How to Compare Merchant Services Options

Comparing Merchant Services Options

Choosing the right kind of merchant services provider for your business can streamline your ecommerce transactions and boost your revenue. However, the “best” provider for you will depend on how your business operates and what exactly you need. To help you compare your merchant services options, we’ll cover the following merchant service features:

  • Hardware
  • Software
  • Payment options
  • Processing fees
  • Receiving your funds
  • Additional professional services
  • Legal considerations

Let’s take a closer look at each variable along with the basic features.

Hardware

To accept credit card payments from customers in a physical store, you need some kind of hardware that can process the card. Traditionally, this involves a point of sale (POS) system with a card terminal, but today’s options have expanded to include mobile payment card readers that can process swiped, chip, and contactless payments as well as gift cards and e-wallet options such as Apple Pay.

When considering the options for merchant services, find out whether the provider offers point-of-sale hardware along with a secure payment gateway:

Hardware Included

Some payment service providers (PSPs) like Square will give you a mobile card reader for free when you open an account, with full registers available on a monthly plan. This is an ideal solution for small startups that can’t afford to invest in a large POS system.

Hardware Not Included

Traditional payment processors don’t usually supply hardware to retailers. Instead, they supply software that integrates with all of the most common commercial POS systems. This is an ideal solution for established businesses that already have (or are happy to source) their own hardware and e-commerce enterprises without a physical store.

If you don’t handle traditional or contactless cards in person, you may not need a mobile credit card reader or any hardware at all. If you do need equipment to get started, make sure to inquire about the hardware costs up front.

Initial Cost of Hardware for a Small Business

While the cost of credit card terminals and registers can escalate into the thousands, most small businesses are looking at a small to moderate initial investment for hardware—whether provided by the merchant service provider or purchased separately.

When sorting through credit card processing services, ask whether the hardware is provided and/or which brands are compatible with their software.

Software

Having the right software lies at the heart of effective payment processing. For a physical store, it’s the software that keeps track of transactions, generates sales reports, and synchronises the entire operation.

For online stores, software programs are used to integrate a payment gateway into your e-commerce website, process credit card payments, and give you access to transactions data and inventory information in real-time.

Nowadays, many merchant service providers offer an app for mobile devices that provides 24/7 access to transaction and sales data. You can usually find it in the app store for your preferred shopping cart provider.

Because this data is stored in the cloud, you can view your data and reports from any device and make changes to the system whenever you need. Generally, merchant account providers offer more sophisticated software plans and sales reports than payment service providers like PayPal and Stripe.

Pricing Structures & Payment Options

Whether you run a physical or virtual store, offering customers a range of payment options can boost your sales. For in-store sales, you’ll want to be able to offer cash, credit, and debit card payments (at the very minimum) and consider alternative payment types like e-wallet payments (mobile wallets) and virtual terminal services.

For online transactions, you’ll need to be able to accept all of the major international credit card companies plus alternative payment methods. To secure the best rates, it’s a good idea to work with direct processors that have direct access to Visa and MasterCard’s credit networks. Some credit card processing companies are actually middlemen that impose heavy markups to cover their own transaction costs.

Two of the merchant services options that are especially valuable for e-commerce businesses are buy-now-pay-later schemes (like Klarna) and recurring billing for subscription services. Currently, PayPal has its own version of buy-now-pay-later, and most other providers can integrate Klarna. Selected credit card processors also specialise in recurring billing. Be sure to ask about this feature if you’re thinking about offering subscriptions or memberships.

Processing Fees

The difference in processing fee structures is where the merchant services options really become important. If your business is only seasonal or you only make the occasional sale, a pay-as-you-go pricing model provides affordable access to card payment processing.

However, if you process a high monthly volume of sales, a monthly fee structure could end up saving you thousands of dollars in fees.

Flat-Rate Pricing Model

Small businesses will typically start off using a payment services provider (or “merchant aggregator”) like PayPal, Square, or Stripe. Rather than assign you your own personal merchant account, PSPs include all of their members under the merchant account of the aggregator.

Typically, it’s free to create an account with a PSP and there are no recurring monthly costs. The predictable pricing is an attractive option for many businesses, especially for low-volume merchants. However, you will pay the highest percentage of credit card processing fees in the payments industry whenever a customer makes a purchase.

Why Is the Flat-Rate Pricing Model So Expensive?

To understand why the processing fees are so high, it’s important to understand how credit card processing works.

  • The transaction process

When a customer makes a purchase, the acquiring bank (the bank that handles the merchant account) puts through a request to the card issuer (the customer’s bank) to authorise the transaction. This request between the two financial institutions will return a result of “approved” or “declined,” and the funds—if the transaction is successful—are transferred to the merchant service provider.

  • Bank and card network fees

To cover the costs of this network communication, the card-issuing bank charges a fee to the acquiring bank. This is called the “interchange fee”. The card network also charges a small fee for the use of their card. This is called the “assessment fee.” Rather than representing a fixed amount, these fees are calculated as a percentage of the sale and vary according to the nature of the transaction.

  • Markups and margins

In order to offer a flat-rate pricing model, payment service providers need to charge the highest possible interchange and assessment fees (plus a small markup) to cover all of the possible scenarios. In most cases, you will pay up to 3% of the transaction in fees plus a fixed amount.

