Merchant services explained: Payment processing for the small business owner
Discover what merchant services are and how they can benefit your business. Learn about payment processing, costs and fees, how to choose a provider, and more.
Updated 
8 min. read
Swiping, dipping, and tapping.
Whichever way your customers like to pay, you'll want your business to be able to go with the flow. And that means understanding what merchant services are.
Whether you're an aspiring entrepreneur or you have a startup business, sooner or later, you'll need to explore how to efficiently accept payments from customers. You may be asking: What type of payment device is best for my business? How do I ensure online payments are secure? Do I need the ability to scan QR codes? What are my options for handling card payments out in the field?
This article provides answers to these essential questions:
- What are merchant services?
- What are the benefits of merchant services?
- How do you pick a merchant services provider?
- Do merchant services cost anything?
- Where can you learn more about merchant services?
What are merchant services?
Merchant services are the financial products that allow a business to accept and authorize their customers’ card payments.
Payments can happen with a click online, a smartphone tap, or a card swipe. Merchant services are the services and equipment that allow those point-of-sale payments to be accepted, authorized, processed, settled, and funded to your business. Unless a business is cash-only, it will need merchant services, also known as merchant processing or merchant card processing, to accept the various types of card payments their customers prefer.
What do merchant services consist of?
There are many pieces to the puzzle of making merchant services work seamlessly and, importantly, securely. A basic merchant services setup has three elements.
1. POS systems
POS, or point-of-sale, systems are the hardware and software used at a physical location to accept and authorize card payments. The hardware is a device for swiping, inserting, or tapping a card or scanning a barcode. These devices might be at the checkout line in a store, or they can be mobile devices used in the field, such as at a farmer's market, showroom floor, or restaurant table. The software portion of a POS system can also be loaded on the device to provide business management functionality, such as inventory management, sales insights, and data collection and analysis.
Your business's specific POS system might vary depending on whether you run a restaurant, an e-commerce site, or a landscaping business.
2. Payment gateways
Think of a payment gateway as a POS system for online sales. A payment gateway is a platform that allows your online customers to submit payment information on your business's website to support e-commerce. Payment gateways provide businesses with a secure way to accept and authorize their customers’ online payments.
3. Merchant service account
How does a customer's tap of a phone or card turn into funds in your business's bank account? Enter the merchant account—a type of business bank service account that allows businesses to accept electronic payments such as debit and credit cards. The merchant account acts as the middleman between the swiping, dipping or tapping of a card at the point of sale and the deposit of the proceeds from those transactions into a business deposit account. Depending on your funding preferences, a merchant account allows businesses to receive the money from their payment transactions almost immediately.
If you conduct traditional commerce or e-commerce, you will almost certainly need a merchant account. All merchants that accept credit, debit, gift or prepaid cards have a merchant account of some kind.
What are the benefits of merchant services?
It may be tempting for some businesses, especially in the early days, to keep things simple by being cash-only. But the benefits of accepting card payments go far beyond a few missed sales. Here are some potential benefits to consider.
1. Potential sales growth
Merchant services may help increase a business's sales opportunities. A merchant services system offers customers multiple ways to pay for products and services, whether online, at a business's physical location, or even out in the field with a mobile payments device. By offering many payment options, your business may also attract more potential customers, allowing them to pay for goods or services in the manner they prefer.
2. Security & compliance support
Merchant services provide secure payment processing and customer payment data protection. They also help businesses meet industry data security regulations and meet compliance requirements for various types of card payments.
3. Cash flow management
The right merchant services provider may help your business's cash flow. Your business may gain quicker access to funds from credit and debit card transactions. For example, funds are available within hours for businesses operating a BMO merchant account and a BMO business checking account.
4. Inventory management
During a sale, an in-person POS system scans each product's barcode, allowing the software to track everything that goes out the door. Inventory management capabilities provide real-time inventory data to help ensure you don't sell out of products.
