The rise of digital payment methods, including credit cards, debit cards, and mobile payment systems, has significantly changed customers’ payment habits. As a result, businesses are actively responding to the new payment trends and using cashless methods to improve operational efficiency and create a safer work environment. According to Statista research, the total transaction value is expected to show an annual growth rate (CAGR 2023-2027) of 11.79% resulting in a projected total amount of US$14.79 billion by 2027.
As the number of new payment methods continues to grow and customer demands and preferences change, it is beneficial to become a merchant services provider to offer a convenient payment experience for customers. Insider Intelligence also expects revenue the online payments providers can collect as fees will increase from $82 billion in 2018 to $138 billion in 2024. In this article, we highlight the most common types of merchant service providers, and their functions and describe how to become one of them.
What is a merchant services provider?
A merchant services provider is a financial software partner that allows the accepting and processing of payments. It serves as a mediator between banks, customers, and merchants, providing debit and credit card transactions.The merchant services provider, or MSP, has various offerings for businesses, including digital payments, technology integrations for transaction tracking, POS services, CRMs, business data understanding, and collection of outstanding invoices. Understanding the features and capabilities of merchant services can help you develop a payment processing platform that is right for your business needs.
Merchant service provider vs payment gateway
Merchant service providers and payment gateways are two important components of the payment processing ecosystem, each performing different tasks. A merchant service provider, also known as a payment processor, acts as an intermediary between businesses and the various parties involved in the payment process. They enable businesses to accept electronic payments and handle the authorization, processing, and financing of transactions.
On the other hand, payment gateways act as secure channels for the transmission of payment information between customers, businesses, and merchant service providers. They encrypt and route payment data, ensuring the secure transmission of sensitive information. Payment gateways also provide additional functionality such as fraud detection and integration with e-commerce platforms. Together, these components work in tandem to enable businesses to process payments smoothly, securely, and efficiently.
3 Types of merchant services providers
Different providers offer different merchant payment services so you can choose the best solution for your type of business. Most merchant services can be categorized into several types and differ from their competitors by certain functions. According to different functions, there are three of the most common types of services available through merchant providers: merchant accounts, payment services, and payment gateway providers.
Merchant account providers
These entities are the most popular service providers. They offer a merchant account specifically designed for businesses to accept credit and debit card payments. Merchant account providers are extremely helpful for companies that make a large number of transactions with credit and debit cards. With this model, the processor (or the Bank) issues a Merchant ID, that is exclusive to your business and no one else.
Offering access to exclusive merchant accounts, they allow businesses to control payments and get benefits from quick access to funds and low transaction fees.
They also can provide other merchant payment services to enhance your business’s payment methods, including:
- Credit card terminals
- Mobile card readers
- POS systems
Merchant accounts can also have the following fees: monthly minimum, billing, authorization, transaction, customer service, and maintenance.
Payment services providers
While large companies have merchant account providers, there is an alternative for small businesses that do not need an additional account. Payment service providers (PSPs, third-party processors, or aggregators) enable businesses to accept digital payments both offline and online, without having a dedicated merchant account.
For example, you do not need to have a unique merchant ID number, because your account is aggregated with other merchants. PSPs simplify payment processing for small business owners, despite having longer processing times and higher overall costs.
What is the difference between a merchant service provider and a payment service provider?
Despite the similar functions, there is a key difference between a merchant services provider and a payment services provider. Payment service providers consolidate multiple businesses under a single account, while merchant services providers establish a separate account and identification number for each business they serve.
The table below illustrates the difference between a merchant services provider and a payment services provider:
| Characteristics | Merchant service provider | Payment service provider |
| Description | Merchant service providers offer an account specially designed for businesses to accept credit and debit card payments. | Payment service providers offer your business the ability to accept credit card payments without a dedicated merchant account. |
| An approvement process | Involves a verification and compliance process that may take weeks. | Typically instant approval. |
| Merchant account setup | The underwriting process varies by the bank account provider and can have different requirements for opening an account. | Payment services providers provide easier ways to set up. PSPs are free to sign up for and there is minimal documentation that is required to activate your account. |
| Pricing | More complex fees include: flat-rate, interchange-plus, and tiered pricing | Fewer fees to worry about in general |
| Processing volume | Negotiable limits on transaction size and processing volume. | Can offer strict limits on transaction size and processing volume. |
While PSPs consolidate a variety of different merchants under a single umbrella account, merchant services providers offer a dedicated account for accepting electronic payments. Each of these methods provides debit and credit card transactions but has specific functionality to meet your business needs.
Payment gateway providers
A payment gateway provider is a kind of merchant service provider that authorizes the processing of card or direct payments. It serves as a mediator between the business and the customer, allowing businesses to accept online transactions through a secure network.
Payment gateway providers can offer more than a simple function of enabling your business to process credit and debit card transactions over the Internet. They also provide a high level of security and fraud prevention so that both you and your customers can conduct online financial transactions seamlessly.
