These days, small and medium-sized businesses (SMBs) prefer to opt for industry-specific payment systems and tools over generic solutions.
They account for over 50% of spending on vertical-specific software solutions (i.e., custom software for a particular industry or market).
Merchant services are one of these key investments. They enable secure, efficient in-store and online payment processing and offer flexible, convenient payment options that customers demand today. In person payments are a key feature for retail businesses, allowing them to accept physical card payments and provide a seamless checkout experience.
In this article, we’ll discuss different merchant services for small businesses, including retail businesses. You’ll also find guides and expert tips for selecting the ideal provider to support your day-to-day operations.
TL;DR
- Merchant services are integrated solutions that allow businesses to process diverse payment methods across multiple channels. They work through a dedicated merchant account, enabling secure and flexible digital payments for both small businesses and consumers by supporting options like credit cards and digital wallets.
- Merchant services help small businesses simplify payments, save money with transparent pricing, and secure transactions with fraud protection and PCI compliance. Merchant service providers offer a range of services, including payment processing, authorization, customer support, and dispute management, to help businesses operate more efficiently.
- To choose a merchant service provider, compare pricing structures, review contract terms, check system compatibility, and prioritize responsive customer support. Check its scalability and security capabilities too to support your future growth.
What Are Merchant Services?
Merchant services are comprehensive solutions—tools, systems, and support—that allow businesses to process in-person and online payments. A POS system is a comprehensive solution that helps businesses process payments and manage sales efficiently.
In theory, you could accept third-party payment methods like PayPal, Apple Pay, or Google Pay without merchant services, but this would require individually setting up and integrating each one into your website or point-of-sale setup.
With merchant services, you can integrate these capabilities into one cohesive system. It lets you handle multiple channels, including credit cards, debit card payments, mobile wallets, checks, and gift cards, without juggling different systems. Merchant services enable you to accept credit cards, ACH payments, and ACH bank transfers as additional payment types.
Such robust payment infrastructure relies on these key components:
- Payment processing. The behind-the-scenes technology that routes payment information, processing payments securely between banks and card networks like Visa, Mastercard, and Discover.
- POS systems and card readers. These POS equipment collect payment information at physical locations and transmit them to payment processors. They also integrate with business management tools (e.g., inventory, CRM, and accounting software), and can handle different payment types.
- Payment gateways. These capture, encrypt, and transmit the customer’s payment details from the eCommerce website where you can accept online payments to the payment processor. This encryption turns data into an unreadable format to prevent fraud and security breaches. Payment gateways can also facilitate payment links as an alternative method to accept payments.
- eCommerce tech stack. For businesses with digital storefronts, these streamline online transactions through shopping carts, website integrations, checkout solutions, analytics and reporting, etc.
- Check processing. This service converts paper checks into electronic payments to speed up the payment timeline, track payments, and manage cash flow. Merchant services help manage payments and support various payment processing needs, minimizing errors and risks of bounced checks.
You can access these components and your merchant account only through your merchant account provider, who will guide you through the process of setting up a new merchant account.
Merchant services also ensure security and compliance with payment card industry standards to protect sensitive payment data.
Funds from processed transactions are typically deposited into your business checking account.
In summary, merchant services help businesses process payments efficiently by providing integrated solutions tailored to your payment processing needs.
Merchant service accounts and how they work
Merchant service providers assess your credit history, business type, and expected transaction volume during application. Once approved, you get access to your merchant account, and the merchant account provider will help set up your new merchant account, confirm fund availability, and facilitate transaction approval.
This bank account holds customer payments for 1 to 2 business days before transferring funds to your business bank account. Your payment processor verifies the transaction’s legitimacy throughout this period.
From there, let’s see how merchant services can benefit small businesses in particular.
Understanding Payment Processing
Efficient payment processing is the backbone of any successful small business, ensuring that transactions are completed quickly, securely, and with minimal hassle. By understanding how payment processes work and who is involved, small business owners can make smarter decisions about which merchant service provider and payment solutions best fit their needs.
