When it comes to running your business, selecting the right merchant service provider is critical, but it can be hard to understand exactly what these businesses provide and what to look for in a payment processing company. Your merchant service provider will act as your partner for essential payment processing services and financial services.
Let’s break down the basics of merchant services, merchant service providers, payment processing, and related business services, so you can feel confident when selecting the best merchant service provider for your goals and needs.
Key Takeaways
- Merchant service providers deliver payment processing services to businesses, managing financial transactions through software, technology, and related systems.
- Merchant account providers offer the specialized commercial bank accounts which receive the funds from credit card payments. Merchant accounts are required for most businesses.
- Different types of merchant service providers offer different payment processing solutions, such as merchant account providers and payment processing providers.
- Modern merchant service providers have expanded their product offerings to encompass the omnichannel customer experience and evolving payment landscape.
What Is a Merchant Services Provider?
A merchant service provider, sometimes called a MSP, is a business that offers credit card processing, payment services, and related financial services to your business. Merchant service providers simplify your operations by taking care of the technology, software, and security needed to handle customer transactions and other financial processes.
Merchant services traditionally referred to credit card payment processing services, but, today, the term has evolved to support the wide range of payment methods and financial processes that modern businesses use. Merchant services cover those financial transactions that occur between a business, its customers, banks, credit card networks, and other relevant parties, with the merchant service provider acting as the secure intermediary between the parties.
To put it simply, merchant service providers offer the solutions and equipment to facilitate the flow of money in and out of the merchant account.
When it comes to merchant services, a merchant is defined as any business or person that sells a good or a service. Common types of merchants include eCommerce merchants, retail merchants, wholesale merchants, and direct-to-consumer (DTC) merchants.
Merchant service providers may provide some or all of the following:
- Payment processing software
- Point-of-sale (POS) systems
- Secure payment gateways
- Check processing
- Virtual terminals
What Is a Merchant Account?
A merchant account is a type of commercial bank account that allows businesses to accept online credit card payments and debit card payments, depositing the funds directly into the merchant account. A merchant account is required for any business that operates online. Forbes Advisor explains this requirement, saying, “A merchant account is a necessary intermediary drawing funds between your customers’ bank accounts and depositing those funds into your business’s bank account.”
Importantly, a merchant account is not a standard bank account. The merchant account has dedicated safeguards as it acts as a repository for the funds, with businesses not having direct access to those funds.
Key Products from Merchant Service Providers
Merchant service providers offer a continually growing array of services and products to support financial transactions and credit card processing. Let’s break down some of the most popular products from merchant service providers.
Payment Processing Software
Payment processing software allows merchants to accept and record payments that are not cash or check payments, including such payment types as credit cards, debit cards, and digital wallets. Typical payment processing software includes a payment processor, payment gateway, and merchant account.
Payment processing software from merchant service providers does the work of facilitating communication between the two financial parties involved in a transaction, like a customer’s credit card network and the merchant’s merchant account, successfully and securely transferring the funds between the two.
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Point-of-Sale (POS) System
When you make a purchase at a store, you typically do so at a computer operated by an employee. This computer is part of a point-of-sale system, which allows merchants to accept payments in person, including through electronic data capture terminals. The POS system includes both the hardware to physically capture the financial information and the software to process the purchase.
Modern POS systems do far more than sales and returns, though. Today, this type of merchant services can offer additional features, including:
- Inventory management, keeping the most up-to-date records of your stock
- Team management, including timesheets and scheduling
- Reporting, to break down key data and analytics
- Software integrations, connecting directly to other platforms
- Industry-specific features, for business types like restaurants and retail
Cloud-based POS systems are becoming much more common than traditional on-premises POS systems, as cloud-based POS systems allow real-time synchronization across platforms and hardware. This shift reflects the increasing modernization of merchant services to make it easier for customers to complete transactions.
POS system hardware can include:
- Countertop terminals
- Handheld credit card processors
- Digital tip jars
- Kitchen display systems
- Self-serve kiosks
Credit Card Processing Terminal
Merchant services credit card processing can occur through a credit card terminal, also called an electronic data capture (EDC) terminal. This hardware may also be referred to by the method the credit card is processed—swipe, dip, and tap.
Credit card terminals also take debit card payments. Typically, a countertop terminal will include a credit card processing terminal, but many businesses will also benefit from a handheld credit card terminal, allowing employees to take customer payments instantly and anywhere.
Secure Payment Gateway
Secure payment gateways operate as the online version of POS systems, serving as a safe way for customers to make purchases online. The secure payment gateway manages the transaction between the customer’s web browser, the business website, and the payment processor.
Like other solutions from merchant service providers, secure payment gateways must handle the information involved carefully, since the payment gateway collects and transfers the essential information of the customer’s payment method. Any weakness in the system could be exploited by hackers to steal that customer information.
Security measures for payment gateways include tokenization, SSL certification, TLS protocols, and PCI DSS compliance.
Check Processing
While checks may seem like a less common payment method in today’s financial landscape, they still feature prominently in certain industries and for certain processes within a business. Merchant service providers can allow customers to make payment via Automated Clearing House (ACH) payments, which are slower payment methods that incur fewer fees.
Merchant service providers can also provide eCheck processing, scanning paper checks and processing them rather than requiring the business to go into their bank.
Virtual Terminals
Virtual terminals allow businesses to accept payments when the card is not present. This can include payments over the phone or by mail. Virtual terminals can also easily turn a computer into a payment terminal through a USB-connected card reader.
Compliance Practices
Merchant service providers must ensure secure payment processing to keep vital customer information safe. To do so, merchant service providers follow the Payment Card Industry Data Security Standards (PCI DSS), which were created for any business that accepts, transmits, or stores cardholder payment information.
