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Merchant Services 101: Credit Card Processing For Businesses

It’s the question Businesses ask themselves repeatedly.  What are merchant Services, why does it cost so much and why do I need it? 

by Linda Heuer Photo by TheDigitalWay on Pixabay

Merchant services is effectively the industry for accepting credit and debit cards and can be difficult to effectively navigate, especially when you first enter the world of accepting credit and debit cards.  So, whether your business is established, or you are just thinking about or starting a new business, pairing yourself with the right merchant services provider is crucial to your profitability.

Jeanne Rogers of Oomph Consulting Group, Albuquerque NM, states, “Merchant Services can be confusing for companies, whether they are new or have been around for a while. The bills aren’t always easy to read, there are a multitude of marketing and processing options to filter thru so it pays to do your homework.”

Making the right financial decisions regarding whether to accept Credit and Debit cards, how to process the transactions and how to obtain processing equipment can have a huge impact on your company’s profitability.

We’re going to do our best to lay out what Merchant Services is and how to make smart financial decisions so you can enjoy the fruits of your labor.

What Is Merchant Services?

In the world of Merchant Services, as the business owner, you are the Merchant.

Merchant services is a broad term that refers to financial services for businesses, but it most often refers to processing services that allow merchants to accept transactions through credit and debit cards.

Merchant services can also encompass payment gateways, gift cards, loyalty programs, online transaction processing, mobile payments and more.

Credit cards, like cash and checks, have come a long way since they first rolled out in the 1950’s. Today, statistics show that approximately 7 in 10 Americans have at least one credit card in their wallet.

According to the U.S Census Bureau, the population at the beginning of 2019 was 328 Million people and 70.2% of American Households have credit cards, which means there are potentially 236 million American customers with credit cards ready to make purchases.

Have you ever wondered what’s involved in credit or debit card processing? Every credit or debit card transaction involves four parties:

  1. The customer making the purchase
  2. The merchant receiving payment for the purchase, this would be you
  3. The bank the merchant processor uses for credit card processing services (acquiring bank)
  4. The bank that issued the customer’s credit card (issuing bank)

What Do I Need To Know?

If you want to sign with a merchant account for credit card processing, you are probably wondering about the credit card fees you will be charged. The most important determinant of how high your fees will be, depend upon the type of business you are in, your business credit rating and where your business is located.

Certain businesses are more likely than others to suffer payment disputes and charge-backs, so their transactions are considered riskier by the issuing and acquiring banks. Businesses with these riskier transactions are therefore charged higher fees to offset the risk of charge-backs.

Charge-backs are what happens when a customer successfully disputes a credit card fee transaction with your business.

The safest transactions, as far as the issuing and acquiring banks are concerned, take place when the cardholder either taps or inserts their own card in the credit card reader and signs the receipt to pay for goods that are inexpensive and not likely to generate complaints. You may hear or see this referred to as a “card present” transaction.

Restaurants, gas stations and car rental agencies all fall into this category, and because their charge-back risk is low, they pay less in fees for credit card processing interchange rates.

The risk of a charge-back is highest when your transactions are completed via the Internet or by phone. The risk is even higher if the transactions are expensive, involve a lengthy shipping process or the business or industry is one that is subject to complaints.

The essential point we want to make is that when you apply for credit card processing services, the business you are engaged in and the zip code that the company reside in figures significantly in the interchange fees that you will be charged.

Do I Need A Credit Card Processing Company?

Any merchant, whether doing business in a physical location like a retail store, a virtual location like an online website, or by phone or mail order needs credit card processing services if you wish to serve all potential customers and remain competitive.

Although you will pay a certain price for credit card processing services, the essential point is that you greatly reduce your chances of being successful in business without it. The good news is that due to the variability in options and pricing for credit card processing services, you can shop around for the best deal.

For businesses to be successful in today’s marketplace, it’s a smart business move to accept credit and debit cards. In fact, some may argue that with Apple (Apple Pay™), Google (Google Wallet) and others driving new payment methods, businesses should look beyond traditional acceptance to mobile wallets.

What Are The Top Three Reasons For Accepting Credit Cards?

