What Are Merchant Services?

Merchant services are services that businesses can use to accept and process 🧸electronic payments from their customers.

Merchant services facilitate these transactions, which m🔯ay involve a combination of point-of-sale (POS) systems, credit card readers, payment gateways, and online transaction processing, among others.

How Merchant Services Work

Merchant services encompass a number of processes involving businesses (merchants), their customers, and the respective banks🍃 of both. The♛se processes include:

The Customer Payment Process

Customers encounter merchant services when they initiate a transaction using a credit card, debit card, or other electronic meꦐans.

This may occur at a POS device at a business' physical location, such as a shop or restaurant, or through an online payment gateway or portal on the merchant’s website.

In a t🌠ypical scenario, the POS device or online portal co💟llects the transaction amount, the cardholder account number, and other data identifying the cardholder.

It transmits that information to the card-processing network associated with that card, such as 澳洲幸运5官方开奖结果体彩网:American Express, Discover, 澳洲幸运5官方开奖结果体彩网:Mastercard, or Visa.

In some cases, such as with American Express and Discover, the network is also the company that🥃 issued the card used (the issuing bank).

It either accepts or rꦦejects the transaction and relays𒊎 its decision back to the merchant’s terminal.

Mastercard and Visa are simp🥂ly networks or associations, not card issu﷽ers, so they seek approval from the issuing bank.

If approved, the transaction goes through.

Most of this process—often referred to as 澳洲幸运5官方开奖结果体彩网:authorization—happens behind the scenes and virtual🐻ly instantaneously, making it largely invisible to the custo🌄mer.

The Merchant Payment Process

The merchant doesn’t receive money from customer transactions right away. That involves a separate, m꧒ultistep process.

When a transaction is given the green light, the merchant receives an authorization code from the card issuer.

The merchant forwards that code to its payment processor, often along with other transactions it completed that day (a procedure known as 澳洲幸运5官方开奖结果体彩网:batch processing).

The processor sends the information to the appropriate card network, which then forwards it to the issuing bank, if different. The issuing bank then begins the settlement process, in which money finally changes hands.

The Settlement and Funds Transfer Process

In the settlement process, the issuing bank transfers funds for the transaction to the business' bank (the acquiring bank). That bank then deposits the funds in the business' 澳洲幸运5官方开奖结果体彩网:merchant account. This process typically takes 24 to 48 hours.

The issuing bank also adds the transaction amount to the customer/cardholder’s balance. This will be shown on their next billing statement.

In the case of a debit card, the issuinജg bank can simply withdraw the money from the cardholder’s account.

Components of Merchant Services

Me🌜rchant services rely on a combination of hardware and software. Some common componen𒈔ts:

POS Systems

In their most basic form, POS systems are computers that allow a consumer to use their credit or d🗹ebit card to purchase something at a business. They then transmit the information to a card-processing network, initiating the pay𓃲ment process.

These systems have become increasingly sophisticated and allow merchants not only to conduct transactions but also to monitor their 澳洲幸运5官方开奖结果体彩网:inventory, record sales data, and perfoওrm other useful business functions.

Some POS software can also ꦰlink to accounting software, making bookkeeping easier.

Credit Card Readers

A credit card reader, or payment terminal, is h𒉰ardware that allows the POS to collect the data it needs. Card reade🍎rs work in different ways.

Some rely on older magnetic stripe technology. Others accommodate EMV chips or wireless 澳洲幸运5官方开奖结果体彩网:NFC technology for contactless payments from smartphones an🏅d other devices.

Payment Gateways

A payment gateway i𝐆s the virtual equivalent of a POS system, performing the same 🀅basic functions but for online transactions.

Because the physical card isn’t involved—these are often referred to as “♔card-not-pre🐭sent transactions”—the gateway must verify its legitimacy in other ways.

This typically involves asking the cardholder to provide a 澳洲幸运5官方开奖结果体彩网:validation code. Technically known as a CVV, CV2, or CVV2 code, it’s a three- or four-digit number fo💯und on the front or back of credit and debit cards.

