What are merchant services? All you need to know

Merchant services are essential to doing business in today’s digital landscape. But what are they? How do they work? And how can you find the right provider?

In this guide, we’ll answer all your questions and more. Read on to learn everything you need to know about merchant services, payment processing solutions and their associated fees. 

What are merchant services?

Merchant services is a broad term used to describe the hardware, software and financial services required to accept and process payments. Critically, that includes credit and debit card payments, online transactions, mobile payments, contactless payment options and more. 

Why are merchant services important?

Simply put, cash is no longer the go-to payment method for today’s digital-first consumers. In fact, by 2028, the global volume of digital card transactions will surpass 174 billion — a 386% increase from 2023. Bottom line: If you want to keep customers happy, you need more than just a handful of ways to process payments. 

Fortunately, many small business (SMB) owners are already heeding the call for electronic payment processing. According to research, SMBs will spend more than $100 billion on payment solutions by 2025. 

Why? Doing so can unlock numerous opportunities and advantages:

• Increased sales: Accepting various payment methods allows you to cater to a wider audience. In turn, you can maximize your profitability and avoid turning away willing customers.
• Improved cash flow: Electronic payment processing is generally faster than traditional options. The result? Quicker access to funds in your bank account.
• Enhanced security: Merchant services providers offer secure payment processing solutions that protect your customers’ payment information. That way, you can mitigate the risk of data breaches, fraud and legal noncompliance.
• Greater customer satisfaction: Modern payment solutions are a boon to the customer experience, enabling you to process payments and complete transactions as quickly and smoothly as possible.
• More efficiency: Rather than jumping through hoops and numerous tools, merchant service providers offer solutions that house all your data in one platform. This prevents you from spending additional hours updating your daily transaction information. Plus, it gives you more time to focus on growing the business.
• Swift adaptability: The business landscape is constantly evolving. Whether scaling up your payment processing solutions or scaling back, a merchant service provider can help you stay ahead of your changing needs. 

What is a merchant?

“Merchant” is a term that describes the relationship between a business owner and a payment processor. Simply put, merchants are businesses that accept credit card payments in-person, online or over the phone. Therefore, anyone or any business that sells goods and services can be considered a merchant.

For example, a retail merchant might operate a brick-and-mortar storefront that customers can browse. In this case, the business owner may only need a physical credit card terminal to process credit and debit card transactions. 

But, if you’re strictly an eCommerce merchant, you don’t need to account for in-person transactions. Instead, you just need a way for customers to submit their payment information online, such as through a secure payment gateway. 

The point? All merchants are different. What works for one business owner might not work for another — that’s why it’s best to choose the merchant service provider that suits your unique needs. 

What is a merchant account?

A merchant account is a type of bank account that allows businesses to accept transactions by credit card, debit card or another electronic payment method. Note that it isn’t the same as your business’ bank account — rather, it’s where you hold funds before they’re cleared or transferred to your primary account.

Businesses normally obtain this from a merchant account provider, such as a bank or other financial institution. Sometimes, a single company can act as both a merchant service and a merchant account provider, but this isn’t required. Either way, you must have a merchant account to receive funds from card payments. 

To summarize, merchant account providers give you a place to hold funds when you process payments. Merchant service providers, on the other hand, give you the means to process, collect and distribute funds in the first place. 

How do merchant services work?

As an intermediary between businesses, customers and financial institutions, merchant services providers facilitate the transaction process. This involves several key steps:

1. A customer initiates the transaction using their preferred payment method. For example, they may insert their credit or debit card into the merchant’s card reader or use a digital wallet on their phone to make a contactless payment.
2. The system sends the customer’s payment information to the acquiring bank (i.e., the merchant’s financial institution).
3. The acquiring bank sends the card transaction to a payment processor, then to the customer’s card association (such as Visa, MasterCard or Discover).
4. The card network routes the transaction to the customer’s issuing bank and requests approval. This is the financial institution that provides the credit or debit card.
5. If the card transaction is approved, the issuing bank sends an approval code to the card association.
6. The card association routes this authorization code to the acquiring bank.
7. The acquiring bank sends the code to the merchant’s payment system, such as their credit card terminal.
8. The system prints a receipt for the customer. In the case of debit card payments, the money is moved immediately. For a credit card payment, the issuing bank bills the customer for the charges incurred at the end of their billing cycle.

