When Martin Andrews decided to open his first restaurant, he sat down and made a list of everything he would need to do before he served his first paying customer. Find premises, refit the kitchen, design the interior, source all the fittings, recruit kitchen staff, train front of house staff, build a website, shmooze the local media, arrange a launch night, the list went on and on.
But something Andrews didn’t consider was his merchant services. As a head chef, the kitchen was Andrews’ domain. He had never thought about the practicalities of accepting payments from customers before.
A couple of weeks before his restaurant’s official launch, Andrews realised his mistake.
“I was sitting in the kitchen, looking over my menu plans, when it hit me. I hadn’t thought about how customers would pay for their meal. We could obviously do cash transactions but I knew that card payments would require specialised equipment like a card machine.”
Andrews went straight online to research card payments. He discovered that cash use had peaked in 2012 and had been declining ever since. While 60% of transactions were cash in 2016, just 40% of transactions were cash in 2017. The next year, cash use had fallen even further—just 36% of transactions used were cash.
Andrews immediately realised that not accepting card payments would mean alienating two-thirds of his potential customers. He started researching card payment facilities, which he learned were collectively referred to as merchant services. After a short search, he eventually selected a provider based on good reviews and competitive pricing.
Andrews’ new restaurant opened on the 30th June 2017, two days after his merchant services were installed.
“Without proper merchant services in place, our opening would have been a disaster,” said Andrews, reflecting on the near miss. “We’d have had to turn customers away or give away free meals or send customers to the nearest ATM. As a new restaurant, that could have been the end for us!”
In this article, we’ll retread Andrews’ research, learning about what defines merchant services and how in-store services differ to online services. Finally, we’ll recap how you can find the cheapest merchant service provider for your small business.
What is merchant services?
Merchant services is a specific type of financial service that includes all the services and products a business needs to accept payments from your customers. This includes things like card terminals, point of sale (POS) systems, payment gateways and merchant accounts.
While card payments might seem simple—after all, it takes just one or two seconds for a card transaction to go through—there’s actually a lot of parties working together behind the scenes. There’s you (the merchant), your customer (Joe or Jane Bloggs), your bank (the merchant acquirer), your customer’s bank (the issuing bank), your payment processing provider (Worldpay, First Data, etc.) and the card association (Visa, Mastercard, American Express/Amex, Discover, etc.).
For a card payment to be successful, every single one of those parties has to work together perfectly. Thankfully, merchants don’t have to think about most of the behind-the-scenes stuff. As long as your merchant services are set up correctly, all the other organisations will do their jobs automatically.
So that, in a nutshell, is what merchant services are.
In the next few sections, we’ll look at specific merchant service products and services. By the end, you should understand everything you need for your business to accept a card payment from your customer.
Brick and mortar merchant services
Way back when, brick and mortar merchant services were simple. You bought a cash register (and a card terminal if you were fancy), manually entered transaction details in the register and stored cash payments in your cash drawer.
Well, things have moved on from then. Modern brick and mortar merchant services are a lot smarter and more comprehensive.
What is a Point of Sale (POS) System?
A POS system is the hardware and software used by a business to manage transactions and payments. Most modern POS systems are actually EPOS (electronic point of sale) systems, which integrate with a raft of external business systems like marketing platforms and accounting systems.
Although most EPOS systems are sold as one package, there’s really two separate elements to think about: hardware and software. Let’s take a look at both elements in more detail.
POS hardware includes all the physical stuff you need to set up a POS system. Precisely what products you need will change depending on your business requirements. Here are some of the more common pieces of kit.
- POS Screen: Your staff need an input and output device for your POS system. In cheaper systems, this is usually a tablet like an iPad or even a smartphone. In more expensive systems, the screen is usually a robust touchscreen monitor.
- Barcode Scanner: For big retail environments where you have lots of SKUs, barcode scanners can reduce checkout time as cashiers don’t have to manually look up products.
- Card Terminal: Your card terminal (or card reader) is the bit of kit that actually captures your customer’s card data and verification data.
