What Is a Merchant Services Provider? – A Complete Guide

When retail businesses want to accept non-cash payments, they often need the help of a merchant services provider.

Although merchant services provide a wide range of financial tools, their primary role is to ensure fast and secure digital payments for businesses. For example, credit card payments, debit cards, and even methods like Apple Pay typically require a merchant account.

What exactly is a merchant services provider, though?

Keep reading for a deep dive into MSPs: what they are, how they work, and how retailers can find the best MSP for their business.

Merchant Services Providers Explained

Merchant services providers facilitate transactions in retail locations. They act as the bridge between the retailer and issuing bank and therefore make it possible for businesses to process transactions with credit cards, debit cards, and other digital payment methods.

However, merchant services providers also play a role in safeguarding financial data.

These services are crucial for enhancing operational efficiency and ensuring customer satisfaction across different industries.

How Do Merchant Services Work?

Merchant services simplify the payment process for businesses. By offering the necessary infrastructure to accept, process, and safeguard electronic transactions, they ensure a smooth and secure experience for both merchants and customers.

Here’s a breakdown of the process:

Accepting Payments

POS systems capture card information via swipe, modern tap for contactless payments, or manual entry. This data is then encrypted and transmitted via a secure connection to the payment gateway for authorization and processing, ensuring end-to-end security.

For ecommerce transactions, merchant services offer payment gateways tailored to online shopping. Customers can make purchases using a range of methods, such as credit cards and digital wallets, all backed by advanced encryption for peace of mind.

Initiating Transactions

The payment process starts when a customer makes a transaction. At this point, the merchant’s payment system interacts with a payment processor to kick off the payment. The customer’s details are collected and prepared for secure transmission. After that, the data is encrypted and sent to the processor for verification and processing.

Transmitting Data

To enhance the security of financial transactions, strong encryption protocols are implemented.

Following industry best practices, sensitive card information is replaced with unique identification symbols, a technique known as tokenization. This provides an additional layer of data protection.

Authorizing Transactions

Next, the gateway triggers a request that is forwarded to the acquiring bank, which contacts the issuing bank.

Here, the issuing bank verifies the customer’s account to determine if there are enough funds or available credit. Upon confirmation, the credit card terminal receives a final decision as to whether they should accept or deny a transaction.

Transferring Funds

Once authorization takes place, the funds from the customer’s account are transferred to the merchant’s account.

The merchant process consists of a settlement between the acquiring bank (merchant’s bank) and the issuing bank (customer’s bank).

What Services and Products Do MSPs Provide?

An MSP serves as a kind of mediator, connecting retailers to the banks that manage card transactions.

This service is relevant to businesses falling into several categories, including:

• Banks
• Electronic payment gateway providers
• Independent sales organizations (ISO)

In addition to traditional processing services, MSPs have evolved to offer innovative products such as loyalty programs and gift cards.

Types of Merchant Services

Merchant services offer a wide variety of tools and solutions to make payment processing more secure and efficient.

Merchant services encompass a broad spectrum of financial and support instruments designed to streamline and secure payment processing for merchants.

These different types include the following:

Card Reader

A card reader is a secure device that reads the information stored on credit or debit cards. Using technology such as magnetic stripes, chips, or contactless (near-field communication), these devices retrieve card data.

Card Terminal

A card terminal accepts card payments. It typically consists of a card reader, display screen, and keypad. Card terminals are essential for processing in-person credit and debit card payments.

Customer Support

Exceptional customer support is crucial for any merchant service. It not only plays a vital role in troubleshooting but also ensures seamless operations and promotes customer satisfaction.

Ecommerce Platform Software

This software empowers businesses to effectively sell their products and services online, with essential features like a shopping cart, content management system, and payment gateway.

Electronic Payment Gateway

An electronic payment gateway enables businesses to accept online credit and debit card payments securely. It establishes a connection between the merchant’s website or app and the payment processor, ensuring the safe transmission of customer payment information.

Payment Processing Services

Payment processing services enable businesses to accept credit and debit card payments. Acting as intermediaries between merchants and financial institutions, payment processors simplify the transaction process for both parties.

Point-of-Sale (POS) Systems

POS systems make it easy for businesses to accept payments at physical locations. These systems include hardware like a touchscreen display, a barcode scanner, a credit card reader, and a receipt printer.

Online Payment Gateways

Online payment gateways enable businesses to accept payments on their websites or mobile apps. By connecting the merchant’s platform to the payment processor, these gateways transmit customer payment information.

