Merchant services – Buying guide

As cash transactions are on the wane and retailers have to deal with an ever-expanding list of different payment methods on a daily basis, merchant services have never been so much in demand. A growing number of suppliers are now offering these services, and they’re not always coming from the traditional banking industry anymore. This relentless expansion of the market and its players makes it always more confusing for many small business owners when they start to search information about how to accept credit cards. Suppliers don’t make it easier, with a wealth of plans and options, and often obfuscating fee structures.

What are the different components of a typical merchant services package, and what are they for? What are the different types of merchant services providers, and which major companies best illustrate these types in Ireland?

Merchant services: what’s in the package?

Merchant services refer to a series of financial and commercial services proposed to retailers who need to process card payments and other electronic payment methods. A typical package necessarily includes a merchant account, as well as card processing services, and sometimes payment gateways and online payment solutions.

A general definition of merchant services

Merchant services or merchant payment services are financial and commercial services proposed to professionals considered by banks as “merchants”. A merchant is typically any business or even sole trader engaging in the sale of goods and services by debit or credit card. Therefore, they are also sometimes simply called credit card processing services.

However, the diversification of cashless payment types has broadened the scope of these services, which now also include all software, hardware and services necessary to accept e-wallet payments, m-payments, over-the-phone payments, and online payments.

All these services are based on the use of a dedicated merchant account, separated from business bank accounts. Not all high-street or even business banks offer merchant accounts. On the other hand, merchant accounts and services may be offered by specialised institutions, and not only by brick-and-mortar, traditional banks.

Merchant account

A merchant account is a necessary part of any merchant services package.

All merchant accounts are associated with a unique merchant number or “merchant ID”.

The merchant account of any retailer is the bank account where funds remitted by a customer after an electronic payment are first directed.

Typically, during a credit or debit card transaction:

-  Customers authenticate themselves by keying pin or tapping the contactless card,

-  Card information and transaction information are encrypted to be sent over the internet for authorisation,

-  Both sets of data are dispatched by the payment gateway to the servers or Visa, Mastercard, or any credit card issuer, and payment processors,

-  Payment processors request authorization from the customer’s bank,

-  Transaction is either authorised or rejected,

-  If transaction is authorised, funds are automatically transferred to the retailer’s merchant account,

-  After a few hours up to a few days (these values vary depending on several factors including merchant account provider), funds are directed from the merchant account to the business account of the retailer, at the so-called “acquiring bank”, and can be actually used for any business purpose.

The whole point of the merchant account is to provide payment security by isolating electronic payments from other business operations. During the short time funds are held on the merchant account, the payment is “cleared” and various security checks are applied.

Merchant accounts are usually billed both on a monthly basis with a flat fee, and on a transaction basis with percentage (and sometimes also flat) fees.

Credit card processing services

Credit card processing services are also a core part of the package, as they enable credit card payments.

This is the reason why banks started to become hardware suppliers, as they are the primary source of credit card terminals or PDQ machines for small businesses holding a merchant account at these banks.

PDQ machines, or “chip-and-PIN” machines, or card terminals, differ in terms of technology but also in terms of payment methods accepted.

-  The first merchant credit card terminals where actually all offline card imprinters and are now considered antiques.

-  The first widely distributed kind of terminals only accepts swipe payments, by reading the magnetic stripe of the card. A signature is required by the customer to authenticate the transaction. Although far less popular than they used to be, swipe payments are still possible on most current PDQ machines.

-  The market is now dominated by “chip-and-PIN” machines. As the name suggests, these machines rely on the smartcard’s chip to process the transaction and on the customer’s PIN to authenticate it.

-  Credit card terminals are now also widely equipped with RFID chips to accept contactless payments, which includes m-payments such as Apple Pay or Android Pay,

-  Some terminals also support newer systems such as Magnetic Secure Transmission or Sound wave-based transmission (as used by Samsung Pay).

