Whether you run a small online store or a major brand, accepting credit cards and digital payments is a must for all businesses.
But to seamlessly receive these payments, you’ll need merchant processing services. These are solutions that help you authenticate and accept payments according to your business requirements. They will also help you stay compliant with various rules and regulations, including the applicable fees for in-store and online payment processing.
In this article, we’ll learn about the different types of merchant processing and how they work.
TL;DR
- Merchant processing ensures that all entities, such as the issuing bank, the acquiring bank, and the card company, work cohesively to facilitate payments between a customer and a business.
- To receive card-based payments, businesses must have a merchant account. This account temporarily holds the transaction funds until the bank verifies the payment.
- Payment processing incurs certain fees, including the interchange rate and processing charges for each transaction. Businesses can take steps to minimize these charges in order to maximize their revenue.
How merchant processing works
When a customer pays with a card, digital wallet, or other electronic payment method, the payment is processed through several entities before reaching the merchant. These entities include the issuing bank, the acquiring bank, the card or digital payment company, and the payment processor.
Merchant service providers ensure that all these entities work and make the end-to-end payment process hassle-free through the following steps.
Let’s assume the customer’s preferred payment method is a credit card:
- The customer makes a purchase and presents their credit card to the merchant. In case of an online purchase, they enter the card details on the merchant’s website.
- The merchant securely sends this payment information to their payment processor (via a gateway or terminal). The processor is the entity that communicates with the acquiring bank (the bank where the merchant receives the payment).
- The bank forwards this information to the relevant credit card company. The card company further sends the details to the issuing bank, i.e., the bank from which the customer wishes to make the transaction. This information transfer is facilitated through a payment processor.
- The issuing bank verifies the payment using key details like the credit card number, CVV, and expiry date.
- If the details are verified and there are enough funds in the customer’s account, the issuing bank will send an authorization code. This code is a guarantee of funds and, in many cases, triggers a liability shift that protects the merchant from certain types of fraud.
- This authorization code is forwarded to the card company and then to the acquiring bank. At this point, the transaction is guaranteed, but the full processing fees are not yet calculated or applied. If the merchant uses a compliant surcharging program (like CardX), the processing fee may be added to the customer’s total. The processor’s fees (interchange, assessment, markup) are calculated and deducted later during settlement.
- The customer receives a receipt as a form of confirmation of payment. The amount is deducted from the customer’s account and transferred to the merchant’s bank account.
While you receive the payments in your business account, you’ll need another type of bank account called the merchant account to receive electronic payments.
Role of merchant account
A merchant account is a specialized commercial ledger or holding facility established with an acquiring bank. It is not a standard business checking account where funds are stored indefinitely; it acts as a temporary intermediary to secure and verify funds before they are settled into the merchant’s business checking account. However, unlike the usual business account, the merchant has no direct access to it.
This account is used by banks to temporarily hold funds from credit or debit card payments or other electronic transactions. Once the bank verifies and approves the payment, the funds are transferred from the merchant account to your business account.
Creating a merchant account allows you to receive credit and debit card payments, which are crucial for businesses today. In addition, they also ensure the privacy of business data and compliance with laws and regulations.
Types of merchant processing solutions
Most businesses accept multiple payment methods. They can accept traditional payment methods like cash or checks or opt for digital methods, such as credit cards and online wallets. They may also accept payments in person or online.
While cash and checks don’t require processing, digital payment methods require different types of solutions to process payments.
For example, if you are purchasing a shirt in-store, you’ll complete your card transactions using a physical card terminal. This machine collects credit card information and processes payments. However, if you’re buying the shirt online, then the payment can be processed by simply entering the card details into the device used for purchase.
Depending on the business type, merchant processing solutions can come in the form of:
Point-of-sale (POS) systems
POS systems are the commerce hubs of brick-and-mortar stores.
They consist of the hardware and software components required to process an in-person payment. This includes hardware such as a display monitor, card terminal, and receipt printer.
Customers can swipe or tap their cards using the terminal to start a payment. These machines are connected to the merchant processing systems that verify the transactions and push the payment through to your business account.
Many POS systems are also equipped with software that helps with other business processes like inventory and staff management, in addition to payment processing.
Mobile processing solutions
Mobile processing solutions don’t require additional equipment to initiate a card payment. These systems enable a smartphone or tablet to function as a card terminal. The device can collect payment details, send requests through a payment processor, and complete transactions.
Businesses that move frequently or don’t have a fixed location rely on mobile processing solutions. In comparison, POS systems are ideal for businesses that operate from a static location.
While merchant processing is crucial for accepting card payments, choosing the right merchant processing company is also equally important for hassle-free transactions.
