What is a Merchant Services Provider?

A merchant service provider (MSP) offers the hardware, software, and infrastructure that businesses need to accept credit cards, debit cards, and electronic payment transactions. They also store payment information, keep cardholder data safe, and help businesses maintain PCI compliance. 

Some merchant providers offer additional technology for POS systems, accounting integrations, business analytics, invoice collection tools, and more.

Merchant service providers play a crucial role in the success of businesses in the modern era. They offer essential services and technology to ensure businesses can accept payments from customers.

Regardless of your business size or industry, if you want to accept credit and debit card payments, a merchant services provider makes this possible. 

What is a Merchant?

The term “merchant” refers to any individual, business, or organization that sells products or services. Merchants can operate in-person through traditional brick-and-mortar locations, on the go with a mobile service, online through an ecommerce site, or any combination of these.

Examples of merchant types include:

• Retail Merchants — Sells products in-person from a physical storefront.
• Ecommerce Merchants — Sells products or services online.
• Wholesale Merchants — Manufacturers who sell in bulk to other businesses.
• DTC Merchants — Sells products directly to customers.
• Affiliate Merchants — Businesses selling through affiliate networks. 

In the world of payment processing and merchant solutions, merchants are the customers of merchant services providers. 

What is a Merchant Account?

A merchant account is a special type of bank account that’s specifically used so businesses can accept credit cards and debit card payments. Merchant accounts establish a relationship between businesses and acquiring banks for card payments. When a customer buys something from a business, the funds pass through the merchant account before being deposited in a business bank account. 

Unlike a traditional business checking or savings account, merchant accounts are not set up for regular deposits and withdrawals. Instead, merchant accounts operate somewhat like holding accounts.

Every time a debit or credit card is used, the credit card processor or merchant services provider needs to verify the transaction. The data from the transaction is routed from the business to the card network and the issuing bank to ensure the card is valid and the cardholder has sufficient spending power. 

The money can’t move through the merchant account into a traditional business bank account until the issuing bank approves the transaction.

Types of Merchant Service Providers

Merchant service providers (MSPs) offer different types of solutions for businesses. Some specialize in one area, while others provide a wider array of services to accommodate businesses. Generally speaking, the solutions offered by merchant services providers can be segmented into three different categories—which we’ll cover in greater detail below:

Merchant Account Providers

As the name implies, all merchant account providers can set up businesses with a merchant account. Businesses cannot accept credit or debit cards without a merchant account, so this is a crucial type of service. 

Some merchant account providers also offer processing services directly through the major credit card networks—Visa, Mastercard, Discover, and American Express. These entities are known as “direct processors.”

Other merchant account providers rely on direct processors to process payments for their merchants. 

Payment Service Providers

Payment service providers (PSPs) make it possible for businesses to accept credit cards and debit cards without a dedicated merchant account. Instead, they aggregate multiple businesses into a single merchant account, so each business does not get a unique merchant ID. 

This setup makes it easier for merchants to sign up for merchant services and start accepting payments right away. There’s no lengthy auditing and approval process that is more typical for traditional merchant accounts. 

However, PSPs can be more expensive. It’s also more likely that the accounts can be frozen or terminated without any advance notice. These are typically designated for smaller businesses with a lower processing volume.

Payment Gateway Providers

Payment gateways are required to process payments online. While payment gateway providers can offer businesses the gateway they need to process online payments, not all of them come with a merchant account. 

So if your business wants to accept online payments, you may need to get a third-party gateway that’s separate from your merchant account provider. 

What Does a Merchant Services Provider Do?

The exact solutions offered by a merchant services provider vary from one to the other. But overall, payment service providers offer payment processing solutions, payment security, and payment technology for businesses to process credit, debit, and digital transactions. 

Payment Processing

Merchant services providers handle the complex process of transferring funds between a cardholder’s account and a merchant’s account. They facilitate authorization, settlement, and funding of transactions. 

MSPs work with acquiring banks, payment networks, and issuing banks to ensure transactions are processed accurately and securely. They have the technology and infrastructure necessary to process transactions through a variety of payment methods, including credit and debit cards, mobile payments, and digital wallets.

