The confusing world of merchant services
Recently, my wife, owner of Firefly Wine Shop, asked me to review a company offering merchant services. Within 30 minutes of research, I tumbled down the rabbit hole of payment systems, getting progressively more confused at all the options and terminology. Part of the problem is that people are loose with terminology, referring to the same service by different names. Other times, companies provide only one of several services while competitors offer all the services bundled. Keeping track of the entire mess took several hours of research. Below is my effort to make sense of it all. Please share in the comments where I mess up.
What are Merchant Services?
In simple terms, merchant service providers work with merchants to accept payment from customers with credit or debit cards or other electronic forms of payment. They intermediate the transaction, using the real world Point of sale (POS) system to connect the merchant’s bank, the customer’s bank or credit card. The POS systems include credit card scanners, chip readers, and Near Field Communication (NFC) devices. The NFC devices enable the card or phone tap technology to pay with digital wallets. Some POS systems also include check scanners. Few merchant service providers that I could find manufacture their own POS systems, but there are exceptions, such as Square. Normally, they use third party systems like NCR Silver and Clover, for small businesses.
The merchant service providers use a payment processor. The payment processor supplies the software, often as a SaaS, to authorize the transaction and electronically moves the money from the customer bank to the merchant bank. Some payment processors may be independent companies or may be part of the merchant service provider. And some traditional payment processing companies have added merchant service capabilities.
Merchant services may also help with gift cards and loyalty programs, provide check guarantee services, offer payment gateways, and sometimes even cash advances.
What about e-commerce?
With the explosion of e-commerce, a new level of complexity emerged in merchant services. Traditional payment processors didn’t work. So a new breed of software emerged, payment gateways. You may have heard of a few of these, such as PayPal, Google Pay, and Apple Pay. Some lesser known to the general public include Stripe, SecurePay, Authorize.net, and Braintree.
When websites build or buy a shopping cart service, such as WooCommerce, Big Commerce, or Shopify, they connect to one or more payment gateways at checkout. When a customer completes their transaction, the website forwards the transaction details to the payment gateway. The payment gateway converts the data and sends it to a payment processor of the merchant. From there, the transaction occurs much like it did with traditional retail. Upon completion of the payment processing, confirmation is sent back to the payment gateway and displayed on the website.
But of course, some companies complicated things (at least complicate understanding the options). Payment gateways like PayPal and Square integrate payment processors into their platform. They created shared merchant accounts on the backend to process transactions from thousands of merchants. On the front end, everything still works the same so customer don’t see any difference.
What does this all mean?
For merchants shopping for merchant services, the number of options and companies providing services continues to grow. Looking for services that work with your bank as preferred providers is often the easiest way to get started, but with increasing integration of services many providers are offering lower rates for transactions, sometimes just charging a monthly rate.
I suspect over the next few years, the software services in payment gateways, payment processers, cloud based POS, and digital shopping carts will continue integrating with companies such as Google, Apple, and Amazon finding ways to expand their influence in the merchant services arena. But larger retailers will push back on the influence of these tech companies, working with other merchant service providers and driving a consolidation in the industry.
As I put together the next edition of my textbook, there will definitely need to be something about merchant services, payment gateways, and how to integrate them in e-commerce websites and apps.