Online merchant processing
Online merchant processing enables businesses to accept payments through their websites, apps, or ecommerce platforms. This type of solution is essential for digital-first companies and retailers who serve customers remotely. It works by securely capturing card or digital wallet details at checkout, encrypting the information, and routing the transaction through a payment gateway and processor for authorization and settlement.
Online payment processors go beyond just accepting cards—they securely capture card details using tokenization and encryption. Tokenization is vital because it replaces sensitive card data with a non-sensitive token, drastically reducing the merchant’s PCI Compliance scope and liability. Whether you’re selling a single product or managing a high-volume storefront, a robust online processing system ensures a fast, secure, and reliable checkout experience.
When choosing an online merchant processor, look for features like real-time analytics, recurring billing support, and transparent pricing. The right provider will not only help you accept payments but also scale your business efficiently.
Virtual terminal processing
Virtual terminals allow businesses to accept payments without a physical card reader. Instead, payments are keyed in manually through a secure web-based interface. This is ideal for businesses that accept orders over the phone, via invoice, or by mail.
With a virtual terminal, you can input the customer’s card details directly into the terminal’s interface, authorize the payment, and generate a receipt—no hardware required. It’s especially useful for service-based businesses, remote consultants, or anyone operating without a storefront.
Recurring payment processing
For subscription-based or service businesses, recurring payment solutions are key. These systems securely store customer payment details and automate billing on a set schedule (e.g., monthly or annually).
This reduces administrative overhead, ensures timely payments, and improves customer experience by eliminating manual re-entry of payment details. Look for providers that support flexible billing models, automated reminders, and dunning management.
Integrated payments (for SaaS and custom platforms)
Integrated payments are built directly into your software or platform, offering a seamless user experience. Often used by SaaS companies or custom-built applications, this type of processing allows users to pay without being redirected to external sites.
Through APIs or SDKs, businesses can embed payment capabilities directly into their platforms, manage data more effectively, and even monetize payments via revenue sharing. It’s a great option for platforms looking to deliver a frictionless, branded experience.
Key players in merchant processing
While payment processors play an important role in transferring information among financial entities, there are other players required to complete the entire transaction. These include merchant account providers, payment gateways, credit card networks, and issuing banks.
Merchant account providers
Merchant account providers are financial entities that provide a dedicated merchant account to clients in exchange for a cut or a fee. They manage all aspects of the merchant account, including the account setup, transaction management, and the required hardware and software.
Payment gateways
A payment gateway verifies the credit card or payment information to approve a transaction. It’s often confused with a payment processor, but there is a slight difference.
Payment processors are responsible for communicating the details among various entities, whereas payment gateways deal with verification and approval.
Credit card networks
Credit card networks are the connecting systems between banks, merchants, customers, and the card issuing company. These networks authorize transactions from a particular card, which is crucial for a payment to go through.
Issuing banks
The issuing bank is the financial institute that issues a card against a customer’s bank account. The issuing bank provides cards branded and managed by the credit card networks American Express, Discover, Visa, and Mastercard.
Fees and costs associated with merchant processing
Since payment processing involves multiple entities, the fees associated with merchant processing can be confusing. Each entity issues its fees either to the customer or to the merchant.
Here’s a detailed list of the common costs associated with merchant processing:
- Interchange rate: The primary cost of accepting a card, this fee is set by the card networks but paid to the issuing bank (the customer’s bank) to cover their risk and rewards programs. .
- Payment processing fees: Charges applied by the payment processing service to the merchant.
- Assessment fees: These are charged directly by the card network and are a necessary, non-negotiable component of the wholesale cost
- Chargeback fee: If a customer requests a chargeback, the merchant may have to incur a chargeback fee to compensate for additional processing.
- Monthly fee: Depending on the payment processor, you may need to pay a monthly or annual fee.
In addition, there are other costs like statement fees, merchant account fees, and verification fees. While the individual costs are small, they accumulate much larger amounts, particularly for high-volume merchants.
Here are a few tips to minimize these fees to ensure maximum profit:
- Use address verification systems: Address verification systems help verify customers’ addresses beforehand to prevent chargebacks and fraud.
- Add a surcharge: Surcharging helps you offset the interchange fees by making the customer bear the costs. However, this isn’t legal in all states, so you need to check the laws before applying a surcharge.
- Negotiate: Some card processors may be willing to negotiate a lower processing fee, especially if you deal with large transaction processing volumes every day.
Choosing a merchant processing service
Understand your payment needs
Start by identifying how and where you plan to accept payments. Do you need to process online transactions, in-person payments, or both? Will you be accepting credit and debit cards, ACH payments, or contactless payments like Apple Pay and Google Pay?
Key questions to ask:
- Will customers pay online, in-store, or over the phone?
- Do I need recurring billing or one-time credit card processing?
- What devices or hardware are needed for in-person payments?
- Will I be managing payments through a mobile app or integrated system?