Some PSPs provide a lower rate for in-person transactions vs. online transactions and domestic vs. international sales. This can be a hindrance for online businesses that handle mostly online payments and few (if any) in-person payments and also for those who handle a lot of international payments.

And if you do try to cancel before your contract ends, you may be subject to hefty cancellation fees. Always read the fine print before signing up.

Membership Pricing Model (or Subscription Pricing Model)

For businesses that process a high volume of credit and debit card transactions each month, membership merchant services options are much more economical than flat-rate, pay-as-you-go schemes.

Instead of taking a high percentage of each sale, membership merchant account providers charge a monthly service fee to cover their costs, plus a small percentage and fixed fee per transaction that is markedly lower than a PSP.

The Cost of a Monthly Plan

Merchant service providers (MSPs) understand that businesses come in all shapes and sizes, and most offer a variety of monthly plans.

In addition to the monthly fee, MSPs typically charge a small percentage of each transaction (between 0.1% and 0.15%) plus a small, fixed transaction fee. You will immediately notice that these competitive rates are much lower than the 3% you are likely to pay to cover the transaction costs of a PSP/merchant aggregator. The monthly fee also becomes very small—even insignificant—if you process high transaction volumes each month.

Regardless of which pricing structure you choose, watch out for hidden fees such as PCI compliance fees, batch fees, gateway fees, and statement fees. Any extra cost or additional charge (beyond the general charge per transaction and subscription fee) should be clearly disclosed by the company.

Receiving Your Funds

The next point to consider when weighing the different merchant services options is the time that it takes to receive your funds. When you’re just starting out, a few days without cash can literally be “make or break,” so it’s important to research the options beforehand.

Payment Service Providers

Most payment service providers process major credit cards and debit cards almost instantly, and the funds appear in your PSP account balance. From there, you can either spend the funds directly from your balance or withdraw them to your bank account—a process that can take up to a week for free or within minutes for an additional fee.

Merchant Account Providers

Like payment service providers, many merchant account providers store the funds from a card transaction in a holding account. You should then receive the money in your bank account within 24-48 hours. In some cases, you can receive the profit from a transaction almost instantaneously, depending on the currency and policies of your provider. In most cases, though, you’ll have to wait at least one business day. Just watch out for providers that try to lock you into long-term contracts.

Account Freezing and Other Risks

While it might seem like a straightforward decision, there is one other crucial difference to keep in mind—the possibility of a frozen account. In order to keep their risks low, PSPs have the authority to withhold your funds or even freeze your account if they notice any unusual activity. This can leave you without money for up to a month, without notice. This is how they’re able to take on high-risk merchants with little to no vetting.

In contrast, merchant account providers will never freeze your account, even if something unusual occurs. Instead, they provide adjustable fraud scrub settings that can notify you about potential fraudulent activity and prevent chargebacks before they even occur. This is a definite advantage if you process international transactions that are more likely to be deemed “suspicious.”

Additional Services

The full array of merchant services options covers everything from simple payment gateways to integrated business management solutions. If you already have a strong team in place, you might only need a PCI-compliant payment gateway. However, other businesses find that more sophisticated systems enable them to reduce their staffing costs and boost their sales:

  • Cross-platform integration. Some dedicated merchant account providers have a team that works to integrate their payment gateway with your online platform and/or existing hardware. Unicorn Payment, for example, can have your payment gateway up and running in as little as 12 hours, with total PCI compliance and a user-friendly dashboard.
  • Sales tracking. Tracking your sales shows you who’s buying your goods in real time and which of your channels is the most lucrative for business. Up-to-date transaction data also allows you to deal with fraudulent transactions immediately or update your fraud scrub settings to allow a once-off “unusual” transaction. Learn about cart abandonment trends, track your volume of transactions per month, and more. This type of customer management technology can be invaluable.
  • Inventory management. Keeping your stock moving is key to reducing costs and increasing customer satisfaction. The inventory management tools provided by many merchant account providers let you keep track of stock levels vis-à-vis purchases so you can ensure you have the right inventory available when you need it.
  • Invoice generation. Automatic invoice generation saves you time and ensures your customers always receive their receipts. For international purchases, you can automate the creation of commercial invoices with customs and tax information to streamline customer delivery and returns.
  • Customer loyalty rewards. Loyalty programs are a big drawcard when it comes to attracting and retaining repeat customers. Some merchant account providers can build loyalty rewards points into your payment gateway for you—reducing the need for hiring an external developer.
  • Recurring billing. Subscription and membership sales are a great way to stabilise and increase your monthly turnover and streamline stock and inventory decisions. Look for a merchant account provider that specialises in recurring billing cycles to ensure a smooth and positive outcome.
  • Excellent customer service. Round-the-clock customer service is essential, especially for businesses with a high volume of international transactions. Generally, dedicated merchant account providers will have a much lower average wait time than payment service providers, who might send you to a help page rather than answer your call. Some merchant services companies will even give you a dedicated account manager.

Comparing Merchant Services Companies

As you have seen, there are a myriad of factors to take into account when sorting through merchant services options for your type of business. Look for user reviews (specifically unbiased reviews), and consider the features that you need most. In the end, the best merchant service provider will depend on your budget, business model, and geographical reach.

For most business owners who process payments, the two most important factors when choosing a merchant services option are a fast setup and affordable fees with transparent pricing. Beyond that, the choice is really up to you. As long as you do the necessary due diligence, you should have no trouble finding the right service to suit your needs.