What is Merchant Services?
Merchant services is a broad terms that refers to merchant processing services giving a business the capability to accept payment using a customer's credit card. The merchant services provider (MSP) is the one who actually makes the transaction happen while complying with security requirements. Merchant services providers are also referred to as credit card processors (CCP). MSPs act as the intermediary between your business and your customer’s credit or debit card account.
This is how it works:
- A customer will swipe their credit card or enter their credit card information to make a purchase from your store
- Your point of sale software sends the data to your chosen MSP
- The MSP contacts the customer’s credit card association to check that they have enough credit to pay for the purchase
- The card association checks with the customer’s bank, and then (hopefully) sends the MSP a reply approving the transaction
- The MSP completes the transaction and sends you a receipt for the customer
Merchant Services Fees and Rates
Understanding the fees and rates for merchant services providers can be difficult. It seems like every MSP uses a different pricing structure and has a different way of calculating your fees, which makes it hard to compare one MSP to another.
Here are the main fees and rates to look out for:
These are the biggest fees you'll pay. They're usually a percentage of each transaction plus a flat fee, e.g., 2.5% + $0.10 per transaction. Unusual transactions like foreign currency transactions incur higher interchange fees.
These are generally a percentage of your estimated monthly sales volume, e.g., 0.1% of sales up to 1,000 sales, then 0.11% of the next 1,000 sales, etc.
These are the cost of leasing a physical payment terminal for your store, so it doesn’t apply to online stores. Terminal leasing fees can add up to thousands of dollars, so it’s usually best to buy a terminal outright to avoid this extra charge.
A monthly or annual service charge
Not all MSPs charge this fee, but it’s important to know to look out for it.
Payment gateway fees
These only apply to online retailers. They pay for the cost of your online point of sale (POS) software, which is your virtual payment terminal.
Monthly minimum fee
You’ll have to pay a monthly minimum fee if you don't make a certain minimum amount of transactions each year.
Is Your Business Considered High Risk?
One of the main issues that affect how much you’ll pay MSPs is your type of business. Every business is organized into a merchant category and given a merchant category code (MCC). If you have a high-risk MCC, you’ll be charged higher fees than low-risk businesses. High-risk MCCs include those that sell products with a high return rate, need a large amount of capital to get started, or are considered to be in a high turnover industry.
Some high-risk MCCs are:
- Online gambling or casinos
- Advance bookings in travel and tourism
- Magazine or other subscription-based businesses
- Online dating services
- Debt collection
You could also be considered a high-risk business if:
- You have a history of frequent chargebacks
- You are all first-time business owners
- You have bad credit history
- You do a lot of business with international customers in areas that have a high risk of chargebacks (i.e., outside of the EU, North America, Japan, China, Singapore, or Australia)
- You are a multi-currency business
How to Find the Best Credit Card Processors
There isn’t one credit card processor that is the best for everyone, because every business is different. What’s best for a large retail store with many branches isn’t necessarily best for a small Ecommerce business. However, here are some things to look for to help you find the best credit card processors for your business:
- A CCP that has experience serving your sector.
- A CCP that can service all your needs in one—for example, if you have an online store and a brick and mortar store, look for an MSP that can process both face-to-face and online transactions.
- Hidden fees. Many companies practice ‘bait and switch’ where the price you see advertised doesn’t include all of the real costs.
- Compare fees carefully. Because there are a few different pricing models, it can be difficult to compare like with like. An MSP that seems to offer great value at first glance might actually cost more in the long run due to the pricing model.
- Check the minimum monthly transaction amount and make sure that you expect to meet it.
- Pay attention to whether the rates go up or down according to your volume of sales. If you make a lot of transactions, you'll want a CCP that lowers the fee as sales increase, but if you make just a few high-value sales per month, you'll want the lowest fees to apply to the lowest sales volume.
Credit Card Processing for Small Businesses
Paying by credit card is the norm these days so adding credit card processing capabilities can be a real boost to your income. Small businesses can choose online credit card processing, a conventional credit card reader, or a mobile credit card processor that integrates with a smartphone or tablet.
Conventional card readers can be best if you make a lot of face-to-face sales. If most of your credit card transactions take place online, then an online CCP and payment gateway will be the most useful. Sole traders and mobile businesses, like electricians or entertainers, might find that a mobile CCP that works with their smartphone serves them best.
What is a Payment Gateway?
A payment gateway is like a virtual terminal for your online business. It works together with the credit card processor (also called a payment processor, which can make it easy to confuse with payment gateways) to authorize online sales. Payment gateways securely encrypt customer data and send it to the payment processor, which then transmits a request for payment to the customer’s credit card association. When the CCP gets approval for the transaction, it sends it to the payment gateway which then sends it securely back to the merchant.