Navigating the Confusing World of Merchant Services and Credit Card Processing
March 05, 2020 / Bill Butters
Navigating the Confusing World of Merchant Services and Credit Card Processing
March 05, 2020 / Bill Butters
Navigating the Confusing World of Merchant Services and Credit Card Processing
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The term ‘merchant services’ refers to a broad category of financial services used by businesses. By its narrowest definition, it refers to credit card processing, a service that enables a business to accept credit card and debit card payments. On this page, we disentangle many of the different terms you’ll hear when using merchant services. We hope this helps you make an informed decision for your business.
The Different Types of Payment Processors
Merchant services providers (MSPs) are all different from one another, but the one thing all of them do is credit card processing. Indeed, the terms merchant services provider and credit card processor are often used interchangeably. Broadly speaking, there are two types of credit card processors: acquiring banks and independent sales organizations.
TAcquiring banks. Also known as acquirers, these are banks or financial institutions that process credit or debit card payments on behalf of a merchant. The acquirer allows merchants to accept payments from the card-issuing banks within credit card associations like Visa, Mastercard, and American Express. The largest and best-known acquirer is First Data. Although technically a merchant services aggregator, Square also operates similarly to an acquirer.
Independent sales organizations. Also known as ISOs, these are smaller companies that provide services on behalf of acquirers. ISOs are potentially better for high-volume merchants because they receive volume discounts and pass these savings along to the merchants. They also tend to be better than acquirers at approving high-risk merchants (i.e. merchants in industries with high amounts of chargebacks, such as ecommerce). Leaders, PaymentCloud, and Flagship are examples of ISOs that offer First Data services. Square doesn’t work with ISOs, so the only way to use its services is to apply directly.
How Do POS Systems Differ from Credit Card Terminals?
The terms point-of-sale (POS) system and credit card terminals often get confused. The truth is actually quite simple: a POS system is a system that does credit card processing as well as a range of other useful things for your business.
Credit card terminals. These are devices that process credit cards, debit cards, gift cards, and checks. They are small, hand-held machines usually consisting of a screen, keypad, magstripe reader, EMV chip reader, and signature pen. Some credit card terminals also include a printer for receipts. Well-known credit card terminal manufacturers include Ingenico, Verifone, and PAX. These devices can be purchased or leased from your merchant services provider as part of your credit card processing contract.
POS systems. POS systems are like upgraded credit card terminals. In addition to credit card processing, they let you do many other useful things, e.g. manage inventory, track employee hours, sync with accounting software, and see real-time sales analytics. POS systems comprise a software and hardware component. The hardware ranges from hand-held mobile devices to big desktop terminals. Well-known POS manufacturers include Clover and Square. First Data and many of the authorized First Data ISOs also double up as Clover resellers. Square obviously offers its own equipment to its customers.
What is a Payment Gateway?
Technically speaking, a payment gateway is the technology used to accept credit or debit card purchases from customers through any channel, be it bricks-and-mortar, the internet, or phone. However, in recent years, the term payment gateway has come to be associated more and more with online payments. Online payment gateways are also commonly referred to as virtual terminals, distinguishing them from the credit card terminals used in-store.
These days, it’s very common for a business to take payments in-store and online. For online payments, you’ll need to ask your MSP to setup a dedicated payment gateway (most MSPs work with Authorize.net, a Visa brand). Online payment gateways do come with additional fees and charges, including a small monthly fee, potentially a setup fee, and different transaction fees to your in-store payments.
What Exactly Are Merchant Services?
We began this article with discussion of the term ‘merchant services’, so now let’s properly explain it. A merchant services provider, or MSP, is an umbrella term for a company that offers services to merchant (businesses), including credit card processing and other services.
Other common merchant services include:
Merchant cash advance. This is a type of business loan where the MSP gives the merchant a lump sum of cash in exchange for a slice of the merchant’s future sales. The merchant pays off the loan from a daily or weekly cut of their sales. Repayments finish when the entire principal amount has been paid back.
Gift cards. Gift cards are a popular way for merchants to attract customers. MSPs can facilitate your gift card program through custom-designed or pre-designed cards. Because your MSP also handles your payment processing, these cards can be processed seamlessly through your regular card terminal.
Loyalty programs. These are fairly similar to gift cards in that most MSPs offer custom-designed or pre-designed programs you can use to attract customers. Again, these integrate seamlessly with your payment processing or POS solution.
Email marketing. If you’re using a POS solution, then it may include software that lets you setup automated marketing campaigns. This enables you to easily create and send email marketing campaigns and track the results in real-time from your POS dashboard.
Web design. With more and more retailers going online, more MSPs have begun offering assistance with web design.
Finding the Right MSP
So, there you have it: a guide to the confusing world of merchant services and credit card processing. As a merchant, being informed is essential to finding the right MSP for your needs. As always, try to compare a few MSPs on rates, features, and other factors before settling on one.
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