Payment Security

Payment security is a critical component of any merchant services provider’s offerings. MSPs help ensure that customer payment data is secure and protected from fraud and data breaches. 

This may include offering tokenization, encryption, and fraud detection and prevention services. They also help businesses maintain compliance with industry standards and regulations such as PCI DSS.

Payment Technology

Merchant services providers offer businesses access to the latest payment technologies. Examples of payment technology include POS (point-of-sale) systems, payment gateways, and mobile payment solutions.

These technologies make it easier and more convenient for businesses to accept a variety of payment methods. They also help improve the overall customer experience. Some merchant services providers have reporting and analytics tools that help businesses track sales and gain valuable insights into customer behavior.

What Can You Get From a Merchant Services Provider?

Beyond their core offerings, merchant services providers can offer more than just basic payment processing solutions. Some provide a wide range of services and tools that help businesses manage their finances and grow their operations. Here are some of the other services businesses can access through a merchant services provider:

Merchant Account

A merchant account is a special type of bank account that enables businesses to accept credit and debit card payments. Setting up a merchant account involves a complex process that includes working with acquiring banks, payment networks, and issuing banks. MSPs help businesses navigate this process and ensure that they have a merchant account that meets the company’s required needs.

Credit Card Terminals

Credit card terminals are the physical devices that allow businesses to accept credit and debit card payments at the point of sale. MSPs can provide businesses with a variety of terminals to choose from, including countertop, wireless, and mobile terminals. 

POS Systems

A POS system is a software solution that helps businesses manage sales, inventory, and customer data. A modern POS system can be cloud-based or traditional and can include features such as inventory management, customer relationship management, and reporting and analytics tools. 

Some POS solutions double as credit card terminals or have integrated terminals set up by the merchant services provider. 

Mobile Payment Solutions

Mobile payment solutions allow businesses to accept payments through a mobile device, such as a smartphone or tablet. Some credit card terminals can also be set up for mobile payments.

This is an increasingly popular option for businesses that operate in the field, such as food trucks or home service providers. 

Payment Gateways

Payment gateways facilitate the transfer of payment data between a business’s website and its merchant account. MSPs can provide businesses with a payment gateway that’s compatible with the merchant’s ecommerce platform. Merchant services providers can set up and integrate the gateway with the merchant’s website. 

Virtual Terminals

A virtual terminal is a web-based application that allows businesses to process payments from any computer with internet access. Virtual terminals are an ideal solution for businesses that operate remotely or need to accept payments from customers who are not physically present. 

Virtual terminals help facilitate recurring payments and phone payments without any dedicated hardware requirements. 

An MSP can provide businesses with a virtual terminal that’s easy to use and secure—helping them integrate the virtual terminal into their existing payment processing system.

ACH and eCheck Payment Processing

In addition to credit and debit card processing, MSPs can provide businesses with the ability to process ACH and eCheck payments. These types of payments are processed through the Automated Clearing House (ACH) network, which is a secure and reliable system for transferring funds between bank accounts.

ACH and eCheck transactions typically have lower fees than card payments. They work well for B2B payments, recurring utility payments, rent payments, insurance payments, and more. It’s uncommon for businesses to accept ACH transfers or eChecks for D2C retail products.

Business Loans

Some merchant services providers offer business loans. 

So if you need capital, you could potentially go directly to your MSP and get everything under one roof instead of finding a third-party lender. Getting a business loan from a merchant services provider may give you access to lower interest rates and more favorable terms than traditional bank loans. 

Final Thoughts on Merchant Services Providers

In today’s competitive business landscape, having a reliable payment processing system is essential for success. Merchant services providers help businesses provide a secure and seamless payment experience for their customers while also optimizing internal financials.

Merchant service providers offer a wide range of services beyond payment processing. From credit card terminals to business loans, MSPs provide businesses with the tools they need to manage their finances and scale their operations. 

But not all MSPs are created equal, and fees vary depending on the provider you choose. To help ensure you’re not overpaying for merchant solutions, contact our team here at Merchant Cost Consulting for a free audit. We can help you save money on merchant services without having to change processors.