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How Merchant Services Work

How Merchant Services Work
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There isn’t a single answer to the question “How do merchant services work?”

Merchant services is complex. On the surface, it seems self explanatory, but peel back the layers and the intricacies are revealed. When it comes to explaining how merchant services work, it’s important to explain all aspects of it. Below, we state and describe six facts that relate to how merchant services work.

1. Merchant services is powered by multiple providers.

The truth is there is not a single provider that powers merchant services. Yes, businesses seeking merchant services can work with a single provider, but even in that scenario there are various providers working in the background, in conjunction with that single provider, to make merchant services work.

From the general public’s view, the two types of providers they’d recognize as providers of merchant services are Payment Facilitators and Merchant Service Providers. Without one of these providers, a business wouldn’t be able to initiate the first of many steps to a credit card payment. Once initiated, other players lend a hand in completing the multi-step process (More on that next), these include:

  • Card Associations
  • Card Networks
  • Issuing Banks
  • Acquiring Banks
  • Payment Processors
  • Payment Gateways

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2. Merchant services is a multi-step process.

From customer to business, a six step process takes place to authorize a credit card:

  1. The customer swipes or inserts a credit card.
  2. The transaction is sent to the processor.
  3. The transaction is relayed to the network.
  4. Funds are checked.
  5. An approve or deny code is issued.
  6. Funds are transferred.

What happens in a matter of seconds involves an intricate web of connections between various providers in the payments space.

3. The cost of merchant services has a direct relationship with risk.

Of course, like most things in this world, there is a cost to merchant services. The payment industry has crafted three primary rate plans for businesses to choose from, all of which were built in a way to accommodate for the risk involved in a credit card transaction. These rate plans include Flat, Tiered, and Interchange-plus.

The risk of a transaction is based on a few things: card type, transaction method and what information is captured during the transaction. Flat pricing accommodates for risk by charging an “all encompassing” fee for any transaction type. Tiered pricing groups transactions into buckets based on their risk, each with a corresponding cost that, you guessed it, is directly related to the level of risk for that tier. Interchange-plus is more forgiving as the cost associated to the risk is only tied to Interchange, the wholesale cost of a transaction, then the provider adds its own, consistent markup to create Interchange-plus.

4. True merchant services requires an application.

Before you can actually start using merchant services, you need to go through an application process to gain access to a merchant account. This is for true merchant services provided by a Merchant Service Provider, but with a Payment Facilitator, an application is usually not required.

Opting for merchant services via a facilitator may seem easier, and it is, initially. However, down the line you may face held funds and high transactional costs as you increase sales. With a true merchant account, you gain customized pricing for your business, dedicated support and resources.

5. Merchant services can vary by business size.

Depending on where your business stands, and where you see it going, certain providers may not be a good fit. You want to make sure your merchant services is flexible so it can change as your business evolves. Whether your business is small, multifaceted or enterprise, there is the right merchant services out there for it. Consider size, sales volume, how sales are taken and how you’d like to grow your business when considering a provider.

6. Merchant services may require equipment.

Unfortunately, merchant services doesn’t work by the wave of a magic wand, though some might think so when it comes to online purchases. However, so much happens behind the scenes to make e-commerce transactions happen.

For in-person transactions, however, equipment is required. A credit card reader that can process all transaction types is ideal to ensure you are able to accommodate all customer preferences and all the latest (and most secure) technology in payments.

Learn what to compare across Merchant Service Providers.


What fact surprised you about merchant services? Tell us below, we’d love to hear from you.

About Author
Picture of Ursula Librizzi

Ursula Librizzi

Ursula is the sales and marketing operations manager for PayJunction. She oversees daily marketing tasks and liaises between the sales and marketing departments.

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