Mobile Payment Solutions

Mobile payment solutions facilitate transactions using smartphones or tablets. Various methods, such as near-field communication (NFC), SMS text messages, and QR codes, can be utilized for making payments.

Integrated Payment Platforms

Integrated payment platforms provide businesses with a way to handle payment processing. If your POS provider offers processing, this is typically called integrated payment processing.

Related Read: A Complete Guide to Integrated Payment Processing

Payment Facilitation Services

Payment facilitation services combine payment processing and merchant account services. This innovative model simplifies the setup process for businesses that may not meet the requirements of a traditional merchant account.

High-Risk Merchant Services

These services cater specifically to businesses at a higher risk of chargebacks or fraud. Industries that sell adult products or gambling services are usually included in this category. For example, smoke shop credit card processing typically requires a high-risk account.

Digital Wallet Services

Digital wallets securely store payment information on smartphones or other devices to allow users to make cardless online or in-person purchases. This eliminates the need for them to enter their credit card information.

Automated Clearing House (ACH) Processing

ACH processing enables businesses to accept electronic payments directly from a customer’s bank account. It is commonly used for recurring payments and deposits, making it ideal for businesses that offer subscriptions or memberships.

Subscription Billing Services

Subscription-based businesses rely on subscription management services to handle their recurring billing needs. These services automate the billing process, keep track of customer payments, and generate invoices.

Merchant Cash Advances

This innovative solution allows businesses to receive a lump sum of money in exchange for their future sales. Perfect for businesses with fluctuating sales or those in need of quick cash, even if they don’t qualify for a traditional loan.

Gift Card Processing

Gift card processing enables merchants to effortlessly sell and manage gift cards, which can be a powerful tool for retaining customers and driving sales, especially during key periods.

Currency Conversion Services

Currency conversion services allow businesses to accept payments in multiple currencies. These services convert foreign currencies into their home currency, making it easier to do business with international customers.

Fraud Prevention and Security Services

Detecting and preventing fraudulent transactions has never been easier. With the help of advanced tools and technologies, including real-time monitoring and identity verification, these services are designed to keep your transactions secure.

From fraud scoring to address verification and chargeback management, these services offer a wide range of features to ensure the safety of your business.

PCI Compliance Services

PCI compliance services are important for businesses to comply with the Payment Card Industry Data Security Standard (PCI DSS). These services safeguard sensitive cardholder data through routine security assessments, secure data storage practices, and robust encryption protocols.

Merchant Services Providers vs Merchant Account Providers

These two entities overlap quite a bit, but there are significant differences between merchant services and merchant account providers.

Merchant services providers is an extensive term that is used to describe an organization that has multiple offerings for merchants – including technology integrations, business services, and payments.

Merchant account providers, on the other hand, facilitate the setup of merchant accounts, enabling businesses to accept credit and debit card transactions.

Here’s the tabular approach for you to understand it better.

Merchant Services Providers vs Payment Gateway

Now let’s understand the distinctions between a merchant services provider and payment gateway.

A merchant services provider is a company that offers a comprehensive suite of services to businesses for accepting electronic payments. They go beyond simply processing transactions and provide a wide range of tools and support to help businesses streamline their payment operations.

A payment gateway acts as the intermediary between a customer, the merchant, and the financial institutions involved in an electronic transaction. It’s a crucial component of the online payment process.

Here’s the tabular approach for you to understand it better.

The Best MSP for Small Businesses: How to Choose One

Choosing a merchant services provider requires careful consideration. Don’t make an impulsive decision! Take the time to evaluate and consider various factors when selecting a provider that best suits your business needs.

Let’s dive into the key factors you should consider during this process:

Define Your Needs

If you’re looking to tackle your IT pain points head-on, start by identifying the issues and concerns you have with your current payment processing system.

Ask yourself these questions:

1. Are you struggling with slow transaction speeds and frequent downtime?

2. Are you concerned about data breaches or non-compliance with PCI standards?

3. Will your current provider be able to support your growth?

4. Do you have an in-house IT team, or do you rely solely on external support?

Outcome

What do you want to happen? What do you value most? Look out for the following key features of merchant services:

1. Reliable systems with minimal downtime and fast response times.

2. Robust security measures and proactive threat detection.

3. Proactive monitoring and maintenance are necessary to prevent disruptions in your business operations.

4. An adaptable infrastructure that can grow with your needs and keep up with evolving technology.

What’s Your Budget?