Online Transaction Processing (OLTP)

Used in conjunction with a payment gateway, online transaction processing allows merchants to process large numbers of transactions in real time, while also recording that information for accounting and other purposes.

OLTP is a vital tool in ecommerce, where speed iಞs key.

Benefits of Merchant Services

ꦡ Merchant services cost money, but beyond making electronic paymen🤡ts possible, they provide worthwhile added benefits to businesses. These include:

Enhanced Payment Security

Merchant services have a number of built-in safeguards to protect both the business andꦅ its customer (as well as the card networks and banks) from fraud 𒉰and theft.

Payment gateways, for example, provide a secure online connection between the merchant and the customer, making it very difficult for hackers to infiltrate the system.

For in-person transactions, POS systems and the security features embedded in credit cards work in tandem to protect consumꩲers’ information and thwart potentially fraudulent transactions.

Merchants that accept card payments must typically comply with industry standards set by the PCI Security Standards Council, known as PCI DSS (the “DSS”𝔉 standing for data security sta🧔ndard).

The rules vary depending on the size of a business and the number of transactions. The bigger the business, the more complex the requirements. Merchants that don’t comply are subject to fines.

Because most merchants have other work to attend to, th𝔉ey often delegate their PCI DSS compliance to merchant services providers.

The PCI council advises merchants, “In most cases, using a wholly outsourced third party to capture and process payments is the safest option.”

Increased Sales Opportunities

While some consumers still prefer to use cash and som♉e merchants may not accept any other form of payment, trends co🌳ntinue to move in the direction of electronic and even digital payments.

The latest study by the Federal Reserve on consumers' payment choices found that credit cards accounted for 32% of all transactions and debit cards for 30%, while cash trailed at 16%.

In addition, an October 2024 McKinsey & Company survey of digital payments using wallet apps found that such payments are increasing rapidly, with about nine out of 10 U.S. consumers engaging in some form of digital payment during 2024.

Clearly, merchants that aren’t set up to𒉰 handle electronic (or dꦏigital) transactions put themselves at a disadvantage when it comes to sales.

Streamlined Payment Processing

In addition to greater security, state-of-the-art payment systems speed transactions both online and off, reducing time and labor costs.

The less time that cuဣstomers have to wait in line and the less effort they need to expend in completing an online transaction, the more likely they are to retur𝕴n to a business.  

How to Choose a Merchant Services Provider

Businesses today have numerous merch𝔉ant services providers to choose from. Some are specialized businesses; others are div𝕴isions of major banks or corporations.

Both Mastercard and Visa publish online lists of services providers that comply with their security requirements.

By Research

When considering different services providers, the PCI Security Standards Council suggests a list of 12 questions that could narrow your choice. For example, ask yourself:

• “Does [the] solution/product ensure the secure capture and transmission of cardholder data?”
• “Does the vendor/service provider carry insurance to cover data breaches related to their product/solution?”
• “Does the vendor/service provider assist with notification of my customers in the event of a data breach and your product solution is the root cause?”

By Ratings

A number of websites provide ra💦tings of merchant services providers. Providers that are cited as among the best on multiple lists include (in alphabetical order):

• Dharma Merchant Services
• Helcim
• Payment Cloud
• Payment Depot
• Stax
• Square
• Stripe

By Fees

♉Most merchant services providers offer a variety of plans and pricing tailored to different types and sizes of businesses.

For example, Helcim charges no monthly fee. Its processing fees average 1.83% plus 8 cents for in-person transactions (for Visa, Mastercard, and Discover) and 2.27% plus 25 cents for online transactions.

Stripe’s standard per-transaction fee is 2.9% plus 30 cents for domestic cards, also with no monthly fee.

Both of these providers and others charge extra for hard꧃ware such as POS terminals an꧟d card readers, as well as for any additional services that the merchant may choose.

The Bottom Line

As electronic payments have become integral to retail commerce, merchants have com꧂e to rely on merchant services providers to assist them in making sꦉure that transactions are completed swiftly and securely.

A wide variety of such servic﷽es is available, and they can be tailored to the size of a bu𝕴siness and the types of risks it may face.