What Are Merchant Services and Why Do They Matter?

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For businesses needing to accept credit and debit cards in a secure manner, merchant services are the place to start. Learning what exactly these services are, and why they matter for your specific business might take a little more digging.

Getting to the heart of the merchant services market means learning what exactly this term means for your bottom line, who exactly merchant service providers are, what the transaction process involves, and what businesses should expect pricing models to look like. Uncovering these answers starts with asking the right questions. We’ve broken down those questions into five categories that can help businesses better understand the complex world of payment processing.


What Does Merchant Services Mean?

Merchant services are a key component of credit card processing today. This term refers to the management of a merchant’s electronic transactions. Merchant credit and debit card processing consist of the necessary sales information from a merchant that makes a transaction possible. Merchant services encompass three key stages in an electronic payment: authorization, fund collection from the issuer, and payment to the merchant.

At least that’s the simple version of merchant services. The inner workers of these payment processing techniques are a little more complex. While merchant services play an essential function in business payment processing and getting funds into a merchant account in a timely manner, the payment processing marketplace is rapidly changing to help businesses more effectively process credit and debit cards.

Debit and credit cards are the most popular merchant services payment method but this has been shifting over time as emerging payment technologies gain traction. Other payment methods that fall into the merchant services category include Automated Clearing House (ACH) transactions that allow people to make payments from their checking account without relying on physical paper checks. Mobile payment services are also rapidly gaining ground, helping the merchant services execute payment processing models using better, faster, and more secure technology.

Under the merchant services payment processing umbrella, there are also a number of other payments that businesses must manage processing on a regular basis. Other opportunities, such as gift cards and loyalty programs, allow businesses to process transactions using a combination of different technologies to help link multiple systems. Collectively, these merchant services are designed with three segments in mind: The bank/issuer, merchants, and the consumer.


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What is a Merchant Service Provider?

Businesses understand the value of relationships in helping grow customer relationships and their bottom line. The relationship you have with a merchant service provider is a key component of that equation. A merchant service provider allows businesses to accept different types of payment methods, while still protecting their business and customers through the latest industry security standards.

Merchants today have a lot of standards to live up to when it comes to processing payments. Financial regulations and industry-wide security protocols have put additional pressure on businesses, issuers, and banks to stop the spread of payment breaches that put consumer data at risk. This has paved the way for security protocols for merchants and service providers to follow.

A key element of a merchant service provider is being the middleman between merchants and financial institutions for their payment processing needs. Instead of worrying about properly managing their transactions alone, merchant service providers act as the gateway to properly managing electronic transactions. Without this relationship, businesses would be on their own to work with banks and issuers.


What is the Transaction Process for Merchant Services?

There are a series of seven steps involved in the transaction process for merchant services. This starts when a customer initiates a transaction at a merchant’s POS system using electronic payment methods. That transaction information (amount, card number, and issuing bank info) is then sent to a merchant’s payment software to their merchant services provider.

A business’ merchant services provider is tasked with sending that transaction data to the necessary card issuer brand, then that transaction information is then passed to the consumer’s bank. This continues the authorization stage that helps a payment be made smoothly between consumers, businesses, and issuers.

Once the initial authorization process is kicked off, this triggers the consumer’s bank/card issuer to verify that the available funds/credit limit is available for that customer. If verified, the payment approval is then sent back to the card issuer to continue the transaction. The approval of this transaction is approved with the merchant service provider, and the transaction nears the final step. From there, the merchant can then complete the transaction with their customer.

This process appears to be lengthy and complicated, but it occurs in a matter of seconds in order to create seamless interactions between merchants and customers. Having a positive relationship between businesses, merchant service providers and banks/issuers is important for ensuring smooth a smooth transaction process.

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What do Merchant Services Pricing Models Look Like?

It’s important to understand the differences between merchant services pricing models. Some providers are known to slip in additional fees after a certain amount of time/transaction volume, while others are focused on building a transparent business model that doesn’t leave businesses surprised about the charges. Knowing how your merchant service provider prices its payment processing billing models is important when establishing your budget.

The three basic pricing models are broken down to a flat rate, tiered pricing, and interchange plus (or cost-plus pricing). There is not necessarily a “best” pricing model as this varies for each merchant based on size and processing volumes.

Flat rate pricing is what’s used by credit card processors like PayPal and Square. They charge for each transaction, which ends up being more expensive per transaction, but it can be an easy model to manage since there aren’t additional fees to worry about. This is a traditional model for small businesses that aren’t processing too many payments on a monthly basis.

Tiered pricing models are broken into three tiers of their own: qualified,mid-qualified, and non-qualified. This allows payment processors to bundle rates for each individual merchant based on how many transactions they are processing. This model follows a similar easy-to-understand model that flat-rate pricing offers, but also can end up costing more per transaction.

The next pricing model tends to be the most popular among businesses of all sizes. This is the interchange plus model, which is based on the fees card brands charge to process a transaction. For merchant services, this model allows businesses to pay less per transaction since they are able to tap into wholesale costs that are based on deals made with card brands.

The reason the interchange-plus pricing structure tends to be the most popular among payment processors is due to its built-in transparency. While knowing exactly what your payment processing expenses will be on a monthly basis may be harder to predict, this model is built to save businesses money in the long run with their payment processing needs. Regardless, this model is designed to streamline how businesses manage their credit card processing services.


How to Choose a Merchant Service Provider?

By now, you’ve established the importance of establishing a positive relationship with a merchant service provider. Like everything in the retail environment, there are plenty of choices merchants must make when selecting a merchant service provider. Each of those questions relates to deciding what type of provider is best for your business and your customers.

The most important factors to consider when choosing a merchant service provider is finding one that offers transparent, flexible and diverse solutions to fit your processing needs. You’ll want a provider that emphasizes transparency across the entire transaction so you’ll always know how your funds are being managed.

When choosing a merchant service provider, know the answers to some important questions, including what type of payments you are looking to process, how many transactions you’re processing on a monthly basis, and what your annual budget is for your payment processing services.

Selecting a merchant service provider is also about finding a payments partner that can enable a point-of-sale solution that is flexible and can grow with your business’ changing needs. This includes the ability to integrate new technologies as they enter the market. Since some merchant service providers aren’t always compatible with every business need, it’s important to establish relationships that can help you integrate numerous services smoothly with your existing POS system.

Since payment processing requirements can fluctuate, it’s important to choose a merchant services provider that doesn’t force you into a billing model that doesn’t work for your business. Instead, select a payments partner that is focused on providing innovative, flexible solutions that evolve as your business grows. Choose a provider that empowers your business to select its own payment processing path so that you can focus on serving your customers better.

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Anna Kragie is a content contributor for Payline Data. She previously wrote for PYMNTS.com, as a Sr. Content Producer, where she focused on financial services and payments innovation, fraud and security, emerging payments, and FinTech news, research and thought-leadership content across the payments industry.


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