This process may seem complicated, but in reality, it’s lightning-quick. From start to finish, the card transaction flow happens in just a matter of seconds. 

What do merchant services include?

Merchant services offer a wide range of key business functions related to payment processing. Generally, they fall into three categories:

• Payment processing solutions and services.
• Payment solutions and equipment.
• Value-added services.

Let’s break each down in more detail: 

Payment processing solutions and services

A payment processor is a company that facilitates the electronic payment workflow on behalf of merchants. Merchant service providers offer processing as one of their core business offerings. 

There are several distinct payment processing solutions beneath this broad umbrella:

• Credit card processing: As perhaps the most essential of all, credit card processing is by far the most common merchant service. Simply put, this enables business owners to accept credit card (and debit card) payments.
• Card-not-present (CNP) transactions: This includes transactions where the cardholder isn’t physically present, such as an over-the-phone or online payment. CNP transactions give customers more flexibility and freedom to pay at their convenience, whether they’re in-store, at home or on the go.
• Contactless payment processing: Over 50% of Americans are now using some form of contactless payment method, according to MasterCard. That includes tap-to-go credit cards and mobile wallets like Apple Pay, Google Pay and Samsung Wallet. These solutions use near-field communication (NFC) to share payment information between devices — no need to insert the card into a chip reader or swipe it on a terminal.
• Check processing: Many consumers still pay with their checkbooks. This service simplifies the process by allowing merchants to convert paper checks into electronic payments easily.
• Batch processing: Some merchants prefer to process multiple transactions as a group at a specified time (i.e. in “batches”). This approach is often more efficient than processing each transaction individually and can also lead to faster deposits.
• Subscription billing: If you offer a recurring service, such as a monthly delivery, you may want to give customers the choice of leaving their card on file for a scheduled payment. Subscription billing makes it easy, allowing you to automatically charge customers at the same time each month or at any interval you desire.
• Fast funding: This feature accelerates the transfer of funds to the merchant account. Same-day and next-day funding, for example, can help you meet payroll demands, pay bills and keep your business running in the right direction. 

Payment solutions and equipment

Of course, you can’t process payments if you don’t have the requisite hardware and software. That’s why many merchant service providers also supply the tools you need to succeed, such as:

• Point of sale (POS) systems: A POS system is a combination of software and hardware for managing different business operations. This includes, but isn’t limited to, inventory management, transaction histories, customer profiles, accounting, reporting and more. Whether you’re a restaurant or retail merchant, chances are a POS is at the heart of everything you do.
• Payment gateways: A payment gateway is an online payment portal that allows customers to submit their payment information on the merchant’s website, where it routes to the payment processor. Gateways are a secure way for businesses to accept online transactions, making them essential eCommerce merchants. 
• Virtual terminals: A virtual credit card terminal is similar to a payment gateway in that it enables online transactions. The key difference is that gateways are primarily customer-facing, whereas virtual terminals are for merchants only. They’re normally accessible through the payment processor’s website or mobile app.
• Card readers: A card reader is a small device that allows the customer to either swipe their card’s magnetic stripe, insert its chip or use a digital wallet like Apple Pay or Google Pay. POS systems often include these alongside other equipment.
• Mobile payments: Some payment technologies are made with portability in mind. Tablet-based POS systems, for example, allow restaurant diners to pay from the convenience of their table. 

Value-added services

Merchant service providers are evolving alongside the rapidly changing payment industry. In turn, many offer additional services, such as:

• Loyalty programs: Setting up loyalty programs can be complex, but the right equipment makes it easy. With the help of a payment processor, you can reward customers for repeat business through points, discounts and special offers.
• Fraud prevention: Bad actors are constantly targeting small business owners, hoping to score an easy payday and exploit your customer’s payment data. That’s why service providers are upgrading their fraud prevention capabilities with real-time monitoring, chargeback protection and encryption.
• Gift cards: Merchants can use gift card features as a way to secure additional revenue.
• Customer support: You never know when technical issues could throw a wrench in your workday. The best providers offer assistance and can help merchants troubleshoot problems in a hurry to get their business back on track.
• Statement analysis: Credit card processing fees are an unavoidable part of doing business. However, some partners go the extra mile to help merchants understand their costs and identify potential savings or areas of improvement. 

What fees are associated with merchant services?

