The old adage “cash is king” might still ring true, but a study by the Federal Reserve Bank in San Francisco found that cash transactions are decreasing while the number of debit and credit card transactions is increasing.
For businesses looking to implement such transactions into their processes, it takes some further digging. Merchant payment processing, also referred to as merchant services, is an all-encompassing term that covers everything businesses need to accept credit and debit card payments from their customers.
In this guide, you’ll learn more about the basics of merchant payment processing and how it can add value and streamline business processes. Plus, you’ll discover potential solutions that can help you reap the rewards of the growing embedded finance trend.
What Is Merchant Payment Processing?
In a nutshell, merchant payment processing is how businesses process and complete debit and credit card payments. When a customer swipes or enters their card into a card reader (or enters a card number online for an e-commerce purchase), transactions are completed almost instantly. However, all the "stuff” that happens behind the scenes is known as merchant payment processing.
How Does Merchant Payment Processing Work?
Merchant payment processing starts with a payment processor. Today's payment processors can accept both in-person and online transactions. When customers present their card or enter the card information online, a payment processor:
- Communicates with the cardholder's issuing bank
- Seeks approval for the transaction
- Transfers funds into your business bank account (known as a merchant account)
Companies that offer payment processing services are known as merchant service providers. The best merchant service providers will include everything a business needs to accept debit or credit card payments. This includes hardware to accept the transaction, such as a point-of-sale (POS) system; virtual terminals to process online payments, and backend software to process transactions and communicate with banks.
Additionally, your merchant service provider can grant you the ability to accept multiple payment methods. For instance, in addition to debit and credit card options, you may also be able to accept gift cards and prepaid cards. Today's processing solutions also allow merchants to accept the latest technologies, including contactless payments via Google Pay and Apple Pay.
By giving your customers more payment options, you increase the likelihood of both short-term sales — customers won't have to walk away because they can't provide a valid payment method at the moment — and long-term retention, as customers will leave feeling satisfied with an overall convenient payment and shopping experience.
Of course, merchant account providers — another name for merchant service providers — could not exist without collecting fees. Fees can vary significantly among these providers.
You may see some of the following language used by your payment processing company:
- Monthly fees: These are recurring, flat-rate fees that you pay to gain access to the processing service. These may be offered as monthly subscription fees. Some providers may have monthly minimum requirements, which can be challenging for a small business that might not have a high volume of transactions.
- Transaction fees: These fees are charged every time a transaction occurs. Pricing can vary depending on the payment method — debit card, credit card, gift card, or prepaid card.
- Chargeback fees: Businesses are charged these fees if a customer disputes a transaction.
- Processing fees: These fees are similar to transaction fees and are part of the cost that businesses incur during a non-cash transaction.
- Interchange fees: This is another name for transactional fees incurred for debit and credit card processing.
- Early termination fees: Payment processing companies will likely sign you up for a contract. If you break this contract early, you will owe termination fees.
- Compliance fees: Payment processors must follow PCI compliance standards. (PCI is simply the organization’s name rather than an acronym.) If they do not, they can be subject to compliance fees.
How Do Fees Play Into Payment Processing?
Let's say that you sell a product for $200. The customer pays this money to you in exchange for the product. The customer pays using a credit card. When this happens, your payment processor communicates with the customer's credit card network and issuing bank to ensure the transaction is valid.
Credit card networks include companies like Visa, Mastercard, Discover, and American Express. The customer's issuing bank is the bank or credit union that provided the customer with the credit card, such as Capital One or Navy Federal Credit Union.
Whenever a customer uses a debit or credit card to purchase a product from you, part of your profit from that transaction goes to pay fees to the credit card processor. These are formally known as interchange fees. They represent the cost of accepting debit and credit card payments. Typically, interchange fees are 1% to 2% of every debit or credit card transaction.
The actual processing rates and pricing model can vary, but typically the following organizations get some portion of each interchange fee:
- The issuing bank (e.g., Bank of America)
- The credit card network (e.g., Mastercard)
- Your bank (the bank where you have your business account)
- Your credit card processing company (e.g., Helcim or National Bankcard)
Some of these fees, such as those set by credit card networks, are unavoidable. This portion of the fee will be standard no matter which credit card processor you use. But businesses do have a choice in the payment processor they select.
The fee structures can vary dramatically among payment processors. Some may have different prices for credit card and debit card transactions. Others may have hidden fees. It's important to read the fine print and understand the pricing structure your provider uses to process debit or credit card payments. You also want to clearly identify how their services are helping your business.