The payment processing workflow explained
Every time a customer makes a purchase—whether in-store or online—a series of steps takes place behind the scenes to ensure the payment is processed smoothly. Here’s how the typical payment processing workflow unfolds:
- Payment initiation: The customer chooses their preferred payment method, such as a credit or debit card, digital wallet, or another accepted option, and submits their payment at checkout.
- Data transmission: The payment information is securely sent to the merchant’s payment gateway, which acts as a digital bridge between the business and the payment processor.
- Verification and approval: The payment gateway forwards the transaction details to the payment processor. The payment processor then communicates with the customer’s bank or card issuer to verify the transaction and check for sufficient funds or credit.
- Authorization: If the transaction is approved, the payment processor notifies the merchant service provider, who then authorizes the sale and updates the point of sale system.
- Settlement: Funds are transferred from the customer’s account to the merchant’s account, typically within one to two business days, depending on the service provider and the merchant’s agreement.
This entire process is designed to be fast and secure, often taking just seconds to complete. By understanding each step, small business owners can better manage their payment processes, troubleshoot issues, and provide a seamless experience for their customers.
Key players in payment processing
Several essential players work together to make payment processing possible:
- Customer: Initiates the payment using their chosen method.
- Merchant: Accept payments and provides goods or services.
- Merchant service provider: Manages the merchant’s account, offers payment processing solutions, and ensures the business can accept payments securely.
- Payment gateway: Securely transmits payment data from the merchant to the payment processor, especially for online payments.
- Payment processor: Verifies, approves, and routes transactions between the merchant, banks, and card networks.
- Banks: Both the customer’s bank (issuing bank) and the merchant’s bank (acquiring bank) are responsible for holding and transferring funds.
Each of these players has a specific role in ensuring that payment processing works efficiently and securely. By understanding how merchant service providers, payment processors, and payment gateways interact, small business owners can better navigate the complexities of how to accept payments and managing their merchant accounts.
Payment Methods and Fees
Offering a variety of payment options is crucial for small businesses aiming to meet customer expectations and maximize sales. However, each payment method comes with its own set of fees and pricing structures, which can impact your bottom line. Understanding these costs—and how they’re calculated—will help you choose the right payment solutions and avoid unnecessary expenses.
Common accepted payment types
Today’s customers expect flexibility and convenience when it comes to paying for goods and services. The most common payment methods accepted by small businesses include:
- Credit and debit cards: Visa, Mastercard, American Express, and Discover are widely used for both in-person and online payments. Being able to accept credit cards and debit cards is essential for most businesses, but each transaction typically incurs a processing fee.
- Digital wallets: Services like Apple Pay and Google Pay allow customers to make contactless payments using their smartphones or smartwatches. These digital wallets offer speed and security, making them increasingly popular for both in-store and online payment.
- Contactless payments: Tap-to-pay cards and mobile devices enable quick, hygienic transactions at the point of sale, enhancing the customer experience.
- Online payment services: Platforms such as PayPal provide additional flexibility for online shoppers, allowing them to pay without entering card details directly on your website.
Each payment method comes with its own fee structure. Common costs include:
- Transaction fees: A percentage of each sale, often charged by the payment processor or merchant service provider.
- Monthly fees: Some providers charge a monthly service fee for access to their payment processing solutions.
- Interchange fees: Set by credit card companies, these are paid to the card-issuing bank and vary depending on the card type and transaction.
- Flat rate pricing: Some service providers offer a fixed percentage fee for all transactions, making costs predictable.
- Tiered and interchange-plus pricing: Other providers use more complex models, where fees depend on the type of card or transaction risk.
It’s important to review your merchant services agreement carefully to identify any potential hidden fees, such as charges for chargebacks, PCI compliance, or early termination. By understanding the full range of payment options and associated costs, small business owners can select the most cost-effective and customer-friendly payment solutions for their needs—ensuring efficient payment processing and a competitive edge in the market.
The Benefits of Merchant Services for Small Businesses
Payment complexities can be a stumbling block for thriving SMBs. Here’s how merchant service providers like Stax can help in terms of efficiency, security, and cost savings. Many providers also offer competitive pricing and support for international payments, making them attractive for businesses seeking value and global reach. Additionally, accepting cash remains an alternative payment method that can help businesses avoid processing fees.