When choosing a provider, it’s important to consider the monthly subscription charges. Make sure they align with your expected transaction volume.

Additionally, look for flexible contracts that don’t tie you down to long-term commitments or early termination fees.

Research Potential Providers

Be sure that the MSP covers your essential IT needs, such as network monitoring, security, and help desk support.

To get a sense of their reputation, check out online reviews to get an idea of how other customers feel about them.

1. Did they think the provider was highly responsive?

2. Did they have great technical expertise?

3. What about how they communicated with their customers?

Compare Offerings and Pricing

Carefully examine each service package and be mindful of any potential additional fees. Begin by comparing:

Additionally, check for hidden expenses such as installation fees, contractual obligations, and unexpected data overage charges.

Evaluate Support and Security

Check the MSP’s support infrastructure.

• Look for multiple support channels like phone, email, and live chat. This variety caters to different preferences and enhances issue resolution.
• Ask about their average response times. This indicates how quickly they can attend to your needs and align with your urgent expectations.
• Inspect data security. Ensure compliance with industry standards like PCI DSS, leaving no room for complacency in safeguarding sensitive information.

Consider Integrations and Features

When choosing an MSP, prioritize compatibility with your current software and future IT goals to avoid integration issues.

Be sure to evaluate reporting tools for better business insights.

Moreover, prioritize seamless integration through features such as comprehensive security solutions and reliable backup options.

Ask Questions and Request Demos

Transparency is crucial when evaluating service providers. If their proposals lack clarity, don’t hesitate to ask for more information.

Demos and free trials provide valuable hands-on experience to ensure that the provider’s interface and features align with your requirements.

What Does It Cost to Work with a Merchant Services Provider?

Understanding the costs associated with a merchant services provider is crucial for any business. These costs can vary significantly depending on several key factors:

• Transaction Volume: Businesses with higher transaction volumes often qualify for lower processing rates due to economies of scale.
• Transaction Type: Card-present transactions: In-person transactions using physical card readers generally have lower processing fees than card-not-present transactions.
• Card-Not-Present Transactions: Online or phone-based transactions typically incur higher fees due to increased fraud risk.
• Industry: High-risk industries, such as ecommerce, online gambling, or adult entertainment, face higher processing fees due to increased fraud risk and regulatory scrutiny.

Card Type: Processing fees vary based on the type of card used:

I. Credit Cards: Generally have higher processing fees than debit cards.

II. Rewards Cards: Often have higher fees than standard credit or debit cards due to the rewards programs offered by card issuers.

Pricing Models: MSPs offer various pricing models, each with its own implications for costs:

I. Interchange-Plus Pricing: This model is considered the most transparent. It charges a small markup on the actual interchange fees set by the card networks, providing more predictability and potentially lower overall costs.

II. Tiered Pricing: This model categorizes transactions into tiers (qualified, mid-qualified, non-qualified) based on factors like card type and transaction method. Higher tiers typically have higher processing fees.

III. Flat-Rate Pricing: This model charges a fixed fee per transaction, regardless of the card type or transaction amount. It offers simplicity but may not always be the most cost-effective option, especially for businesses with a wide range of transaction types.

Benefits of Working with a Merchant Services Provider

Partnering with a reputable merchant services provider offers numerous advantages for businesses of all sizes:

• Streamlined Operations: MSPs provide integrated solutions that streamline various aspects of business operations, including:
• Payment Processing: Seamlessly integrating with existing POS systems and ecommerce platforms.
• Inventory Management: Connecting payment processing with inventory systems to track stock levels and manage orders efficiently.
• Customer Relationship Management (CRM): Integrating payment data with CRM systems to gain valuable insights into customer behavior and preferences.
• Enhanced Security: Robust fraud prevention tools and security measures, such as tokenization and encryption, protect businesses from fraudulent activities and data breaches, minimizing financial losses and safeguarding customer data.
• Multiple Payment Options: Offer a wide range of payment options to customers, including credit cards, debit cards, digital wallets, and mobile payments, enhancing customer convenience and satisfaction.

Get More Insights: A Beginner’s Guide to Accepting Credit Card Payments

• Seamless Checkout Process: Streamlined payment processes reduce friction and improve the overall customer experience, leading to higher conversion rates and increased customer loyalty.
• Automation: Automate many aspects of the payment process, such as recurring billing and invoice generation, reducing manual effort and minimizing human error.
• Data-Driven Insights: Access to detailed transaction data and analytics provides valuable insights into sales trends, customer behavior, and areas for improvement.