According to the PCI Security Standards Council, PCI DSS has six goals:
- Build and maintain a secure network.
- Protect account data.
- Maintain a vulnerability management program.
- Implement strong access control measures.
- Regularly monitor and test networks.
- Maintain an information security policy.
Compliance standards are continually evolving in the face of the changing digital landscape. By partnering with a trusted payment processing provider, your business can be confident that your transactions are safe and reliable.
Merchant Account
Merchant accounts providers offer the most essential element of merchant services: the merchant account where funds will be deposited. Merchant accounts are required for most businesses who plan to accept payments, although some payment service providers (PSPs) utilize aggregated accounts for smaller businesses.
How Payment Processing Works
The essential work of most merchant service providers is the authorization, capture, and settlement of customer payments, known as payment processing. Typical payment processing merchant services follow these basic steps.
1. The customer makes a purchase.
Payment processing initiates when a customer makes a payment. The customer can do this online or in-person, and they may make the payment through any of the merchant services solutions the merchant uses, like a credit card terminal, countertop terminal, or online payment gateway. The customer is sharing their payment information by doing so.
2. The payment gateway communicates the payment information.
The payment gateway securely sends the payment information to the payment processor, which then seeks approval for the transaction from the customer’s payment source, be that a bank or a credit card network.
3. The payment is approved or denied.
The customer’s payment source informs the payment processor of its authorization response, conveying if the payment request is approved or denied.
4. The purchase is completed.
The authorization response is shared with the payment processor and the merchant, allowing the transaction to be completed, if authorized.
5. The payment processor instructs the customer’s payment source to send the funds to the merchant account.
The funds are transferred from the issuing bank to the acquiring bank, thus settling the transaction. The funds may not be available immediately or within a few days.
Types of Merchant Service Providers
While many merchant service providers offer all-in-one platforms, it’s still important to understand the different types of merchant services companies.
Merchant Account Providers
Merchant account providers manage merchant accounts, which are specialized commercial bank accounts that can receive credit card payments. If a business is doing sales online, it will likely need to open a merchant account.
Payment Processing Providers
Payment processing providers, also called payment processors, are those vendor businesses that coordinate and manage payment transactions. Payment processing providers act as the middleman between the merchant, financial institutions, credit card networks, and other consumer payment sources.
Payment Processing Providers vs. Merchant Service Providers
While there is considerable overlap between payment processing providers and merchant service providers, the terms do have a few key differences. Merchant service providers is an all-encompassing term to refer to the services and solutions around customer payments for merchants. Payment processing providers refers to businesses that executive the specific steps of authenticating and approving a financial transaction.
Many merchant service providers are payment processing providers. Payment processors often refer to those vendors who deal exclusively with credit card payments, while merchant service providers may manage a more diverse range of payment methods, plus supporting services.
Payment Service Providers (PSPs)
While merchant accounts are common for many businesses, they may not be the right fit for smaller businesses. A payment service provider does not require a business to open a dedicated merchant account, instead using an aggregated account. By providing this option, merchant service providers can work with smaller businesses or those businesses who otherwise cannot easily open a merchant account.
Payment Gateway Providers
Payment gateway providers are those merchant service providers who offer online payment processing services for eCommerce merchants. If your business conducts online sales, you will need to use a payment gateway provider to ensure a secure transaction.
Merchant Services Provider Cost and Pricing
Working with a merchant services provider can incur various fees that should be considered before signing a merchant agreement. Common MSP fees include:
- Setup fees
- Monthly fees
- Transaction fees
- Equipment fees
- Gateway fees
- Chargeback fees
- Minimum processing fees
Merchant service providers typically use one of the following pricing models.
Flat Rate
Merchant service providers that utilize flat-rate pricing work well for new businesses or those businesses with low sales volumes. These providers charge the same rate for every transaction, no matter what credit card network is used. There may be different rates for different payment types, but the rate for each type should be the same no matter the brand. While this pricing model is easy to set up, it can be costly in the long run.
Interchange-Plus
Interchange-plus pricing applies the interchange rates of each card type, like Mastercard or Visa, for every credit card transaction. On top of that, there is a monthly markup from the payment processing provider.
Tiered
With tiered pricing, the merchant services provider separates transactions into different tiers with specified criteria for the fees. Payment processing fees may fluctuate and be less transparent with this pricing model.
How to Choose a Merchant Services Provider for Your Business
If your business completes financial transactions with customers, you likely need to select a merchant service provider. It can be hard to sort through all the companies and financial institutions offering different solutions, though, to select the best merchant services provider for you.
When partnering with a merchant services provider, consider the following:
- What services you need, depending on how you interface with your customers
- Payment types you accept, online or in-person
- How much business you do, to consider how much to budget
- Hardware requirements, if you conduct in-person sales
- Merchant service provider cost and fees, to plan financially
- Compliance requirements, particularly any industry-specific needs
Once you select the best merchant services provider for your business, you will sign a merchant agreement, which is the formal contract between the merchant services provider and the merchant.
Discover Your Next Merchant Services Provider in FirsTech
When it comes to the critical solutions your business needs, you deserve a merchant services provider that you can trust. FirsTech has provided secure payment solutions for almost forty years, working as a partner alongside businesses like yours to achieve the next level of success.
As a merchant services provider, FirsTech prioritizes an optimal customer experience and a secure, compliant transaction process. We offer a comprehensive range of payment solutions services to ensure that you can accept customer payments through the formats they prefer, with the integrations you need to ensure seamless business processes.
Talk to our team today to make FirsTech your merchant services provider.