  • Your Customers Expect It: Today’s customer expects options. They want to be able to choose whether to pay with cash, plastic or even their phone. Businesses that only accept cash will lose repeat business and are likely losing customers they don’t even know about.
  • Cash is Dying: Experian reported only 24% of sales were made with cash in 2018 and that number is predicted to drop to 11.2% by 2021.  In fact, new research by Capital One states that only one in 4 Americans even carry any cash at all, 34% of Millennial’s admit to “rarely or never” carrying cash versus only 25% of those aged over 55. Surprisingly, of those Americans who do carry cash in their wallets, the average amount reported was only $25 so, if your product cost more than $25 with tax, this could be a show stopper.
  •  Customers Spend More with Credit: While credit cards cost the business owner money, those costs are often offset by incremental revenues from both new customers and the average spend amount by existing customers. A Dunn & Bradstreet study found that customers spend 12% to 18% more when using credit or debit cards vs when they are using cash. McDonald’s, a popular burger chain, reports its average ticket is $7 when people use credit cards versus $4.50 when they use cash.

If you either plan to be or are one of the 55 million (27% of the total) small businesses not accepting credit cards, now is the time to start. Businesses who choose to accept credit cards see a boost in revenue of up to 23%, far outweighing the costs associated with accepting them.

Gain a competitive advantage, meet customers’ expectations, and drive incremental revenues to your bottom line – we recommend that you start accepting credit cards today.

Lease, Buy or Take Free Equipment – That’s The Question

As a merchant, you have a lot of options when it comes to equipment. There are numerous types of equipment available and various ways you can obtain the equipment needed to run your business. You may have the option of buying, renting or leasing terminals, or in some instances, will have the option to use the equipment at no upfront cost.

There are several reasons you may want to lease equipment vs purchasing equipment up front.  The primary reason you may want to lease equipment is to protect your current cash flow.  You will find this scenario frequently with businesses who are new, in a massive growth mode or who are managed by an individual who isn’t up to speed on running a financially stable business.

It’s important that you look at the entire picture when it comes to obtaining your equipment. We recently had the opportunity to view multiple offers one of our clients in Los Angeles, CA had received for the same equipment.

The first offer was from a large well-established national bank. The bank offered the client a Clover Station for free, no monthly fees and a cost plus rate of 2.75%.

The second option was found online from an online retailer. This retailer offered the Clover Station at a cost of $600.00 upfront, had a $1200.00 activation fee, $50.00 in monthly fees and offered a cost plus rate of 1.75%.

The third offer from a traditional merchant services provider, took into account the merchants tight cash flow and offered a monthly lease fee of $150.00 for the Clover Station, a cash drawer and a scanner. They offered $40.00 in monthly fees and a cost plus rate of 0.05%.

Based on historical data, the new owner of the business anticipated that they would be processing about $15,000.00 a month in transactions.

So, given the three scenarios, over the course of 4 years:

Option 1 – The bank would have cost about $20,000.00 over the 48 months with no upfront cost.

Option 2 – The online retailer would have cost about $16,800.00 over the 48 months including the $1800,00 in up front fees.

Option 3 – The traditional merchant services provider will end up costing the merchant about $10,000.00 over the 48 months and had no up-front fees.

As you can see, if our client had gotten caught up with receiving free equipment, she would have cost her business about $10,000.00 more than she needed to over the first 48 months of service.

Our advice is to take a look at the entire offer. Compare all components including equipment cost, processing rate, monthly fees, quarterly fees, etc. You might be surprised how much money you can save by digging into the offers.

The same thing applies to business loans. Compare all components, if you don’t, it could cost you thousands.

How Does Credit Card Processing Work?

Acquiring banks (also called merchant banks) contract with businesses like yours to operate accounts that allow you to accept credit card payments. Acquiring banks deposit funds for credit or debit card purchases into your merchant account.

They may also furnish merchants with credit card processing software and equipment such as a merchant processor, credit card reader and terminal, as well as providing customer service, promotional materials, and other credit card processing services.

All Businesses who want to accept credit card payments need to have an account with a merchant services processor.  This account is essentially an unsecured line of credit that pays the merchant for purchases their customer has made by credit card.  This payment is basically a loan to the merchants account from the merchant’s acquiring bank.  In layman’s terms, the acquiring bank loans the money to the business which covers the cost of each customers’ credit card purchases.

Upon completion, the merchant will not have the exact same amount as the original purchase because both the acquiring bank and the issuing bank charge the merchant fees for their services.  The fees are a percentage of each transaction, so of course the larger the amount of the transaction, the higher the fee.  Additionally, these fees generally include a fixed amount per transaction from the issuing and acquiring banks.

The Anatomy of a Transaction

Here is a step by step description of an average Mastercard transaction.  Once you realize what is involved for just purchasing a pack of gum and a soda at a local convenience store, you will understand why the cost of having a merchant services processor is what it is.

