What is merchant services?

June 29, 2019

Merchant services, often labeled credit card processing, is the handling of electronic payment transactions. They’re generally run through an account that a merchant sets up to facilitate credit card processing. A merchant services provider simplifies the payments acceptance process, enabling merchants to expand their payment options, get their money more quickly and a number of other benefits.

How credit card processing works

Accepting credit and debit cards is a complicated business – here’s a simplified breakdown of how it works:

  1. The customer presents a payment card for goods or services at a merchant location (or enters payment information online).
  2. The card payment information is sent to the acquiring bank (the merchant’s financial institution).
  3. The acquiring bank sends the transaction to a payment processor, then to the card association – e.g. Visa, MasterCard or Discover.
  4. The card association sends the transaction to the issuing bank (financial institution that issued the credit card), and then requests an approval.
  5. The issuing bank sends a response. If they approve the transaction, the issuing bank sends an approval code back to the card association.
  6. The card association sends the authorization code to the acquiring bank.
  7. The acquiring bank sends the approval code to the merchant’s payment terminal.
  8. The terminal prints a receipt for the customer to sign.
  9. At the end of the billing period, the issuing bank bills the customer for the charges incurred during that period.
  10. The customer pays his or her credit card bill to the issuing bank.

Defining interchange and other fees

Each time a shopper swipes (or inserts, in the case of EMV chip) his or her payment card, a fee is charged to the merchant. Usually a percentage of the transaction amount, this fee is charged because the issuing bank and acquiring bank assume the financial liability of the electronic card transaction. For example, if the consumer never pays his credit card bill or pays it late, for goods purchased, the issuing bank will be out those funds. Also, if the transaction turns out to be fraudulent, the banks have historically assumed the burden of those transactions (though this has shifted back in the direction of the merchant with the introduction of EMV chip technology).

The amount and types of fees you are charged as a merchant depend on several factors, including:

  • Type of business – usually defined by MCC (merchant category code)
  • How risky the business is
  • Retail in-person (Card-present) vs. internet, mail order, phone transaction (MOTO or Card-not-present)
  • Merchant’s credit rating and history
  • Swiped/dipped vs. key-entered card number

What a merchant services provider does

In general, here’s what a merchant services provider does:

  • Gathers payment card and transaction information from the merchant
  • Receives authorization (or denial) for the transaction
  • Collects funds from the issuing bank (institution that issued the credit or debit card)
  • Sends funds to the merchant – less interchange and other fees

Typical offerings of a payment processor

Above and beyond enabling credit and debit card acceptance, a good merchant services provider or payment processor can help you grow your business in ways you might not think. When you’re looking for a provider, you should ask if you can accomplish the following with them to consider:

  • Accept a full complement of payment cards – Visa, MasterCard, Discover, American Express, eWallets and other alternative payment forms
  • Process paper checks securely
  • Accept eCommerce payments online, including ACH payments
  • Accept mobile/wallet payments such as Apple Pay®, Google Pay® and others
  • Take payments using a smartphone or tablet (with an attached “dongle”)
  • Accept payments that are already directly integrated with a point of sale (POS) system that you use
  • Access detailed, flexible reporting of your payments activities
  • Establish a customer loyalty-rewards program that’s connected to your payments
  • Set up a gift card program to incentivize repeat business and to create wallet-based billboards for your business
  • Apply for or access loans or cash advances to support your business growth or to make needed investments in hardware or software

Equipment you’ll need for payment processing

When you partner with an experienced merchant services provider, you should be guided through each step of the set-up: from understanding the terms of your processing contract to funding your bank account. Your merchant services representative will work with you to understand your business and your goals to recommend the best POS system for your business. Perhaps a more traditional cash register is right for you – or maybe a tablet-based POS system that allows you to ring up purchases out on your showroom floor or in the field is best for you.

The financial services industry – and accepting electronic payments – can be complex. But, the good news is that you certainly don’t have to go it alone. Choose a reputable processor for your credit and debit card acceptance needs and you’ll be well positioned to grow your business for years to come.