Merchant services can easily be explained as “credit and debit card processing,” but this view is very simplistic. Is there more to merchant services other than swiping a card and paying for things?
Explaining merchant services in long-form is a bit more complicated. Let’s try to go over everything you need to know about merchant services as plainly as possible so you can understand what all goes into this extremely important industry.
Who is involved in merchant services?
Merchant services isn’t an industry with just one type of business or player. Think about paying for something with a $10 bill instead of your credit card. Who is involved with allowing that bill to travel from your hands and into the business’s bank vault? Credit and debit processing works similarly.
* Credit Card Companies: You can probably name these easily. The bigger associations are companies like Visa, MasterCard, American Express, and Discover.
* Banks: These aren’t just any banks. These are specifically banks that issue credit cards, like Chase, Bank of America, Wells Fargo, Citi, etc. In some cases, credit card companies will double as banks as well.
* Processors: You may be familiar with the term “acquirer,” and that word is essentially synonymous with “credit card processor” in this context. The main function of an acquirer is to act as a go-between for merchants themselves and credit card associations. These acquirers can be in charge of tasks like issuing money to an account or creating statements.
* Merchants: Simple enough; this refers to the main business receiving tender in question. If you buy a coffee from Starbucks, Starbucks is the merchant in this example.
* Merchant Account Providers: Working with acquirers, merchant account providers take care of the credit card processing directly. More often than not, this is made up of third-party processing companies and banks.
* Gateways: Gateways usually come into play when mobile or online payments are being made. For instance, ecommerce software for tablets and online shopping carts are both examples of gateways.
These are the bigger moving parts of a credit card transaction, but how do they work together to get the job done? A customer swipes or dips their debit or credit card at a merchant’s business terminal, sometimes through a payment gateway. The acquirer and/or account provider then take this information and pass it onto the credit card association. The money and debt information are then transferred to the correct credit card issuing banks. Statements are then sent to both the customer (via their credit card company) and the merchant.
What type of fees are there?
This isn’t speaking to credit card interest rates or the like. Fees and percentages come along with utilizing merchant services through a business. However, there are a variety of different fees and rates to consider and understand.
To start, there are three basic types of fees that go into credit and debit transactions:
* Transaction Fees that are processed anytime a transaction takes place. These will vary based on different factors, such as whether a debit or credit card was processed. Transaction fees are the biggest fees that merchants take on when processing credit and debit cards.
* Flat Fees aren’t associated with any specific rate or variable. This flat fee will be charged to the business’ account every month and is decided based upon the merchant’s applicability and other factors.
* Incidental Fees are more sporadic, but they do come up from time to time. As an example, chargebacks often result in an incidental fee. Other incidental fees can include an address verification service, retrieval request fees and batch fees.
What other merchant services specifics are there to consider?
The above sections are very basic and explain merchant services as plainly as possible. That doesn’t mean there isn’t a lot more to merchant services — books have been written on the subject, after all!
Other aspects of merchant services to consider are other ancillary fees that pop up based on very specific scenarios. Depending on the merchant services provider you choose, they may charge fees monthly and annual fees, fees for renting a terminal or programming said terminal. There can be application, statement and and other service fees. It’s always important to ask questions about all of the fees assessed when a merchant services account is created.
One such fee is the PCI Compliance fee. PCI, standing for Payment Card Industry, requires that all merchants operate within strict regulations. PCI fees may be billed monthly for those not in compliance and many providers also assess a fee annually whether the merchant is compliant or not.
Consider other aspects, like customer service and local service availability. Depending on the merchant services provider, customer service can be available 24/7 or only during a certain time window. Many merchant services providers also like to work with merchants under the stipulations of a contract, and these contracts contain very important details about how the credit card processing process will work.
All of this information is relevant to business every day, though it’s often a faraway thought. Merchant services help businesses stay open and customers get the items they need because of these processes and systems.
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