- Receipt Printer: While a lot of businesses are pushing email or SMS receipts, a lot of customers still expect paper receipts.
- Cash Drawer: Merchants obviously want to keep cash safe so a cash drawer is part of most POS systems.
While you can buy POS components separately, most merchants opt a pre-built package from a supplier to ensure everything works together.
Pre-built packages are usually a bit more expensive than DIY systems but I think the benefits are more than worth it.
POS hardware components are only half the story. You’ve also got to think about the software running on it. POS software can be divided into two camps: on-site and cloud.
Here’s a quick summary of each.
- On-site: Traditional on-site POS software is installed on a local computer. Unless you have a maintenance agreement, it’s your responsibility to update and maintain the software.
- Cloud: Cloud POS software runs on a remote server operated by the software provider. While your staff access the system via the internet, there is usually an offline backup installed locally in case the internet goes down. Because the software is managed by the provider, you don’t have to worry about updates or maintenance.
Whichever option you go for, you should always test out the software thoroughly before buying a system. POS software needs to be powerful enough to support your specific business requirements and flexible enough to change with your business developments.
What is a merchant account?
Most business owners and managers are familiar with business bank accounts. What they might not be that familiar with is a merchant account. Merchant accounts are special types of bank accounts that can accept payments directly from debit cards and credit cards.
Without a merchant account, you can’t process card payments as you have nowhere to deposit the money.
There are two different types of merchant account: dedicated and aggregated. I’ll give you a quick summary of each below.
- Dedicated: Dedicated merchant accounts are opened exclusively for one merchant. Since the account is specific to one merchant, they have more leeway to negotiate transaction fees. The major drawback is that the application process is in-depth and time-consuming.
- Aggregated: Aggregated merchant accounts are shared by numerous merchants. All payments are paid into one merchant account then the provider pays out money to each merchant’s individual business bank account. Aggregated merchant accounts are quicker and easier to set up but give merchants less control over their payments.
You also get a special type of merchant account called a high-risk merchant account. Providers offer these more expensive accounts to merchants who can’t access standard merchant accounts because their business poses a financial or reputational risk.
What is a card terminal?
A card machine (also called a card terminal or PDQ machine) is the physical device merchants use to capture a customer’s card and authorisation data. In other words, it’s the device that accepts your customers’ credit card or debit card.
Card terminals work by reading the data stored on a customer’s card, accepting their PIN and then sending the information to your POS system or directly to your acquiring bank. The nitty-gritty details are quite complicated so I won’t go into it in much detail here. For a full explanation of the inner workings of card payments, check out our blog post The Ultimate Credit Card Processing Guide.
There are a few different types of card terminal: countertop, portable and mobile. Here’s a quick rundown of each option.
- Countertop: Countertop card terminals are physically attached near (or to) your POS system. While countertop terminals traditionally used USB or Ethernet to communicate with your POS system, modern devices can use WiFi or Bluetooth too.
- Portable: Portable card terminals are battery-powered devices that connect to a base station or POS system via Bluetooth or WiFi. They usually have an in-built receipt printer, allowing merchants to complete transactions anywhere in their premises.
- Mobile: Mobile card terminals are also battery-powered but don’t need to connect to a base station or POS system. Instead, they use the mobile telephone network (GPRS, 3G, 4G, etc.) to communicate directly with your merchant bank. This allows you to accept payments anywhere you have phone signal.
What is a card reader?
A card reader is similar to a card terminal but it’s just different enough to deserve its own section. (Some commentators will refer to card readers as payment service providers. This can be a bit confusing so we try to keep to just card reader.)
A card reader is a small, battery-powered device that pairs with a mobile device (iPhone, iPad, etc.) to allow you to accept payments.
The card reader reads a customer’s card details, accepts their PIN then sends all the data to your mobile device for processing. Your mobile device, which is running a POS app (developed by the card reader manufacturer), processes the transaction and sends the data on to the merchant acquirer.
