In today’s competitive marketplace, it’s important for many businesses to accept and process electronic payments. Businesses will typically need to set up internal operations to support electronic payments and work with third-party providers to build their payments infrastructure. They also need to consider how to power this infrastructure, create the customer experience, mobilise data to make it available for analysis, and track performance. It’s a large amount of work, but it will directly impact long-term business success.

Merchant services providers play an important role in helping businesses set up electronic payments. Here’s an overview of what merchant services providers are and what they do for businesses.

What's in this article?

• What are merchant services?
  
• What is a merchant services provider?
  
• Types of merchant services providers
  
• Merchant services providers vs merchant account providers
  
• What does it cost to work with a merchant services provider?
  
• Benefits of working with a merchant services provider
  

What are merchant services?

Merchant services are a broad range of financial services and tools that businesses need to accept and process customer payments, typically from credit cards, debit cards, or other electronic payment methods.

What is a merchant services provider?

Merchant services are provided by merchant service providers (MSPs) or payment processing companies, which act as intermediaries between businesses, customers, and financial institutions such as banks and credit card networks.

An MSP is a company that helps businesses accept and process payments from customers using credit cards, debit cards, or other electronic methods. They make sure that the payment process is easy and secure, for both the business and the customer. They also offer additional tools and services, such as setting up payment systems for physical and online shops, keeping businesses compliant with payment security rules, and providing support when needed.

Key components of merchant services include:

• Payment processing
  MSPs facilitate the authorisation, capture, and settlement of transactions when customers pay using credit cards, debit cards, or other electronic payment methods.

• Point-of-sale (POS) systems
  POS systems are the hardware and software systems that businesses use to accept and process payments at the physical location where the sale takes place. They range from simple card readers to advanced setups with integrated inventory management and customer relationship management features.

• Payment gateways
  Payment gateways are the online equivalents of POS systems, allowing businesses to accept and process payments via their websites or mobile apps. They securely transmit transaction data between the customer’s browser, the business’s website, and the payment processor.

• Merchant accounts
  Merchant accounts are specialised bank accounts that hold funds from card payments before they are transferred to the business’s regular bank account. Merchant services providers typically help businesses set up and manage these accounts.

• Fraud prevention and security measures
  MSPs often provide tools and services to help businesses minimise the risk of fraud and maintain compliance with security standards, such as the Payment Card Industry Data Security Standard (PCI DSS).

• Analytics tracking and reporting
  Many MSPs offer access to data and reporting tools that can help businesses track sales, customer trends, and other key performance indicators.

• Customer support
  MSPs usually provide customer service to help businesses resolve issues related to payment processing or other aspects of their accounts.

Types of merchant services providers

There are several types of merchant services providers in the market, each offering different services and catering for various business needs. Some of the common types of MSPs include:

• Traditional merchant services providers
  These MSPs primarily focus on providing payment processing services for brick-and-mortar businesses. They usually offer POS systems and hardware, such as card readers and terminals, to facilitate in-person transactions.

• Payment gateways
  These providers specialise in offering online payment processing services for e-commerce businesses. They provide secure payment gateways that enable businesses to accept credit card and other electronic payments via their websites or mobile apps.

• Independent sales organisations (ISOs)
  ISOs are third-party companies that partner with banks or other financial institutions to resell merchant services. They often provide a suite of services, including payment processing, POS systems, and other business tools, by working with multiple processing partners to offer competitive rates and services.

• Mobile payment processors
  These MSPs focus on providing payment processing solutions for businesses that need to accept payments on the go, such as food vans, market stalls, or mobile service providers. They typically offer mobile card readers or mobile POS systems that can be used with smartphones or tablets.

• All-in-one payments platforms
  These providers offer a comprehensive suite of payment processing and business management tools, combining payment processing, POS systems, inventory management, customer relationship management, and other features in a single integrated platform. These solutions are designed to simplify business operations management.

• Payment facilitators
  Payment facilitators (payfacs, including Stripe, allow businesses to accept payments without setting up their own merchant account. They aggregate multiple businesses under a single master account, which simplifies the onboarding process and reduces some of the associated fees.

• High-risk merchant services providers
  These MSPs specialise in working with businesses considered high-risk due to the nature of their products, services, or industries. High-risk businesses may face a higher likelihood of chargebacks (disputed transactions) and fraud. Traditional MSPs may be reluctant to work with them. High-risk MSPs offer tailored payment processing solutions and risk management tools for these businesses, often at higher fees.

Some comprehensive merchant services providers, such as Stripe, offer the functionality of multiple types of MSPs. When choosing a merchant services provider, businesses should carefully consider their specific needs, the type of payment processing they require (in-person, online, or mobile), and the additional services and tools that they may need to manage their operations effectively.