  • Authorization:  At time of Purchase, the cardholder swipes their credit card at the merchant’s place of business.  Then the merchants bank asks MC to determine the cardholders bank. MC’s network determines the cardholders bank and requests approval for the purchase.  Then the cardholders bank approves the purchase.  MC then sends approval to the merchant’s bank.  The merchant’s bank then sends approval to the merchant.  The cardholder then completes their purchase and receives a receipt.

Most people think it ends here, but there’s more

  •  Clearing:  The clearing process usually happens within one day after the merchant “batches out” or closes out the previous days business receipts.  The merchant’s bank sends the purchase information to the MC network.  Then MC sends the purchase information to the cardholder’s bank which prepares data for the cardholder’s statement.  MC then provides a complete reconciliation to the merchant’s bank.
  • Settlement:  The settlement process usually occurs within two days of the initial transaction as long as the merchant had “batched out” within 24 hours of the transaction.The cardholder’s bank sends payment for the pack of gum and soda to MC.  Then MC settlement bank sends payment to the merchant’s bank.  The merchant’s bank then pays the merchant for the cardholder’s purchase and the cardholders bank bills the cardholder.

So, while additional cost to the merchant for the convenience of customers using credit cards is in a way justified, gouging a merchant for this service simply is not justifiable.  It’s extremely important to do your homework and find an honest and reputable merchant services company that can provide you with additional benefits like next-day funding.

What Are The Most Important Factors Of Selecting A Merchant Services Provider

Merchant service providers are companies that provide businesses with the ability to allow their customers to use debit and credit cards as a form of payment.

They are essential, especially in this day and age, when cash is becoming increasingly less common. Most merchant service providers will offer their services either on the phone, on a face to face basis, or over the Internet.

Businesses that use a merchant service provider are preferred by customers because most customers will only carry cards on them, rather than cash. Because most customers prefer credit cards as their method of payment, businesses make themselves both more accessible and convenient to their customers.

Before choosing a merchant service provider, as a business we recommend that you take a few different factors into consideration.

  • Customer Service – By far the most important feature of your business is customer service.  The quality of the different services that are offered by the providers are critical to the success of a business. If the level of customer service is very low, then the services offered by the merchant provider are not worth any amount of money.  Regardless how inexpensive goods and services might be, having issues accepting credit cards can be detrimental to your company’s business.
  • Costs of Processing Credit Cards – Every time a credit card or a debit card is processed, the business processing the card will incur a slight charge. These costs will be affected by a number of different factors, including whether or not the credit card is actually present during the course of the transaction, if the card is not a standard card (if it is part of a rewards program or a business credit card specifically used for business expenses), and the types of products or services that are being purchased with the card.

The two main companies, Visa and MasterCard determine the baseline of the charges, better known as interchange rates, for the different cards that are being processed. After that, the merchant service provider will then negotiate rates with you that cover the margins they need to be paid in order for them to move your money from point A to point B and still make a profit. Finding a company that produces accurate, fair margins is an important step when choosing your merchant service provider.

  • In our experience, it is extremely common for a business owner to not fully understand their merchant services billing. Even more common, merchants have fallen prey to merchant services companies that add addition fees and dues which look legitimate on the surface but are only worded in such a way that merchants believe they are actual regulated charges.  These erroneous fees greatly increase the merchant’s cost and can be avoided by signing with a reputable merchant services company.

By looking at these three factors, it is possible to ensure that a business finds a merchant service provider that will be able to keep the credit and debit card processing machines moving smoothly without costing an arm and a leg.

What Type Of Fee’s Are There?

When a credit card transaction takes place, everyone plays a role in that transaction. Additionally, almost everyone gets their cut of the transaction in one way or another, generally in the form of fees. This is why it’s a smart idea to shop around when looking for a merchant service provider. While you can’t get around paying some fees, you can choose a company that has fees that meet your company’s needs.

Here are a few of the fees involved in credit card transactions that you will want to understand:

 Account Maintenance Fee – This fee is charged to pay for any maintenance or updates the provider makes to your account, such as name, address, banking information changes.

• ACH/Daily Batch Fee – This fee occurs when you, the merchant settle your daily transactions (aka batches) with the credit card processing company. It only occurs on days when there is a batch settlement.

• Annual Fee – This fee, charged annually, is paid so your processor can maintain your merchant accounts.

• Authorization Fee – This fee is charged each time the credit card processing machine must obtain authorization for a transaction.