Payment gateway providers offer the following features: fraud detection, 24/7 customer support, and international payment processing, recurring billing. It is also important to ensure that the payment gateway is Payment Card Industry (PCI)-compliant.
Merchant services products
The majority of merchant payment services offer a wide range of services and products for businesses to accept and process payments. Here are the most common categories of merchant services products:
Merchant accounts
A merchant account is a type of bank account that is specially made for business purposes to accept and process electronic transactions by debit or credit cards from customers. This account serves as a temporary holder for card payments, acting as an agreement between the business (also known as an acceptor) and an acquiring bank.
The merchant account stores funds from processed transactions. Those funds are then transferred by your provider into a business account that you specify, such as a business checking account.
Credit card terminals
Credit card terminals which are also called electronic data capture machines are digital products that allow customers to physically swipe, dip, or tap a credit card to make a payment. These machines connect to the merchant service provider and process and validate transactions. There are many different sizes and forms of credit card terminals: from simple magstripe swipers to handheld terminals.
Point-of-sale (POS) systems
A point-of-sale or POS system usually consists of the software and hardware to accept payments. It also can manage a company’s daily operations and processes: processing sales, producing reports, monitoring inventory, managing staff, reconciling tips and commissions, accepting gift cards, and setting up loyalty programs.
Mobile payment systems
With mobile payment systems, the smartphone or tablet can function as a credit card terminal. They consist of a mobile card reader that connects to your mobile device and an application to communicate with your provider’s processing network. These mobile payment systems provide online transactions in any place, where there is an internet connection.
Payment gateway
A payment gateway is software that enables you to accept and process safe credit card payments online through your website or e-commerce store. In essence, the payment gateway replaces the credit card terminal. Customer credit card information is gathered and encrypted by a payment gateway for later processing.
Virtual terminals
A virtual terminal is software that enables businesses to accept payments made with a credit card, without the card having to be physically present. It is a program that transforms your computer into a credit card terminal. An optional USB-connected card reader can be used to swipe cards or manually input transactions. Businesses that accept orders over the phone or by mail and don’t have an e-commerce website are most likely to use virtual terminals.
How does a merchant services provider work?
A merchant service provider acts as an intermediary between businesses and banks. It quickly facilitates a transaction through a secure back-end process.
This process is seamless and takes only a few seconds:
- The customer tapes a card on the POS terminal or enters payment information online.
- The merchant service provider sends payment information to the bank.
- The bank sends the transaction to your merchant service provider and the card company, like Visa or Mastercard.
- The transaction information is sent to the customer’s bank to receive approval.
- The customer’s bank either approves the transaction or declines the payment.
- The card company sends the confirmation to the merchant’s bank.
- Then the payment terminal gets an approval code from the merchant’s bank and confirms the transaction.
- The amount of money is debited from the customer’s card.
SDK.finance payment solution
With the SDK.finance payment acceptance platform for MSPs and PSPs, you can empower the business and increase revenue by offering a complete stack of online and offline services for merchants. Our transaction core has ledgering functionality, so it can be customized to collect the transaction information from the POS, link it to a specific merchant account, and track the transaction status in the bank until the money is in the merchant’s account.
SDK.finance payment solution features include:
- Customer onboarding
- Transactions management
- Online POS
- Payment initiation and acceptance
- Regular payouts
- Refunds initiation
- Merchant’s digital wallet
- Roles and permissions management
SDK.finance has experience in transforming a core transaction accounting system through our payment software. Our technical team has integrated the ledger layer software with a leading MENA payment solution provider, allowing our customer company to see the entire payment cycle in detail, from acceptance and reconciliation to settlement and payout ensuring transparency for the money flow and daily accounting.
Watch the SDK.finance mobile app UI of our platform, designed to help you create secure and feature-rich financial experiences in record time. Supercharge your mobile payment, finance, or digital wallet app launch with SDK.finance:
As a result, SDK.finance helped to reimagine the technology and processes behind the customer company’s accounting system and launch a revitalized scalable future-proof solution. Through cooperation with SDK.finance, a new accounting system based on the ledger layer software is now integrated with an extensive network of the customer’s POS terminals across several countries in the MENA region.
Wrapping up
The merchant services provider is the financial partner that helps businesses to operate, facilitate transactions and provide different payment services that meet companies’ and customers. They act as an intermediary between banks, businesses and customers. The rise of digital payments, payment causes the need to ensure seamless transactions and improve operational efficiency.
SDK.finance provides a payment acceptance software platform for MSPs and PSPs that helps them increase business productivity and quickly grow revenue. With our finance platform, you can offer online and offline payment acceptance services to merchants, without having to start from scratch. Using the SDK.finance merchant payment processing platform, you’ll shorten time-to-market and save resources on software development. Contact us to build your payment platform based on our fintech software.
