You’re gonna pay for that!
Now that we’ve got your attention, we have a question for you.
How do your customers pay you? Cash? Check? Credit?
The volume of each of those forms of payment will differ depending on which industry you operate in. But one thing is clear: there’s been a general shift towards electronic payments and away from cash and paper checks.
If you intend on keeping your business on the up-and-up, then you’ll want to learn about the role that merchant service providers play in our technology-dominated economy.
Find out below!
What is a merchant service provider?
The phrase merchant service provider (MSP) is a general term that refers to any hardware, software, or services that are required for a business to receive and process customer payments made by credit and debit cards. And as if that definition wasn’t broad enough, the term merchant service provider is also interchangeable with ‘merchant processing services’.
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Since the definition encompasses so many different merchant services, sometimes it can be a difficult task for a small business owner to narrow their sights on the “right” merchant service provider for them. Nonetheless, as our world becomes more digitalized, the impact that merchant processing tools (and FinTech in general) have on the overall financial health of businesses continues to grow. From streamlining payments to increasing your revenue, it’s clear that the importance of having the best merchant processing services at your small business shouldn’t be underestimated.
Before we describe how to choose a merchant service provider for your business, let’s first give a breakdown of the different types of merchant processing services.
3 types of merchant services providers
1. Merchant account providers
In the most basic sense, merchant account providers do precisely what their name suggests – they provide a merchant account that’s specifically designed to allow businesses to accept credit and debit card payments. When a business receives a ‘plastic’ payment, the funds will go to their merchant account before eventually transferring over to their business bank account (typically on a daily or weekly cycle).
A merchant account provider may also offer other services to help optimize your business’s payment methods, including:
- Credit card terminals
- Mobile card readers
- POS systems
Smaller businesses may not find it entirely necessary to have a dedicated merchant account – and they may even find it more cost-effective to use a payment service provider without setting up a merchant account (since the rates will often be lower). On the other hand, larger businesses that have a very large volume of transactions through credit and debit cards will find it extremely helpful to have a separate merchant account to keep a clearer record of those ‘plastic’ payments.
What do merchant account providers consider before approving an application?
- The kind of business you’re running
- How long you’ve been in business
- Your business’s financial history (defaults, bankruptcies, so on)
- Your personal credit history
- The rate of credit card fraud and returns in your industry
- If you’ve had a merchant account in the past
If a merchant account provider finds your business to be riskier, it doesn’t necessarily mean you’ll be rejected. It might just mean that the fees you’re charged will be higher, at least until you’re able to demonstrate that the risk is lower than the merchant account provider initially thought.
Side note: Merchant account providers normally provide highly personalized customer support. So, if you’re worried about the obstacles you may encounter with your merchant processing services, merchant account providers will give you a ‘safety-net’ that you can depend on.
2. Payment services providers (PSPs)
Payment services providers (also known as PSPs, third-party processors, or aggregators) allow a small business to accept electronic payments both in face-to-face transactions as well as online – without having a designated merchant account. We say ‘electronic payments’ because that includes credit and debit cards, together with digital wallets such as Apple Pay.
Not having a designated merchant account (or merchant ID number) means that all of the merchants that are using a particular PSP are combined into one ‘umbrella’ merchant account.
What does that mean for your business?
- Little-to-no account fees
- No long-term contract
- A lower level of customer support
- A higher level of scrutinization over your account activity
- Risk of your account being frozen or even terminated without forewarning
Opening an account with a payment services provider is virtually instantaneous since the underwriting process is practically non-existent. But, that means the PSP is taking on all of the risks when allowing a merchant to use their services. It’s for that reason that PSPs will be much more vigilant when it comes to your business’s ongoing transactions. If, for example, you have one transaction in the month that is significantly larger than the rest, the PSP may put your account on hold until they can confirm the legitimacy of that payment.
Keep these details in mind when you consider signing up with this type of merchant service provider. Your customer experience with them may be great when you’re just getting your business established – but it might be better to use another kind of merchant processing service as you start to scale up your business.
3. Payment gateway providers
A payment gateway provider is simply a kind of merchant service provider that allows a business to accept credit and debit card payments online through a secure network. It’s important to recognize that, if you’re conducting business solely offline in a physical store (see Brick and Mortar vs Online Retail), then it’s not entirely necessary to have a payment gateway; a merchant account or PSP will be enough for you to process ‘plastic’ payments in-store.
If you want to give your customers the ability to pay you through your website or phone application, then you’ll need to sign up with a payment gateway provider. Without a payment gateway provider, there’s simply no way for your customers to pay you online.
Important note: While a merchant account provider might charge you a gateway fee, a PSP will include the cost of the payment gateway in their services.
That’s not all there is to it, though. Payment gateway providers go beyond the simple function of allowing your business to process credit and debit card transactions on the internet. They also incorporate a high level of security and fraud prevention so that both you and your customers can perform online financial transactions with peace of mind. When you consider the fact that even big names like Macy’s have fallen victim to hacking, there’s no doubt that having encrypted online payment systems is absolutely critical to the integrity of your business.
