Business solutions

What are merchant services: The complete guide to payment providers

18 min read
What are merchant services: The complete guide to payment providers

The e-commerce business is brimming with labyrinth-like processes and harsh-to-comprehend concepts. And the term “merchant services” is just one of them.

In this guide, we’re going to take a closer look at merchant services, their types, the way they work and so much more. So, buckle up. 

What is a merchant service

Merchant service is a catch-all term for everything in-between accepting and processing payments. Let’s clear things up. 

Even though a transaction takes little more than 3 seconds, there are various background processes and parties involved. They are your customer, an acquiring bank (where your funds are stored), an issuing bank (a financial institution that produces your client’s card) and a credit card brand like Visa or MasterCard. All those parties should interact with each other automatically, smoothly and right away to ensure uninterrupted cash flow and stress-free shopping experience for your buyers. 

Thankfully, you don’t need to keep track of all those interactions as long as there is a merchant service provider (aka payment provider) right by your side. It’s a third-party company that streamlines and assists cashless transactions. It provides business owners with merchant services such as software, hardware, tools and all it takes to accept and process payments.  

Basically, sellers can’t work with cashless transactions without credit card processors.

How merchant services work

No matter whether you take payments in your cosy physical store or right on your website, there is a fundamental process involved. And a merchant service provider facilitates everything that’s happening after a client pushes a “Pay” button or swipes their card. Here’s a simplified breakdown of how things work: 

  • a provider harvests the client’s billing details to conduct 3D Secure and other anti-fraud measures;
  • then it sends customer’s data to the card network for authorisation; 
  • an issuing bank approves or declines the transaction based on the funds available. In case of approval, it forwards a corresponding code back to the card network;
  • then the approval signal goes straight to the acquiring bank where the final decision on the transaction is made – approve or decline; 
  • when a purchase is approved, an acquirer captures the buyer’s funds and forwards them to your merchant account. If you have none, a payment processor stores them for you; 
  • a merchant can withdraw money at their convenience.   

As you can see, lots of unseen processes are in the background of every transaction. And a payment provider makes sure they happen in a matter of seconds and with no worries to you and your clients.

Merchant service providers explained
Merchant service providers explained

When it comes to accepting payments, there isn’t such a thing as a “one-size-fits-all” approach. Different providers offer different features so that a seller can choose the best bet for their business type.

Merchant account providers

As you’ve probably heard, every seller needs to obtain a merchant account in the acquiring bank if they want to process cashless payments. Luckily, you can save yourself the trouble of opening one and turn to the merchant account provider. It’s a third-party organisation that handles your transactions and helps you open a dedicated (personal) merchant account. 

If you process many transactions a day, a dedicated merchant account is just what you need. First, the processing fees will be lower for you. Secondly, you’ll have more power over your funds, meaning that you can withdraw them anytime you want. 

The major drawback of such providers comes down to this: the application process is time-consuming and arduous. You need to show your credit history, taxation, money turnover and more. The list of documents to hand in depends on the company you’re working with.

Payment service providers (also known as PSPs)

Payment service providers, as the term goes, provide sellers with solutions and technologies to accept and process transactions. Unlike merchant account providers, they don’t offer a dedicated account but an aggregated one. So, you’ll have a merchant account shared by many traders. But no worries! That works perfectly fine – all payments are gathered into this account, and a provider distributes funds to every seller and you correspondingly.

It’s usually fast and easy to get started with a PSP. You should only meet specific requirements set by the provider and inform it about your business type and money turnover. Based on that information, your processing fees will be calculated. By the way, most PSPs charge flat per-transaction fees, meaning that you pay as long as you sell.  

Payment security is another thing a PSP can help you with. As a small business owner, you might hate the idea of getting the PCI DSS certification, which’s a must for e-commerce. Luckily, every payment provider is PCI compliant (well, it must be). And when working with it, you automatically become compliant at no extra cost to you. 

A word of warning: it never hurts to ask a provider about its PCI level. Make sure it adheres to the first one. Learn more about this security standard in our article “What is PCI DSS: The information you’ve been hunting for”.

How much a merchant service provider costs
How much a merchant service provider costs

Since you delegate credit card processing tasks to the payment provider, get ready to be charged for its services. Well, you don’t expect to get transactions processed for free, don’t you? Fortunately, there is a variety of pricing plans available out there, so it’s never been a problem to find the solution meshed with your needs. 

Payment providers usually predetermine their credit card processing fees (aka discount rates). On average they’re 2,5-4,5% per transaction. Fees are made up of assessment fees, markup fees and interchange fees. Some of them are fixed because they are divided among an issuer, an acquirer, a credit card brand and a processor itself. And some commissions are negotiable as they are linked to various factors, which we go into below. 

Now let’s dwell on what goes into credit card processing fees, and how much a merchant service provider will cost to your business.

Assessment fees

Assessment fees, otherworldly dues, are money charged by a payment processor to pay for card association services. Visa, MasterCard, Discover and other brands don’t work for free, so they bill you for the ability to use their cards and process payments on their networks.  