How Can Merchant Payment Processing Add Value for Businesses?
Choosing the right merchant payment processing system can add value for businesses. Let's take a closer look at how this is the case.
Improved Customer Experience
The more options customers have at checkout, the less friction there will be when it comes time to pay, thus increasing customer satisfaction during the purchasing process. And since checkout (and payment) is one of the most critical stages for any business that drives revenue through online sales – customer satisfaction at this stage is imperative. Whether customers remember an easy purchase process or not, they certainly remember the difficult ones.
By providing the most convenient ways for customers to pay, you’re able to reduce hesitancy and cart abandonment. Of course, other things come into play when providing a seamless checkout experience. However, providing customers with as many payment options as possible is essential in order to prevent customers from jumping ship.
Today, most large online businesses accept all major credit cards (Mastercard, AmEx, Visa), and most digital options like Paypal, Google Pay, Apple Pay, and Amazon Pay. But as new technologies continue to emerge, payment processing is keeping up by allowing people to pay with cryptocurrency, or through new “Buy Now Pay Later” (BNPL) platforms.
Better Financial Management
Today's payment processors come with enhanced POS (point-of-sale) systems. Not only do these systems make it easier to process debit or credit card transactions, but they can also offer enhanced recordkeeping and financial management. POS systems can track transactions across an entire company, no matter if it's a mobile payment or in one of the many brick-and-mortar stores you have.
Businesses can also use POS data to track the sale of goods and improve their supply chain management.
Fraud and chargebacks can become expensive for businesses. The best credit card processors work with smart cards, accepting EMV chips. (EMV stands for Europay, Mastercard, and Visa, the three that originated the chip standard.) They have algorithms in place to track trends and alert you to possible high-risk data breaches. Businesses can also implement biometrics, like fingerprint scanners for payments within a mobile app, to help reduce fraudulent transactions.
Additionally, the best merchant card processing systems offer customer support around the clock.
As discussed previously, every time a company processes a card, an interchange fee is taken as a cost of doing business. By working with a provider that can offer competitive rates, lower processing fees, or special deals, companies can save money.
That might seem like a nominal amount, but keep in mind that while processing fees on each transaction may provide very little in savings on an individual level, they can equate to millions of dollars for large, enterprise companies.
As fintech continues to evolve, so do the ways in which large corporations can choose their payment processing provider.
In the early days of e-com, companies were still just processing cards to make transactions. As the first wave of fintech evolved, PayPal changed the landscape, allowing for a new way to pay for products. Once the floodgates were open, companies like Venmo, Stripe, and Square all joined the revolution. Then came e-wallets like Google Pay and Apple Pay.
Now that embedded finance is emerging as the latest evolution of fintech, there are new players in the payment world. And while these companies might only offer nominal differences from the others in terms of fees or perks, they do offer one extremely important feature the others can’t offer – a full suite of financial service products, all under one roof.
How Embedded Finance Is Changing Payment Processing
Prior to the growth of embedded finance, companies would have to find their own payment processing company and their own banking-as-a-service (BaaS) platform to hold their money. Then, if they wanted to offer gift cards, they’d have to find their own gift card company.
After all that time and research, they would then have to staff up their departments to make sure all programs worked together and kept their (and their clients) data safe from digital risk.
When large corporations use an embedded finance provider, they no longer need to invest in an exhaustive search for each and every provider. Or the employee overhead to manage it all.
With embedded finance, everything is under one roof. Not only does this allow large brands to dip their toes into the world of embedded finance, but it also allows them to grow as needed by giving them holistic protection across all services; whether it’s embedded banking, branded cards, or payment processing.
As an embedded finance provider, Alviere provides its own proprietary ledger, along with Soc 1, Soc 2, and PCI compliance, and AML (Anti-Money Laundering) and KYC (Know Your Customer) assurance. As such, all the regulatory, compliance, and safety measures are taken so your customer and business information stays safe and secure.
Evaluate Your Merchant Card Processing Today
Merchant processing isn’t the most exciting topic, but it is extremely important. Depending on the size of your business, and your current customer needs, switching to a more dynamic embedded finance platform like Alviere might make sense as a way to increase your customer lifetime value and overall revenue.
Whether you’re just looking for payment processing, or are interested in learning how you can grow your financial service products to meet your customers’ needs, Alviere offers a ready-made platform that doesn’t require upfront costs or added overhead. We take care of the hard work, so you can focus on your larger business goals.