• Cancellation Fee – This fee occurs when as a merchant, you cancel your account with the merchant service provider.

• Debit Network Fees – This monthly fee allows the merchant to have access to many debit card networks.

• Early Termination Fee – This fee is charged when you cancel your account prior to the expiration date mentioned in your original transaction agreement.

Interchange fee – This fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”); and for cash transactions the interchange fee is paid from the issuer to acquirer, often called reverse interchange.

• Minimum Monthly Fee – This fee will be charged if you don’t meet the minimum monthly transaction amounts required by the service provider.

• PIN Debit Transaction Fee – This fee is charged when a customer uses a debit card that requires the entry of a PIN number.

• Statement Fee – This fee, charged monthly, quarterly or yearly and is a payment you make in exchange for getting a monthly statement of your account transactions. Statement fees may be integrated into monthly fees, maintenance fees or support fees, depending on the service provider.

• Transaction Fees – Transaction fees occur every time a transaction is approved, whether it’s approved or denied. The amount of the fee may vary depending on if the transaction was keyed or swiped. Any time the processing equipment makes contact with the network, merchants are charged a transaction fee.

• Wireless Service Fee – This fee is charged when as a merchant, you use a wireless network to transmit the transactions wirelessly. 

What Are Some Of The Common Terms In The Industry?

While you should familiarize yourself with a variety of industries in order to facilitate success and company growth, understanding the ins and outs of the merchant services sector can be particularly important.

This is the case for several reasons, including the fact that merchant services offers a wide range of financial services that can help your business function optimally.

Although the world of merchant services may seem complex, familiarizing yourself with a few of the key terms that are used within the industry can help you gain a basic understanding of how this sector operates.

Here are several merchant service terms that you should know:

• Dial-up Terminals – A telephone line directly connects your terminal to the processor. The card is swiped through the processing device attached to the telephone, and data is transmitted to the processing company.

• IP Terminals – IP Terminals allow you to use the Internet to transmit data to processing companies. Your merchant account is linked to the Internet, and customers choose their products. Credit card information is entered and transmitted to the processor for verification.

• Wireless – Traveling merchants benefit from these terminals that transmit data wirelessly and over the internet.

• ABA Routing Number – The ABA routing number is responsible for directing electronic ACH deposits to the appropriate bank. The ABA routing number is also called the transit routing number.

 (Automated Clearing House) – ACH is a paperless funds transfer system that the Federal Reserve or other entities maintain. These entities maintain networks for the exchange of electronic funds.

 Adjustment – An adjustment is a credit or debit to a seller or cardholder account for the purpose of correcting errors in transaction.

• Bankcard – A bankcard is a card issued through a card-issuing business or card association which is offered for cash advances or as payment for services and goods.

• Card Association – A card association is an entity with employees (or members) that issue debit or credit cards to customers.

 Cardholder – A cardholder is an individual, business, or entity that obtains a debit or credit account that is accessed via card use.

• Discount Rate – The discount rate is the fee resulting from the approving, assessing, collecting, settling, and processing of one or several credit card transactions.

• Fees – Fees are costs the cardholder pays for the screening and processing of payments. Some fees include those for holding a monthly account, obtaining a discount rate, and per item costs for electronic check transactions and credit cards.

• Issuer – The issuer is the entity responsible for establishing and maintaining the customer credit lines accessed via card. Some examples of issuers include Discover, Visa, American Express, and MasterCard.

• Payment Gateway – The payment gateway is the internet-based service which transfers credit card data from a website or computer terminal to a processor from which it is verified.

• Retrieval Request – A retrieval request is one in which a customer makes a request to get more information regarding a transaction from her or his statement.

• Seller or Online Seller – The seller or online seller is an individual or company which sells services or products and has the ability to accept payment for those services and products through use of a seller account.

• Settlement – A settlement is the process in which an individual or business transfers funds for credits and sales between issuers and acquirers.

• Transaction – A transaction is an act between a cardholder and seller which results in either an electronic or paper representation of a cardholder’s consent to pay for services and goods received.


There is a lot to learn when it comes to merchant services, hopefully you are feeling a little more comfortable with what Merchant Services is and how to decipher terms you have been hearing.

Learning new industries can be confusing. At Oomph Consulting Group, we are dedicated to helping others succeed and will do what we can to help you thru your journey. If you’d like us to take a look at your statement, assess a future business decision or just want to say “Hi” :), please contact us via www.oomphconsultinggroup.com

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