The amount you pay depends on your money turnover and the card network used. These are some more factors that affect how much the assessment fees will be: your transaction volume, a total number of foreign payments and a card type used.

Card brands review their dues and change them twice a year. According to the latest data, the assessment fees are as below: 

  • AmEx – 0,15%;
  • Visa – 0,14% for credit cards; 0,13% for debit and prepaid cards; 
  • MasterCard – 0,13%;
  • Discover – 0,13%.

Interchange fees

When paying for their purchases, customers may want to get their money back. The reasons can be different, among the most common ones are poor product quality, wrong size or colour, and so one and so forth. Transactions, especially virtual ones, are often susceptible to fraud. And all those problems are beyond a merchant's responsibility. It is an issuing bank that carries the can for chargebacks, refunds and other handling costs.

Interchange fees are designated to help an issuer handle those expenses. Each card brand decides on the amount to pay. Just like the dues, interchange fees can be changed twice a year.  

Take a glance at the factors that influence the fee rate: 

  • Transaction type. For example, card-not-present payments cost more than in-person ones; 
  • Your business type. It can be low- or high-risk. And if your store goes with a high-risk tag, you have to pay more; 
  • Your average ticket size. The more you sell, the higher your fees;
  • Card type. Debit, credit, prepaid or reward. If you let your clients use the latter, the commission is usually higher.

Markup fees

Markup fees may also be called payment processor’s fees. They are what you pay to make avail of the provider’s services. Most of the time, companies ask merchants to cover a commission per transaction, and that’s all. But some providers might want you to pay one-time fees for the following:

  • PCI-compliance. PCI DSS certification is obligatory for merchants who take payments online. No matter your business type, you should get one unless you want to be exposed to fines. Payment providers adhere to the standard and take responsibility for your transaction security. However, some companies charge additional fees for this service.  
  • Chargebacks. There are lots of reasons why clients file chargebacks. If you’re interested, find out all of them in our article “What is a chargeback: The answers you’ve been looking for”. But here is a thing – some providers want merchants to pay extra fees if a customer demands their money back.  
  • Account registration. The fee incurred when you set up your account. For merchants, however, it should be a wakeup call as normally providers don’t charge money for that. 
  • Cancellation. If you sign up an agreement for a specific term, you might be asked to pay some extra when terminating a contract.  
  • Minimum processing. Make sure to discuss this fee with your provider. Some companies want you to process a certain number of transactions in a given amount of time. If you don’t, they’ll charge you a minimum processing fee.  
  • Support/service. The amount you pay monthly or annually just to keep your account up and running. 

Those are the most common fees, but there may be some other incidental charges. Make sure to investigate all commissions your provider has. Don’t hesitate to ask for details and clarification if needed. And note that with the right provider, you can expect to be charged modestly, but with the wrong one, you might be in dire straits. So, take your time to choose the best one. 

When using Tranzzo, you’ll pay a specific fee for every transaction. It already includes interchange and assessment payments. We charge no monthly fees and hidden commissions for anything in-between. Find out more about our pricing plans by this link.

Merchant services for small business
Merchant services for small business

The easiest way to think of a merchant service provider is as a one-stop company that keeps track of your transactions. It’s your helping hand to ensure hassle-free payments for your customers. But choosing the right processor might be tricky. The web is oversaturated with different payment systems. That’s why you have to keep your eyes peeled not to come across a good-for-nothing platform with sky-high fees and ambiguous terms of use. 

When it comes to signing up an agreement with a provider, take your time to shop around. Investigate terms of business and pricing plans of different companies to decide which one fits your right. Make sure to heed attention to the following:

  • payment methods. Ask your provider from the get-go what kind of payment solutions it offers – card payments, recurring billing, online invoicing, SMS billing, payments in messengers, mobile payments such as Apple Pay or Google Pay;
  • pricing structure. Now you know a lot about fees. With that information in mind, ask for as many details about pricing as possible. Make sure that no hidden fees are included; 
  • merchant account. If you choose to apply for an individual merchant account, learn about fees and terms of use associated with it. 
  • hardware/software. Are you about to sell exclusively online? Or you’re opening a brick-and-mortar shop any time soon? Find out whether your provider can assist you with POS-system installation;
  • bonus programs, cashback. To bring diehard brand loyalists, you should encourage your customers to knock at your door again and again. Ask your provider if you can set up a loyalty program to add cashback and bonuses to your clients’ accounts.   

You can ask whatever your heart desires. After all, your reputation and sales are at stake. So, it’s up to you to decide on an option that suits you best. But let us help you a little. 

Sign up for Tranzzo to make avail of the most trending payment methods and turnkey solutions to handle your transactions. No matter where your business is set up, whether it’s in the UK or any other European country, you can accept payments from anywhere with us. And rest assured that our fees are nothing but easy to understand. Learn how to get started with Tranzzo but contacting our support team.