5. Business insights access
POS data reports can also guide your business, allowing you to analyze a product's sales performance, identify seasonal trends or gauge the effectiveness of a marketing campaign.
6. Systems integration
POS systems may also integrate with other business and accounting software, providing potential benefits to improve business operations and create efficiencies.
7. Technical support
Beyond the actual hardware and software of your payments system, some merchant services providers offer ongoing customer support that may help their business customers manage payment-related issues.
Costs associated with merchant services
Once you've determined the best merchant services for your business and start shopping around, you'll want to consider the costs. Fees and how they are structured can get complicated, so compare providers carefully.
When a customer uses a card to make a purchase, your business will incur fees related to the acceptance costs of the transaction. Your merchant services provider will collect card issuer and card network acceptance costs and their corresponding fees and the monthly merchant account costs. The major credit card companies charge interchange fees for transactions on their networks. Interchange fees amount to a few percentage points of the value of a transaction, and the fee may vary depending on several factors, such as the type of business and whether a transaction is online, over the telephone or in person.
Your merchant services provider will likely also collect fees for its services in processing, settling and funding your transactions. These fees and how they are structured vary among providers and may include, for example, a monthly or flat fee above the interchange fee. Your merchant services provider may also charge for your point-of-sale equipment it provides and for setting up your business's system. Also, you'll want to ask your merchant services provider if they have chargeback fees, which they may impose if a cardholder disputes a payment transaction and the original charge has to be reversed back to the cardholder.
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How do you choose the right provider?
Finding the right merchant services provider takes careful research and asking the right questions. The choice will depend on various factors, including the size of your business, manner of payment acceptance and what industry it is in. Here are some of the main factors you'll want to ask about to evaluate which provider is a good fit for your business.
1. Cost
To compare pricing, you may need to assess your expected number of transactions for a time period, the equipment needed, and how your business needs may change over time. The equipment you'll need is based largely on where and how the business accepts payments—online, in a traditional store setting, over the telephone, through an online application or in mobile locations.
2. Industry-specific solutions
The merchant services needs of an online cosmetics store may be very different from those of a food truck. Some providers may have expertise and stronger solutions for particular industries and business models.
3. Payment processing time
Managing cash flow is always top of mind for many business owners. Be sure to ask potential merchant services providers how quickly you can access funds from payment transactions using their system.
4. Software integration
Merchant services that integrate seamlessly with other business software can help your business processes run smoothly and efficiently. Consider, for example, how valuable it might be to integrate payment data with your accounting software. Integration needs vary from business to business, but it's worth keeping in mind, especially if you may need more sophisticated capabilities in the future.
5. Customer service
Ask yourself how much help you may need from your merchant services provider and the amount of support they provide. Do they offer real-time support, or is their contact center in a time zone that may not meet your needs? BMO, for example, partners with the payment provider Elavon to give merchant services clients 24/7 access to customer service.
Learn more
Consumers today may take it for granted that when they tap, swipe, or dip a card or smartphone or enter their card details on a website, their purchase will typically go through instantly. As a business owner, you know that behind the scenes, there's a complex system known as merchant services. Finding the right solution for your business requires careful research and asking the right questions.
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Footnotes
Merchant Services are made available by Elavon, Inc. and its affiliated entities which may be involved in providing any portion of the service (together, “Elavon”). BMO Bank N.A. (BMO) and Elavon are separate legal entities, which are not affiliated companies by common ownership, management, or control. BMO makes no representations or warranties either express or implied, of any kind with respect to the Merchant Services or any other products and services made available by Elavon, including, without limitation, those of merchantability and fitness for a particular purpose. Products and services made available by Elavon are subject to its management and credit approval. Elavon’s governing agreements contain the complete terms and conditions that apply to Elavon’s products and services. All product and service features are subject to change at any time without notice. Elavon is a registered trademark in the United States and/or other countries.
Banking products are subject to approval and are provided in the United States by BMO Bank N.A. Member FDIC