Merchant services providers vs merchant account providers

A merchant services provider and a merchant account provider both facilitate electronic payments for businesses, but they have different roles in the process.

A merchant account provider is a financial institution that provides a business with a merchant account, which is a type of bank account that allows a business to accept electronic payments from customers. The merchant account provider sets up the account, provides the necessary hardware or software, and handles the processing of transactions. They also charge a fee for each transaction processed, as well as a monthly fee for maintaining the account.

A merchant services provider is a company that offers a wider range of payment services to businesses, beyond setting up a merchant account. These services may include payment gateway integration, fraud detection and prevention, chargeback management, and customer support. MSPs handle not only the processing of transactions but also other aspects of payment management.

Some merchant services providers, including Stripe, also offer businesses access to merchant account functionality. For this reason, it makes sense for most businesses to wait to open a merchant account until after they have chosen a merchant services provider. Depending on which provider you choose, you might not need to open a merchant account at all.

How much does it cost to work with a merchant services provider?

The cost of working with a merchant services provider varies depending on the provider, the services required, and the specific needs of the business. There are, however, several common fees and charges that businesses may encounter when working with an MSP, including:

• Setup fees
  Some MSPs charge a one-off fee for setting up a merchant account and configuring the necessary payment processing tools.

• Monthly fees
  Many MSPs charge a fixed monthly fee for maintaining the merchant account, providing customer support, and offering access to reporting and analytics tools.

• Transaction fees
  For each transaction processed, the MSP typically charges a fee, which can be a flat rate per transaction, a percentage of the transaction amount, or a combination of both. These fees may also include interchange fees (paid to the issuing bank) and assessment fees (paid to card networks such as Visa, Mastercard, etc.).

• Terminal or equipment fees
  If a business needs to lease or purchase POS terminals, card readers, or other hardware, there may be additional costs associated with that equipment.

• Gateway fees
  If a business processes payments online, they may incur a separate fee for using a payment gateway.

• PCI compliance fees
  Some MSPs charge an annual fee to help businesses maintain compliance with PCI DSS and provide related support.

• Chargeback fees
  In the event of a chargeback, the MSP may charge a fee for handling the dispute process.

• Early termination fees
  If a business decides to terminate its contract with the MSP before the agreed term is complete, there may be an early termination fee.

The fee structure and amounts may vary significantly among merchant services providers. Businesses should carefully review and compare the fees and terms offered by different MSPs before committing to a provider. Additionally, some providers may negotiate on certain fees, depending on the business’s transaction volume and other factors. For more detailed information about Stripe’s pricing structure, go here.

Benefits of working with a merchant services provider

Working with a merchant services provider offers numerous benefits for businesses of all sizes. Here are some of the main advantages:

• Diverse payment options
  Merchant services providers allow businesses to accept a wide range of payment methods, including credit and debit cards, digital wallets, and mobile payments. This flexibility enables businesses to cater for different customer preferences, enhance the overall shopping experience, and potentially boost sales.

• Improved cash flow
  Merchant services providers ensure prompt payment processing, which can significantly improve a business’s cash flow. With faster transaction processing and settlement times, businesses can access their funds more quickly, enabling them to manage finances more efficiently.

• Enhanced security
  Merchant services providers adhere to strict security standards, such as PCI DSS, to protect sensitive customer data during transactions. Working with a reliable merchant services provider enables businesses to safeguard their customers’ information and reduce the risk of fraud and data breaches.

• Simplified payment processing
  Merchant services providers provide businesses with the tools and software to process payments smoothly, including payment gateways and POS systems. This simplifies payment processing, reduces the chances of human error, and saves time for both customers and businesses.

• Access to valuable insights
  Merchant services providers often offer reporting and analytics tools that enable businesses to track and analyse payment data. This information can be invaluable for identifying trends, monitoring sales performance, and making informed decisions to grow the business.

• Scalability
  As businesses grow and expand, merchant services providers can provide the necessary payments infrastructure to facilitate this growth. As a result, businesses can easily scale their payment processing capabilities in line with their changing needs, without investing in additional resources or reinventing their approach to payments.

• Technical support
  Merchant services providers offer ongoing technical support to ensure that businesses can efficiently handle payment-related issues. This support can help payments be processed smoothly and minimise downtime caused by payment processing issues.

• Cost savings
  By outsourcing payment processing to a merchant services provider, businesses can reduce the costs associated with maintaining their own payments infrastructure, such as hardware, software, and staff expenses. This allows businesses to focus on their core competencies and allocate resources more effectively.