Evaluate fee structures and transparency
Merchant services cost structures can vary widely, so look for providers that offer transparent pricing and clearly explain fees like:
- Transaction fees
- Monthly minimum fees
- Setup fees and annual fees
- Chargeback fees
- Early termination fee (if any)
Avoid long-term contracts unless there are meaningful incentives. The best payment processing providers won’t hide costs in complex fee structures—they’ll make it easy to understand what you’re paying for and why.
Consider integration and related services
Your payment processor should work seamlessly with your existing tools—whether it’s accounting software, CRM, or an ecommerce platform.
Look for solutions that offer:
- Built-in integrations with platforms you’re using
- Related tools like invoicing, reporting, customer portals, or loyalty programs
- Multi-channel support for both ecommerce transactions and in-store payments
These extras can drive better cash flow management and increase customer engagement over time.
Review merchant account options
Some providers give you a dedicated merchant account, while others use an aggregated setup like a third-party processor. The right fit depends on your business model.
Consider:
- Separate merchant accounts: more control and stability for scaling businesses
- Aggregated accounts: fast setup but may lack flexibility
- Payout frequency: Do they offer same-day funding or standard delays?
- Where will funds land—your business checking account or another bank account?
Match services to your business type
The best merchant account providers often specialize by industry. Choosing a provider that understands your field—whether you’re a small business, high-risk merchant, or ecommerce store—can help you:
- Reduce the risk of account holds or denials
- Ensure proper setup for online payment processing
- Optimize fee structures for your transaction volume
Bonus tip: Some payment service providers offer flexible plans so you can scale up or down based on your seasonal needs.
Read the merchant services agreement
Always read the merchant services agreement before signing. Look for:
- Defined roles of the merchant account provider vs. payment processors
- Clarity around statement fees, refund policies, and chargeback procedures
- Terms that affect your ability to switch providers
- Usage of service marks, especially if you’re white-labeling a solution
Understanding these terms helps you avoid surprises and ensures the merchant processing relationship is built on trust.
Enjoy hassle-free payment processing with Stax
As consumers prefer digital transactions, accepting card payments is a must for all businesses. However, you need a trustworthy payment processing service to ensure hassle-free and quick card transactions.
Stax is a complete payment processing solution that’s built for all types of businesses. It has a variety of products in its suite to ensure they meet all your requirements.
Whether you are a small brand or an enterprise-level business, Stax can help you accept card-based payments with ease. Check out the payment processing solution by Stax.
Quick FAQs about merchant processing
Q: What is merchant processing, and why is it important for businesses?
Merchant processing is the service that enables businesses to accept electronic payments, such as credit and debit card transactions. It’s essential because it facilitates seamless payment transactions between customers and merchants, ensuring compliance with financial regulations and enhancing customer experience by offering a variety of payment options.
Q: How does merchant processing work when a customer makes a payment?
When a customer makes a payment using a card, the transaction information is sent from the merchant to the acquiring bank, which then forwards it to the card company and the issuing bank. The issuing bank verifies the transaction details and the customer’s account balance before authorizing the payment, after which the funds are transferred to the merchant’s account.
Q: What is a merchant account, and how does it differ from a regular business account?
A merchant account is a specific type of bank account that temporarily holds funds from credit and debit card transactions before they are transferred to a business account. Unlike a regular business account, merchants do not directly access the merchant account; it’s primarily used for transaction processing and compliance.
Q: What are the different types of merchant processing solutions available?
Merchant processing solutions can be categorized mainly into point-of-sale (POS) systems and mobile processing solutions. POS systems are used for in-person transactions with hardware like card terminals, while mobile processing solutions allow businesses to process payments using smartphones or tablets, ideal for businesses without a fixed location.
Q: What factors should be considered when choosing a merchant processing service?
Key factors include contract terms, pricing and fees, customer support, security features, and additional tools offered by the service provider. Ensuring the provider meets your business needs and budget while offering robust security and compliance with PCI standards is crucial.
Q: What are common fees associated with merchant processing, and how can businesses minimize them?
Common fees include interchange rates, processing fees, assessment fees, chargeback fees, and monthly fees. Businesses can minimize these costs by negotiating lower fees, using address verification systems to prevent chargebacks, and considering surcharging with CardX (where legal) to offset transaction costs.
Q: Why is PCI compliance important in merchant processing?
PCI compliance ensures that businesses adhere to security standards for protecting cardholder data. Non-compliance can lead to significant fines and increased risk of data breaches, making it crucial for maintaining customer trust and avoiding legal liabilities.
Q: How can businesses ensure secure payment processing?
Businesses can enhance security by using advanced technologies like EMV chip readers and tokenization, implementing strong authentication measures, and partnering with service providers that guarantee PCI compliance and use AI to detect and prevent fraudulent activities.
