, the type of card used, and the risk associated with the payment type.
For example, a provider could have different tiers for credit card payments and debit card payments. Or, different tiers for online payments and in-person payments.
Generally, tiered pricing models are the least business-friendly.
Unlike flat rates, there is no industry standard for tiered pricing – which some providers might exploit to charge drastically higher rates.
Moreover, some providers could advertise low rates that only apply to certain cards, while failing to disclose the fees associated with other card types that businesses are likely to accept.
This lack of transparency can make it challenging for business owners to make informed decisions about their payment processing and can result in them paying much higher fees than they anticipated.
At Gravity Payments, we don’t offer a tiered pricing model.
If you’re using a tiered model and suspect you’re overpaying for merchant services, you can give us a call at 866-701-4700 and get help assessing your options.
How to Pick a Merchant Services Provider
Here are some key points to narrow down your list of prospective merchant services providers:
- Cost: make sure you have a clear understanding of each provider’s pricing structure. Project your monthly fees and see if the projected amount fits within your budget.
- Scalability: you want your provider to be able to handle your business’s future growth. Can it handle increased transaction volumes or new payment methods as your business expands?
- Customer support: the provider should offer reliable customer support that is available during business hours. Check the provider’s support options (e.g. phone, email, and live chat). Also, check online reviews.
- Integration options: if you use other business software or tools (e.g., accounting software or point-of-sale systems), make sure the merchant services provider integrates with those tools.
- Security: the security of your customers’ payment information should be a top priority. Look for a provider that offers robust security features such as encryption and fraud prevention tools.
Merchant Account Provider vs. Merchant Services Provider – What’s the Difference?
“Merchant account provider” and “merchant services provider” are commonly confused.
Here’s what you need to know:
A merchant account provider is a financial institution (usually a bank) that provides businesses with merchant accounts. A merchant account is a type of bank account that business owners need in order to accept electronic payments. The account provider sets up the merchant account, processes the transactions, and deposits the funds into the business’s bank account.
Merchant services providers, on the other hand, are the companies that offer merchant services to businesses and manage their payment transactions.They act as intermediaries between business owners, customers, and banks, helping businesses manage payment processing and finding the best solutions for their specific needs.
Get a Merchant Services Solution from Gravity Payments
At Gravity Payments, we understand that choosing a merchant services provider for your business is not just about finding a company to facilitate payments – it’s also about finding a partner that will help your business grow.
That’s why we provide our clients with solutions tailored to the way they run their businesses and offer the support they need to succeed.
Learn more about Gravity Payments merchant services solutions and see how we can help your business thrive.