Simplified payment management
Global cash usage dropped by 80% in 2019 and continues to decrease by 4% each year. Customers nowadays expect more flexibility to pay however and whenever they prefer.
Stax’s all-in-one platform lets you manage brick-and-mortar and online payments in one easy-to-use interface.
You can accept different payment types—card payments, debit card transactions, mobile payments, next-day (i.e., ACH direct debit transactions), and more. Stax also offers a selection of point of sale POS systems and hardware, like Clover and SwipeSimple, for retail and mobile environments, enabling secure and efficient in-person payment processing.
Cost savings with transparent pricing
Stax’s payment processing services use a transparent membership-style pricing structure. Our invoices itemize the card transaction costs (the interchange rate) and any service markup, so you know exactly what you pay for.
In fact, business owners using Stax Payments can save $400+ a month on credit card processing fees by avoiding excessive hidden charges.
Fraud protection and compliance
Access to secure payment solutions like Stax safeguards your small businesses against fraud and chargebacks.
Merchants only have a 20% win rate when contesting fraud-related chargebacks. With PCI-compliant systems in place, verification not only minimizes financial losses but also saves valuable time that could be better spent growing the business.
Reliable providers can help startups and small-scale businesses meet modern payment preferences. To help you choose the right solutions, here are the types of merchant services you should know.
6 Common Types of Merchant Services
Merchant services providers offer various services, features, pricing models, and integration capabilities. Some merchant services providers prioritize payment solutions for physical shops, while others cater better to e-commerce stores and pop-up shops. For those interested in selling merchant services, there are comprehensive guides to help you get started and succeed in the industry.
Knowing these types can help you choose the best fit for your small business needs.
- POS systems. These in-store hardware and software solutions for brick-and-mortar businesses include card readers, barcode scanners, receipt printers, cash drawers, and POS software.
- Online payment processing. This service sets up your infrastructure to process website or app-based transactions. Online merchant services are essential solutions for small businesses, providing secure payment processing across various channels, including online, in person, and over the phone. It often includes virtual terminals for businesses that don’t have a physical storefront (e.g., service providers, consultants).
- eCommerce payment gateways. Payment gateways integrate with eCommerce platforms to create a secure, customizable checkout experience. They feature built-in fraud protection tools such as tokenization, CVV verification, 3D Secure (3DS), and IP address monitoring.
- Mobile payment solutions. These contactless solutions allow on-the-go small businesses to process transactions from smartphones, tablets, smartwatches, and other mobile devices.
- Invoicing and billing solutions. If you manage multiple customers, these solutions automate payment reminders and generate professional, tax-compliant invoices. They can also handle recurring billing and subscription services.
Example: Retail subscription brands, SaaS, and membership-based businesses can streamline billing management by integrating Stax Bill with Stax Payments. Customers can view, download, and pay invoices through an integrated portal.
You now understand how merchant service types suit different business operations. In the next section, we’ll help further narrow your options and choose the best provider to build your payment infrastructure.
How to Choose the Right Merchant Services Provider
Visa and Mastercard maintain a list of certified providers complying with their stringent security standards. Start looking at these providers to weed out those who may not meet the required protocols.
Once you’ve identified a few options, compare key factors like pricing, contracts, and customer support. Be sure to evaluate your payment processing needs to ensure the provider can meet them. Here’s a closer look at what to consider.
1. Compare pricing structures
Since you’ll be relying on merchant services for the long haul, it’s crucial to choose a pricing structure that won’t hurt your bottom line. Pricing models vary and each can benefit specific business types and transaction volumes:
- Flat-rate pricing. You pay the same percentage fee for every transaction, regardless of the card type or transaction size. It’s easy to predict your monthly fees. However, the larger the transaction volume, the higher the processing fees.
Best for: small businesses with steady, low-volume transactions
- Tiered pricing. It employs multiple pricing levels based on the card type used (e.g., rewards cards, corporate cards) and the transaction’s risk. Qualifying transactions get the lowest transaction fees, while riskier ones obtain higher rates.
