What is merchant services?

ByManoj Bhatt

Merchant services is a category of credit card processing that allows businesses and individuals to accept debit and credit cards as payment for goods and/or services. There are several different types of merchant accounts, but they all allow the business owner or individual professional to take electronic payments from customers using their existing POS (point-of-sale) system or an online website.

Merchant services is the family of credit card processing services that allows businesses to accept debit and credit cards as payment for goods and/or services. Merchant service providers either specialize in business-to-business (B2B) or business-to-consumer (B2C) merchant accounts, which are differentiated primarily by who is likely to be applying for the account.

Generally, if the business owner knows their customers will be fellow business owners and professionals such as doctors and other service providers, they should apply for a B2B merchant account. If they believe that their customers will be individuals who are purchasing goods or services on behalf of themselves or their families, then a B2C merchant account is best.

Merchant services are provided by banks, credit unions and independent sales organizations (ISO). An ISO is a company that has partnered with another financial institution to provide them with the means of acquiring new business customers.

This other financial institution may be a bank or other type of lender, or it may be an ISO. In either case, the bank or other institution takes on the risk that a customer will not pay for their goods and/or services, while the ISO is paid a commission based upon a percentage of each transaction that is processed using this account.

There are four different types of merchant accounts:

  1. Standard Rate Account – a merchant account that charges the business owner a markup fee which is based on a percentage of each transaction. For example, if the standard rate for this merchant account is 1.3%, then every time the business owner accepts $1,000 in Visa credit card transactions using their POS system or website, they will be reimbursed by their acquiring bank $930.70. If they accept $10,000 in Visa credit card transactions, then their reimbursement will be $9,307.00.
  2. Tiered Rate Account – a merchant account that charges the business owner different markup fees for different types of transactions. For example, if you process less than $5,000 per month then your tiered rate may be 1.75%. If you process between $5,000 and $10,000 per month your tiered rate may be 1.3% and if you process over $10,000 per month your tiered rate may be 0.90%. It all depends on the type of business you are engaged in and how much volume you process.
  3. Flat Rate Account – a merchant account that charges the business owner exactly the same markup fee every time they accept a credit card transaction, regardless of how much it is for or what type of business they are engaged in. For example, if your flat rate markup fee is 1%, then every time you accept $1,000 in Visa credit card transactions using your POS system or website, you will be reimbursed by your acquiring bank $930.70.

However, if you accept $10,000 in Visa credit card transactions the reimbursement remains the same at only $930.70 because of your flat rate markup fee. The key difference between a standard account and a flat rate account is that the amount of money you will reimburse yourself for acquiring a particular transaction still varies depending upon how much volume you process.

  1. Rewards Rate Account – a merchant account that charges the business owner reduced markup fees when they have achieved certain thresholds of volume when accepting Visa credit card transactions from their customers. For example, in a rewards rate account, when you process less than $5,000 in credit cards per month your markup fee may be 1.75%.

However, if you process more than $5,000 per month then your rewards rate may be 1.3% or even 0.90%. The lower the volume of transactions that are processed each month, the higher the markup fee payable by the business owner. The higher the volume of transactions that are processed each month, the lower the markup fee payable by the business owner.

Most merchant services providers offer a combination of standard and tiered rates for most merchants; however, flat rate accounts and rewards rate accounts tend to be offered only with high-volume businesses that process at least $100,000 per month in Visa transactions.

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