A merchant services provider (MSP) is a business that offers credit card processing and other merchant services. MSPs are also commonly referred to as credit card processors or payment processing companies (or online payment processing companies when they also cater to e-commerce). While credit card processing is the primary service offered by MSPs, the top merchant services companies also offer a range of other useful services.
Here’s a breakdown of what the top merchant services providers offer:
Credit card processing. Service that enables your business to instantly and securely accept credit card, debit card, and other payments (e.g. gift card) through a range of channels, e.g. in-store, online, phone, mail order.
Business financing. Many top merchant services companies offer a type of business financing known as a merchant cash advance. This is a product where the MSP loans you a lump sum of cash and you pay it back from a pre-agreed portion of your daily or weekly credit/debit card transactions.
Gift card programs. Gift cards can help you expand your customer base, particularly if you’re in the retail or restaurant business. Some top merchant services providers offer gift card programs – from design of branded gift cards through to seamlessly accepting gift cards through your payment terminal.
Loyalty programs. Similar to the gift card program, your MSP can design a custom loyalty program that seamlessly integrates with your payments.
Other features. Other common features offered by MSPs include email marketing, newsletters, and website design.
As discussed above, MSPs typically double up as payment processing companies. In this respect, the merchant services provider acts as an intermediary between your business and your customer’s credit card / debit card provider (e.g. Visa, Mastercard, Discover, Amex), enabling you to seamlessly and instantly collect payments.
At the very least, all credit card processors charge a per-transaction fee. This consists of an interchange fee (the fee charged by the credit/debit card issuer, plus the credit card processing company’s own mark-up) plus a flat fee. Interchange fees can range from 1-5% of the transaction while flat fees range from $0.10 to $0.25. Transaction fees are charged per each transaction – whether you make 10 transaction per month or one million.
Your merchant services provider may also charge one or more of the following CC processing fees:
- Monthly maintenance fee
- Monthly minimum fee
- PCI compliance fee
- Equipment rental/purchase
- Setup fee
- Termination fee
- ACH fee
- International payment fees
- Statement fee
- 1099-K fee
- PCI non-compliance penalty
If you take e-commerce transactions, then there will be separate fees associated with online credit card processing. This includes a fee for setting up and maintaining your online payment gateways.
Although merchant services providers offer a range of services, what really defines each of them is the way they do credit card processing. Broadly speaking, there are two types of MSPs: acquiring banks and independent sales organizations. The difference between the two depends on their relationship to the credit card companies. These distinctions are important because they can help you make sense of the CC processing fees (acquirers tend to be more straightforward, while ISOs charge lots of fees). However, there’s no difference when it comes to processing speed (both let you process payments instantly and securely).
Acquiring banks (or acquirers). These are banks or financial institutions that process credit or debit card payments on behalf of a merchant. The acquirer allows merchants to accept payments from the card-issuing banks within credit card associations like Visa, Mastercard, and American Express. The best-known acquirers include First Data and Square.
Independent sales organizations (or ISOs). These are smaller MSPs that provide services on behalf of the acquirers. Because of their low bulk rates and high rates of approval, ISOs tend to be better for merchants with lots of transactions or merchants in high-risk industries. The best-known ISOs include Leaders, PaymentCloud, Flagship, and CreditCardProcessing.com.
In order to use a merchant services provider’s services, you first need to get yourself approved for credit card processing. With most MSPs, this is fairly straightforward. As long as you can show you’re a legitimate, lawful business, you shouldn’t have too much trouble opening an account.
If your business falls in the high-risk category, then the best credit card processor for you is probably an ISO. Although acquiring banks like Square and First Data are cheaper to get started with, you run the risk of having your account closed if the acquirer notices a high number of chargebacks from your customers.
High-risk businesses include:
- Online gambling or casinos
- Advance bookings in travel and tourism
- Magazine or other subscription-based businesses
- Online dating services
- Debt collection
- Vitamins and supplements
Every business is different, so it stands to reason that there’s no one-size-fits-all merchant services solution. The best payment solutions for small business vary from the best payment processing companies for large enterprises. If you have an e-commerce site, then you’ll also want to look out for merchant services providers that offer online payment gateways.
Here are some rules to follow when comparing merchant services providers:
- Experience serving your industry
- Ability to service all your transaction needs, e.g. bricks-and-mortar, remote, online
- Transparent and straightforward fee structure
- Minimum monthly transaction requirements that you can uphold
- No contracts or setup fees (unless these things don’t bother you)
- Offers add-ons that suit your business (e.g. web development if you’re looking to set up a website).