• Expert Support: Dedicated customer support teams help with technical issues, troubleshooting, and resolving payment disputes, ensuring smooth and uninterrupted operations.
• Reduced Costs: Competitive pricing models, volume discounts, and access to advanced fraud prevention tools can help businesses reduce overall processing costs and minimize losses due to fraud.
• Compliance: MSPs help businesses comply with industry regulations, such as PCI DSS (Payment Card Industry Data Security Standard), ensuring data security and minimizing the risk of fines and penalties.

Trends in Merchant Services

The merchant services industry is currently experiencing a wave of significant transformations. With the rapid advancement of technology and the changing expectations of consumers, it’s important to keep an eye on these trends:

Contactless Payments

Contactless payments are taking convenience and security to the next level. Fingerprint and facial recognition enable contactless payments, while smartwatches offer hands-free options.

And if that’s not enough, voice assistants like Alexa and Google Assistant can even integrate with payment systems.

Adopting Mobile and Digital Wallets

Customers are increasingly embracing the use of mobile and digital wallets for contactless payments.

With just a simple tap on their smartphone or digital wallet, they can check out faster, securely store their payment information, and conveniently access their transaction history. The added layer of convenience and security offered by contactless payments makes it an attractive option for modern-day consumers.

New and Improved Cash Register Technology

Merchants are embracing the advantages of cloud-based retail POS systems, such as scalability, data accessibility, and remote management. These benefits are particularly valuable for small businesses with limited physical space.

In addition to that, self-service kiosks have become a prominent trend in various industries, from convenience stores to movie theaters. They facilitate quicker checkouts and provide personalized product recommendations.

Increase in Different Ways to Pay

Buy Now, Pay Later (BNPL) has become a major trend. It allows customers to make purchases and pay in convenient installments. This is perfect for budget-conscious shoppers who want to buy products but prefer to spread out the payments over time.

Paying with cryptocurrency is making waves as a new payment method. Although it is still in its early stages, some merchants are starting to accept cryptocurrencies. The rise of this new payment method is fueled by consumer interest and the growing demand for alternative payment options.

Challenges and Solutions in the MSP Industry

The merchant services provider industry is confronted with new challenges and opportunities with the rapidly changing landscape driven by new technology and evolving consumer tastes.

The challenge lies not only in overcoming emerging challenges but also in strategically positioning themselves to take advantage of opportunities within this dynamic marketplace.

Dealing with Safety Worries

Challenges

Hackers are relentless in their efforts to target merchant services providers and steal valuable customer data, including credit card numbers.

To effectively safeguard against malware, ransomware, and other cyber threats, MSPs must implement strong security measures.

Additionally, criminals may try to install card skimmers to steal card data.

Solutions

To safeguard data, it’s crucial to invest in robust security technologies such as firewalls, intrusion detection/protection systems, and secure access controls.

Regularly updating software and firmware is also essential.

Additionally, it is highly recommended to choose devices that adhere to industry security standards, like PCI DSS.

Following the Rules

Challenges

Keeping up with ever-changing regulations across various countries, states, and industries can be challenging.

Additionally, maintaining compliance with stringent security standards such as PCI DSS can be tough.

Solutions

To stay compliant with regulations, it’s important to stay updated through dedicated platforms and legal expertise.

Regular PCI scans and audits are crucial.

Be sure to limit access to sensitive data and track activity.

Keeping Up with New Technologies

Challenges

As new payment methods like contactless payments and digital wallets continue to gain popularity, the need for integration and support becomes crucial.

At the same time, the ever-growing presence of cyber threats and vulnerabilities demands strong security measures be implemented.

Solutions

Collaborate with companies offering innovative payment solutions for integration. Invest in training and resources to understand and implement new technologies.

Ensure the implementation of tools like fraud detection, encryption, and multi-factor authentication.

Stay updated on industry trends and regularly update security systems accordingly.

Conclusion

Merchant services providers are fundamental partners for businesses looking to navigate the digital payment landscape. They offer not just tools for transaction management but also strategic solutions to streamline operations, attract customers, and mitigate risks.

In an economy that is rapidly turning towards digitalization, the right MSP can be a game-changer for your business, providing the backbone for sustained growth and customer satisfaction. By understanding the importance of MSPs and the wide range of services they offer, business owners can make informed decisions that will benefit their bottom line.

With the guidance provided in this blog post, businesses of all sizes can enter the world of merchant services with a firm knowledge base.