Wondering how to define “merchant services”? This term encompasses all the components used by a business to accept and process payments from customers. It can include hardware to ring up purchases in person, software to process online payments, and banking services to approve payments and transfer funds to your business account.
Putting the right set of merchant services in place is important for any business. Here’s what to know about selecting the exact services you’ll need, keeping costs low, and choosing a merchant services provider.
Key Points
• Merchant services enable businesses to accept and process payments efficiently.
• Services include point-of-sale systems and online payment processing.
• Stronger security and diverse payment options are key benefits.
• Costs include one-time, monthly, and per-transaction fees.
• When choosing among providers, consider services, fees, funding speed, support, and scalability.
Understanding Merchant Services
What are merchant services? As a group, merchant services are the equipment and processes through which customers pay for a business’s products.
Merchant services include point-of-sale (POS) systems, online payment processing, and software to track sales and inventory. Businesses often work with merchant services providers when selecting and setting up their payment infrastructure. If you’re signing on with a merchant services provider, expect to pay for the hardware (via purchase or lease), processing fees, and potential subscription costs.
How Merchant Services Work
Merchant services combine hardware and software to process transactions and track your sales. Here’s how.
• Brick-and-mortar businesses: Hardware devices take in customer payments, whether cash, card, or the tap of a mobile phone’s digital wallet. The accompanying software processes the payment and, over time, tracks your sales.
• Internet-based businesses: Your company needs to accept payments online. Common methods include online payment service providers, mobile payment apps, or ACH transfers.
• Service providers: Merchant services for your enterprise may require invoices that can be sent and paid electronically. You can opt for net 30 payment terms or whatever deadline you prefer, and send out automated reminders to customers as needed.
When a customer pays you, the funds go to your merchant account, which is usually held by your merchant services provider. The payment is approved by the bank that issued the customer’s card and then settled, typically one to three business days after the transaction. At that point, the funds are deposited into your business checking or other designated merchant account.
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Types of Merchant Services
Of the many merchant services you might use to support your business, here are some of the most common options.
POS Systems
A point-of-sale system consists of the hardware and software that work together to accept customer payments. The system might include registers, credit card readers, kiosks, or even just a phone or tablet. Depending on your business, you may also need extra accessories, like a barcode scanner or receipt printer. POS software processes the payments and tracks your sales.
Payment Gateways
A payment gateway is a service that enables business owners to accept payments on their website. It handles and encrypts customers’ credit or debit card information and acts as a bridge to a payment processor. If the customer’s credit card issuer authorizes the transaction, the payment gateway receives and confirms that authorization. The funds are then credited to the merchant account.
Recurring Payment Processing
Subscription-based businesses can automate their billing with a payment processing service. This lets your customers authorize recurrent charges to their bank account, credit card, or debit card. As a merchant service, the payment processor securely stores customers’ payment data, automatically charges subscriber accounts on each billing date, and manages fund transfers.
Mobile Payments
Merchant services can also include mobile payment systems, with which your business can accept payments through channels like mobile wallets, peer-to-peer apps, QR code payments, and text payments. To receive these payments, you may need a portable card reader that you can connect to a phone or tablet.
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Benefits of Merchant Services
Your business’s use of professional merchant services is generally a plus for both you and your customers.
• Increased security: Keeping financial data private is a major responsibility. A reliable merchant services provider can help you make sure you’re protecting your customers’ payment information.
• More customer payment options: Expanding your merchant services allows you to accept more payment types, such as digital wallets and credit cards, which could attract more customers.
• Faster checkouts: An updated payments system can make it easier and faster for customers to check out, either online or in person.
• Steady cash flow: Your merchant services provider should present a schedule for how quickly funds will be processed and deposited into your business account. Having a clear timetable can help you manage your cash flow effectively.
Costs of Merchant Services
Adding merchant services to your business does come with some costs, which may include:
• One-time charges such as hardware purchases and setup fees
• Monthly software fees
• Per-transaction processing fees
• Early termination fees if you close your account before the contract ends
You’ll want to consider the price of the full merchant services package as you evaluate and compare potential providers.
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Choosing the Right Merchant Services Provider
When investigating what merchant services is able to provide for your business, you’ll want to analyze such factors as:
• Available services: As you’ve seen, the merchant services definition includes many different types of payment processes. Think about the services you need now and how your needs may change in the future.
• Fees: Both upfront and ongoing costs can vary significantly. Get multiple quotes to compare how much each provider would charge to set up your merchant services and maintain them.
• Funding time: The speed with which customers’ money shows up in your bank account will affect your business’s cash flow, so ask how long it takes to settle payments.
• Customer support: Find out when the provider’s customer support team is on duty and what contact methods are available.
• Future growth: If you have plans to expand your business, inquire ahead of time if it would be easy to scale as you grow or if you’d be locked in to the original contract terms.
Alternatives to Traditional Merchant Services
Instead of traditional merchant services providers, you may also consider a payment facilitator (payfac) service. A payfac uses a master merchant account rather than requiring each company to open its own individual account, meaning it may be able to onboard your business faster.
However, payfacs tend to limit the customization of your payment processing. Additionally, they’ll likely charge a flat rate for each transaction, so for high-volume businesses, a payfac could end up costing more than a traditional payment processor.
The Takeaway
Merchant services can be defined as the hardware and software a business uses to accept and process customer payments. These services manage transactions by transferring the customer’s payment to a merchant account and then to the business’s operating account. The customer generally benefits from increased security, more payment options, and faster checkouts, while the business is likely to see a steadier cash flow.
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FAQ
Do I need a merchant services account to accept credit cards?
It’s possible for a business to accept credit cards without a merchant services account by using a payments facilitator (payfac) instead. The payfac uses its own master merchant account for all of the merchants it works with, and after a transaction is settled, the payfac transfers your funds to your business account. You’ll still need hardware and software for in-person dealings.
What fees are typically charged for merchant services?
Merchant services fees can vary based on what services you’re using. Common expenses include hardware and software costs, setup fees, monthly fees, transaction fees, and early termination fees.
Can small businesses benefit from merchant services?
Yes, merchant services can be extremely useful to small businesses. For example, merchant services help a retailer process a wider variety of payment types, making it easier for customers to complete their transactions.
How secure are merchant services transactions?
Merchant services transactions are meant to be secure, thanks to technology like data encryption and fraud protection. But it’s best to review these features in depth when selecting your merchant service provider, as you shouldn’t assume they all offer the same level of security.
What’s the difference between a payment gateway and merchant services?
A payment gateway is the intermediary between your business and the customer’s bank when the customer makes an online payment. The merchant services definition is much broader. It includes all the different types of payment services, hardware, and software that a business may use to accept payments.
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