Business owners can expect to pay a range of fees in exchange for merchant services and payment processing. Regardless of your pricing model, some merchant account fees will always appear on your statement. The payment processor charges these fees on a transactional basis. In other words, each time a customer swipes, dips or taps their card, the business owner pays a “merchant discount rate” (MDR). 

MDRs consist of several different fees:

• Interchange fees: The cardholder’s issuing bank charges the merchant’s bank account a small processing fee for each card transaction — the “interchange fee.” Card networks determine the exact rate based on various factors, such as card type, transaction type or industry.
• Assessment fees: Card networks also charge an assessment fee for each transaction, usually as a percentage of the transaction total. This is meant to cover their operational costs and the risk of handling the payment.
• Authorization fees: Merchants also have to pay an authorization fee, which is charged each time a transaction is authorized regardless of whether it’s ultimately completed.
• Markup fees: Markup fees are additional fees charged by the merchant service provider or payment processor on top of the base costs, which include authorization, assessment, and interchange fees. These markup fees represent the profit margin for the service provider and can vary widely depending on the provider, the pricing model, and the services offered.

The merchant discount rate is usually expressed as a percentage of the transaction amount, and it may also include a per-transaction fee. For example, a merchant discount rate might be 2.5% + $0.10 per transaction, meaning that the merchant would pay 2.5% of the transaction amount plus 10 cents for each payment processed.

Unfortunately, most of the above fees aren’t negotiable. However, you can negotiate your payment processor’s markup fee. And, with the help of Sekure Payment Experts, you rest assured you’ll get the very best rates in the business. In fact, you have our Rate Sekurity Guarantee®.

How do you pay for merchant services? 

Most merchant service providers offer three pricing models:

Interchange-plus pricing

With interchange-plus, you pay the interchange rate plus a fixed markup.

• Pros: Transparency in pricing, as merchants can see exactly what they are being charged for each transaction. It can be more cost-effective for businesses with high transaction volumes.
• Cons: Complexity in understanding the fees, as they can vary depending on the type of card used and the nature of the transaction

Flat-rate pricing

This is a simple structure where you pay a fixed percentage per transaction.

• Pros: Costs are more predictable and simple to understand.
• Cons: It’s not very cost-effective for businesses with high transaction volumes or average transaction values. 

Tiered pricing

This model classifies transactions into different tiers, each with its own rate.

• Pros: You gain a more diverse array of cost structures. 
• Cons: It’s the least transparent option, making it difficult to know your exact interchange fees. It can also be more expensive if most transactions fall into higher-rate tiers. 

How do you choose a merchant service provider?

Whether searching for your first payment processor or jumping ship to a new partner, it’s best to think carefully before making a final decision. 

Consider these best practices for choosing a merchant service provider:

1. Assess your needs: Look at your monthly sales volume and average transaction value. This will help you decide which pricing structure works best for your business.
2. Determine must-haves: Which payment solutions do you require? Think about whether you’ll need in-person, online or mobile payment systems. This can help narrow down the options.
3. Compare fees and rates: Keep in mind that fees will impact your profitability. Look for a provider with room for negotiation.
4. Evaluate customer support: Do they have support available 24/7? Or do they have a reputation for poor customer service? Troubleshooting makes all the difference if your payment systems are offline with technical difficulties.
5. Check platform capabilities: Consider the value-added features your processor can offer, such as a POS system with inventory management tools or marketing platform integration.
6. Consult Sekure: Payment processing is complex. Sometimes, you’re better off leaving it to our Payment Experts, who can help you identify the exact solutions you need to succeed. 

Sekure the payment solutions you need

At Sekure, we know how busy business owners can be. You don’t always have time to manage payment processing, analyze statements or look for new solutions. That’s why we do it all on your behalf. 

Our Payment Experts review your current contract to learn your business inside and out. Then, we offer custom recommendations as to which solutions are best for your unique needs. Better yet, we identify ways for you to save big on processing fees and eliminate hidden costs. 

With our Simple Switch program, we ensure you’re up and running with your new merchant service provider in no time. Plus, we’ll even:

• Pay early termination fees.
• Buy back outdated equipment.
• Give you a free contactless payment solution. 
• Hook you up with the lowest rates, guaranteed. 

Ready to simplify payment processing? Our Payment Experts are here to conduct a free statement analysis so you can see exactly how your business can save with Sekure.