Other features of payment gateway providers:
- Payment info storage
- Recurring billing
- Virtual terminal
- Seamless integration with your website & QuickBooks
Merchant service providers do have their limitations though; among their shortcomings is the inability to provide merchant financing solutions. Fortunately, for small business owners working in industries where merchant processing services play a big role (such as retail, eCommerce, and restaurants), there are plenty of alternative business funding solutions.
Merchant cash advances (MCAs) are a form of business financing which is particularly relevant to the discussion about merchant service providers. An MCA is a loan that businesses repay by automatically funneling a percentage of cash from future credit and debit card sales directly to the lender. What does a merchant services provider have to do with it?
Since MCAs are repaid through a percentage of credit and debit card sales, it’s important that your business has a large and reliable flow of electronic sales before taking these types of business loans. That will ensure your ability to pay back the loan without struggling to do so. If your business sees only a small volume of credit and debit card transactions, you’d be better off with an alternative business funding solution.
The point is that the wide variety of merchant services all make it easier to process ‘plastic’ payments. So, small businesses that make use of merchant service providers are naturally a better fit for merchant cash advances.
Side note: It’s worth highlighting that there is a form of MCA known as ACH (Automated Clearing House) which are repaid through fixed daily or weekly deductions from your business bank account.
Whether it’s a ‘traditional’ MCA or an ACH, it comes with a factor rate that normally ranges between 1.2 and 1.5. Meaning, whatever the loan amount is, the total repayment will equal the original loan multiplied by the factor rate. Plus, the loan term is generally short and the payment frequency is high. These details may not be so appealing at first glance, but MCAs are also relatively easy to qualify for. If you’re looking for fast business loans, you’ll want to have a look into merchant cash advances.
7 best merchant service providers
- Payment Depot
Before we dive into the best merchant service providers, it’s worth mentioning that some will be more costly than others. If the price of a merchant processing service is a bit outside your budget, consider using Become’s business loan marketplace to compare your options.
Square is one of the best-known merchant service providers around because of how popular it is among small businesses. Since it charges just a flat rate for credit card transactions online (and 2.6% + $0.10 for in-person transactions), Square is one of the more attractive merchant processing services for businesses that have only a small volume of electronic sales every month.
Best perk: Low-fees
2. PayPal Credit Card Processing
If you’re a freelancer or are just starting up, then PayPal may be the best fit for your needs. There’s no long-term contract to sign, and it gives you the ability to process credit, debit, and PayPal transactions – both online and in-person. The flexibility of PayPal makes it one of the best merchant service providers for businesses that aren’t yet firmly established.
Best perk: Useful for even the lowest volumes of electronic transactions
As one of the biggest and most seasoned merchant service providers around, TSYS ranks high both in terms of reliability and comprehensiveness. Essentially any merchant processing service you may need in your business – from credit card processing to mobile POS technology – is available through TSYS. If professionalism is what you’re seeking in your merchant services, then TSYS should be at the top of your list.
Best perk: Competitive pricing with a meet-or-beat policy
Largely designed for eCommerce businesses, Stripe offers its users a high level of customizability to their checkout forms. While that may be an ideal option for larger merchants, it can be a bit intimidating smaller businesses; for those, Stripe provides prebuilt forms so the merchant can start doing business quickly. Stripe is free to setup and doesn’t charge fees for monthly statements, payment gateway services, or annual PCI compliance.
Best perk: Customizability of checkout forms
At first glance, Fattmerchant looks pretty standard. It provides the ability to process credit and debit card transactions online and offline, accept mobile payments, integrate with POS systems, create customized checkout tools online, and so on. So what sets it apart? Fattmerchant charges a higher monthly fee than many other merchant processing services (and lower transaction fees). That makes Fattmerchant an ideal merchant service provider for businesses that are earning revenues higher than $30k per month.
Best perk: Competitive pricing model for larger businesses
Specifically built for larger retail or eCommerce businesses, Helcim provides a wide array of merchant services tailored to the needs of both online and offline merchants. Helcim is much more than just a merchant service provider though – they also give their users useful tools like CRM, invoice generation, and a 24/7 support hotline. Add in the highly customizable POS system, the ability to create online stores with digital shopping carts, and even recurring payment plans for customers – and it becomes clear why Helcim is ranked among the best merchant service providers for all but the very smallest of businesses.
Best perk: Incorporate your brand into Helcim products
7. Payment Depot
Similarly to Fattmerchant, Payment Depot offers its merchant services via a membership model. That means users pay a monthly subscription fee which varies depending on the merchant process services being used as well as the size of the business. And just like Fattmerchant, Payment Depot is a better fit for businesses that are earning more than $20k per month. The main difference is that Payment Depot has lower fees.
Best perk: Pricing for online and in-person transactions are the same
Regardless of the size of your business or the industry you’re in, merchant processing services can help streamline your cash flow (among many, many other perks). With the info you’ve got here, it’s no longer a question of “what is a merchant services provider”. The question to ask now is “which merchant service provider is right for my business?”
The answer to that question will be different for every small business – what’s important is that you do your due diligence and investigate the pros and cons of the merchant processing services available to you before making a decision. The insights we’ve provided here should help!