Best for: small businesses that process diverse but low-volume card transactions
- Interchange-plus pricing. You simply pay the base interchange rate (set by the credit card networks) plus a markup by your merchant services provider. This transparent pricing is more predictable and cost-effective for businesses with higher ticket items.
Best for: small businesses with high transaction volumes or varying card types
Review your average transaction volume and size to assess the best pricing structure that will help keep your costs under control.
2. Understand the fine print
Hidden fees and unfavorable contract terms can cost you if you’re not careful. Ask yourself the following questions when reviewing your contract:
- How long is the contract?
- What’s the provider’s cancellation policy?
- Will there be early termination fees?
- Do they charge additional fees beyond the quoted rate?
- What equipment or software charges are there?
- Is there flexibility in the terms?
Don’t fall for promises of low rates or tempting discounts only to be locked into an unfavorable long-term contract. Avoid sneaky fees, early termination penalties, or escalating rates that eat into your profits.
3. Check compatibility with existing systems
Double-check that the provider integrates with your current payment processing setup–both hardware and software systems. Otherwise, you may end up shelling out extra cash for new equipment or updates.
It’s best to ask the provider for a demo to do so. Walk through a sample transaction to check the flow from initiation to completion.
4. Look for responsive customer support
Small businesses risk losing $10,000 per hour of downtime. Although it doesn’t stack up against the $300,000 per hour for mid-size and large enterprises, SMBs have fewer resources to bounce back.
This is why you’d want to partner with a merchant service provider that offers reliable, accessible support channels. Before committing to one, check reviews and ratings on trusted platforms like G2 and Trustpilot.
5. Consider scalability for business growth
Do you plan to expand your product offerings, increase transaction volumes, or open new locations in the future? Be sure your provider can accommodate these changes without requiring major overhauls.
Look for flexible plans and pricing models that can evolve as your business does. Ask about fees for scaling up, adding new users, or handling a higher transaction volume.
6. Evaluate security features
Businesses lose about 3% of their total eCommerce revenue to fraud every year. They also risk facing penalties, legal issues, and a damaged reputation that could take years to rebuild.
Here are non-negotiable security measures your provider must check off:
- PCI compliance – request evidence of their certification if necessary
- Fraud detection tools – check if they employ real-time fraud monitoring, address verification, and CVV checks to catch suspicious activity
Fraud doesn’t only affect big companies—small businesses are prime targets too. Do your research now to protect yourself, not when it’s too late.
Even the best providers can inadvertently cause issues. Don’t hesitate to ask for clarity on anything that seems too vague or confusing—it’s your right to know what you’re paying for and why.
Bonus: Tips for SMBs Selecting a Merchant Services Provider
Don’t rush closing the deal and signing on the dotted line. Take these tips with you as you compare and pick your merchant service provider.
- Identify your specific needs and goals. Do you sell primarily online, or do you need a hybrid solution? How do you plan to grow over the next year or two? The better you understand what you need, the easier it will be to find the right provider.
- Understand your budget and transaction volume. Decide how much you’re willing to spend per transaction to avoid compromising your budget.
- Ask about industry-specific solutions. A fashion online brand requires an entirely different system from a restaurant or dental clinic. Check if your provider offers industry-specific solutions like multi-currency payments, installment plans, and recurring billing.
- Request demos or trials before committing. This is a big one—don’t commit to a long-term contract with merchant service provider without seeing how it works in action first. Request a demo or trial period to test the system and see how it fits with your payment process. If you plan to use mobile payment apps or receive transaction alerts, check if message and data rates may apply depending on your mobile carrier.
- Seek recommendations from other small business owners. The best advice comes from people who are in the trenches like you—therefore, ask around. Check out local business networks and online communities for raw, honest insights.
It may take a little extra effort now to vet merchant services for small businesses, but it will pay off in the long run. Follow these tips and trust your instincts, you’ll find a reliable success partner in no time.
Simplifying Payments for Maximized Business Growth
Investing in the right merchant service provider is a smart move for small businesses looking to scale and stay competitive. It can help streamline your payment processes, secure transactions, dodge significant financial losses, and boost customer satisfaction.
Take your time to research thoroughly to maximize this long-term investment.
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