Credit card machines can also be:

- Strictly for use on the premises, with wired, countertop PDQ machines,

- Wireless, allowing portable use within a 30 to 100 metre radius from the base, thanks to a Bluetooth or Wifi connection,

- Fully mobile, thanks to a built-in 3G modem or a connection with a mobile phone.

As credit card machine costs used to be pretty high in the case of an outright purchase, banks popularised the rental system model.

In addition to PDQ machines, hardware proposed by merchant banks include all the necessary devices to build a fully working electronic point of sale like electronic, connected till, PDQ machine stands, customer displays, receipt printers, etc.

Payment gateways and online payment solutions

Credit cards also made it possible to make online payments. However, merchants with an e-commerce website need extra equipment to accept online payments by credit card or e-wallets. And this equipment is all about software. Because they also wanted this equipment to be part of the services package, banks also started acting as software resellers.

The software needed to accept online payments includes:

-  A shopping cart software, which is basically a website engine to build an e-commerce website,

-  A virtual terminal, wich is the software, on-screen version of a credit card terminal,

-  A payment gateway, which is used to connect with acquiring banks and payment processors over with encrypted data transfers.

As payment gateways are so essential to online payments, and as e-commerce quickly started representing thousands of billions of dollars worth of transactions, gateway providers became key players in the merchant services industry.  Consequently, these providers also started providing full merchant package, complete with credit card readers/PDQ machines, merchant accounts and financial services.

Online payments also mean higher security concerns, which is why banks also started to include the support for security certifications such as PCI-DSS in the package.

Merchant services providers

Merchant services providers fall into several categories, whether by specialization, origin or business model. Traditional high-street banks, online providers, aggregators and high-risk merchant account providers can be singled out.

Traditional, “brick-and-mortar” banks

Brick-and-mortar, high-street banks are historically the first source of merchant services.

As credit card payments became more popular, they just added all the services, hardware and software required to process card transactions, relying on third-party specialists, to create the first full-service packages and offer it to their regular business customers.

These banks still control much of the Irish market, with figureheads such as:

- HSBC,

-       Ulster Bank Ireland,

- Barclays Bank,

-  Etc.

Barclays has one of the most comprehensive offers, as they provide gateways, merchant account and credit card machines under the Barclaycard brand.

Online providers

Online providers have been massively gaining popularity in the last decade.

Because they don’t need to have shops down the street, and because they specialise on merchant accounts and related services, they are often able to offer lower fees than traditional banks.

Figureheads include:

- WorldPay, probably the most established online provider after more than 25 years in the business, and which has grown from a gateway services provider to a full-service merchant partner,

- Payzone, which has been on the market for nearly as long,

- Sage Pay, which is originally only an accounting software provider, and now also provides the full package,

- Elavon, which is originally a payment processor only,

- First Payment Merchant Services, which also provides the full range of services as well as a quite impressive list of point of sale hardware devices.

Aggregators

Aggregators are a relatively new kind of specialised services providers for merchants, who can get even more interesting rates as they actually market sub-accounts. They group hundreds, thousands of merchant accounts under the same merchant account they are holding with a third-part merchant bank.

In addition to card machines, merchant accounts, mobile software is their forte, as they often specialise in mobile solutions involving the retailer’s mobile phone as point of sale system.

Popular aggregators include:

- SumUp,

- Stripe,

- iZettle...

Offshore merchant account providers

Offshore merchant account providers can also provide all the services required by any merchant, including the supplying of card terminals and payment gateways.

These providers, as the name suggests, are based offshore, where regulations make it easier for some businesses considered “high risk” to open a merchant account.

Risk might be related to the business profile and credit history of the retailer, or simply to the nature of the business, with adult entertainment, pharmaceuticals and gambling but also travelling and subscription-based services being flagged for some reason by Irish banks.

Specialists include:

- VeriPayment,

- Instabill,

- Durango,

- EasyPay Direct,

- SMB Global,

- Host Merchant Services...