Card readers usually operate on a pay-as-you-go basis where merchants buy the reader outright and only pay transaction fees when they accept a payment. Common manufacturers include iZettle, SumUp, Square and PayPal Here.
Online merchant services
Twenty years ago, all merchants needed to think about was in-store merchant services. Nowadays, however, things are very different. Nearly every business has a website and most of them have some level of e-commerce functionality.
In the next few sections, we’ll discuss what merchant services you need to accept online payments.
What is an e-commerce platform?
The first thing a merchant needs to accept an online payment is an e-commerce platform. This piece of software is basically the equivalent of a shop’s POS system. You use it to set up products, manage stock, queue up transactions and so on. However, unlike POS systems, e-commerce platforms are used by the customer and not the merchant. (I guess, they’re a little like self-service checkouts in modern supermarkets.)
There’s a huge amount of choice with e-commerce platforms, ranging from all-in-one systems like Wix and Shopify through pre-built frameworks like Magento and WooCommerce to fully bespoke e-commerce platforms.
Once you’ve got your platform sorted, it’s time to think about the technology and services that actually handle the payment processing aspect.
What is a payment gateway?
The easiest way to think of a payment gateway is as a digital card terminal. At a very basic level, all your payment gateway does is accept a customer’s card details (and verification details) then bundle the data up and send it off to the merchant bank.
Obviously, that’s simplifying the matter a bit but that’s the general story.
Your payment gateway also has to integrate with your e-commerce platform, encrypt all the data and wait for the response from your merchant bank. But that’s a rabbit hole we don’t have time to explore. If you’re interested, I recommend you read our article What is an eCommerce Payment Gateway?.
What is an internet merchant account?
Just like with in-store transactions, you can’t accept debit card or credit card payments into a normal business bank account. Instead, you need a merchant account.
However, when you’re taking payments online, you need a special type of merchant account called an internet merchant account. (You probably guesses all of this from the section title!)
There’s basically no difference between a regular merchant account and an internet merchant account except the transaction fees. Because online debit or credit card transactions are slightly riskier, internet merchant accounts charge slightly higher payment processing fees.
How do I buy the cheapest merchant services?
Phew! That was a lot to take in at one time! If you’ve reached the end of the article, you should (hopefully) have a good feel for what merchant services actually means and what individual products and services are included under its umbrella.
Now that you know what merchant services are, the next step is getting them in place for your business. Now, we’ve covered this in some detail in our article What is the cheapest way to buy merchant services? but I’ll give you a quick summary here as well.
There are four main channels for buying merchant services and there’s a huge variation in what you’ll be charged in each. Here’s a quick rundown.
- Banks: Most banks will sell merchant services to their business customers. However, banks are usually just resellers for payment processing companies. For example, HSBC resells Global Payments, Santander resells First Data and so on. Banks typically ratchet up the debit or credit card transaction fees charged to merchants as they know their business customers will take their advice. In short, buying through a bank is expensive.
- Card Processor: A little bit of research will reveal the main players in the payment industry — Worldpay, First Data, etc. All of these organisations have huge sales teams that merchants can contact directly. However, individual small businesses have next to no bargaining power so tend to get fairly uncompetitive rates. Going directly to a card processor is often better than buying through a bank but it’s still not cheap.
- Independent Sales Organisations (ISOs): ISOs are companies that resell a payment processor’s service to a group of merchants. Because they represent a large group of merchants, they’re offered much better deals — typically up to 40% lower than the card processor’s direct quote. ISOs are a great option but it’s difficult to accurately (and quickly) compare their deals.
- Cardswitcher: Sites like Cardswitcher allow you to generate multiple quotes from leading ISOs and compare them in one place. That saves you a huge amount of time and energy and helps you get the best deal for your small business. The process only takes two minutes so you’ve not even got that much to lose!
As I mentioned above, we have partnerships with many leading ISOs and allow users to search, compare and select merchant service deals from across the market.
Our comparison process only takes about two minutes and can cut a huge chunk off your debit and credit card processing bill. Click here to see for yourself.