Regardless of the type of business you're running, it's likely that you'll need to take card payments. A regular bank account isn't sufficient for you to do this. Instead, you need to use a merchant service provider.
So what exactly is a merchant service provider, and how do you choose the best one for your business?
What is a merchant service provider?
A merchant service provider allows you to receive debit card, credit card, and other payment types. Conventional bank accounts, whether personal or business, do not allow for these payment types; instead, they’ll be limited to bank transfers or cash or cheque deposits.
There is a huge range of merchant service providers available in the UK. Depending on your requirements, you may choose to open a merchant account or simply use a payment services provider (PSP). Your choice of merchant account could have a significant impact on your bottom line, so it’s important that you do your research.
Merchant accounts versus Payment Service Providers
A merchant account enables businesses to accept debit and credit card payments. When a customer pays you for goods or services using a card, that money goes into your merchant account before being sent to your bank account (minus the transaction fee). You should note that it can take between 24 hours and one week for the payment to be transferred from your merchant account to your business account.
Merchant accounts can be set up directly with a bank, through a payment provider, or through an Independent Sales Organisation (ISO). ISOs are third party businesses that acquire new merchants on behalf of banks. Examples of ISOs include Paymentsense, Handepay, and Payzone.
All merchant accounts require the services of a payment processor. These are financial institutions that are responsible for moving money between the global card networks and merchant banks. Merchant service providers typically offer businesses both merchant account and payment processing services as standard under one contract.
In the past it was necessary for businesses to have a merchant account if they wanted to accept debit or credit card payments. Today, however, it’s possible to use only a PSP. Instead of each business having their own merchant account, PSPs such as Stripe, Square, and Paypal use aggregated merchant accounts through which the payments of hundreds of different businesses are processed using a single merchant account.
A lack of credit history can make it difficult for new businesses to open a merchant account. However, it’s generally quick and easy to open an account with a PSP - although these providers are best for small businesses with turnover of less than £5000 per month. For higher amounts, it will probably be more cost effective to use an ISO.
Shouldn't I just use my bank?
Many business bank providers also offer merchant accounts. It may appear to make a lot of sense to simply use the same provider, especially if you’re worried about paperwork. However, this isn’t always the best option in the long run.
The rates charged by High Street banks are often higher than those charged by payment processors and ISOs. Crucially, if you’re banking with a newer startup bank, you will likely find that they don’t offer merchant accounts at all.
Card payments. Card machines, or PDQ (Process Data Quickly) machines as they are sometimes known as, allow merchants to process payments at the point of sale. Mobile card readers provided by the likes of Square, iZettle, and SumUp can cost as little as £30, while more advanced PDQ devices can cost up to £1000 to purchase outright.
Payment gateway. A payment gateway allows you to take card payments securely over the phone, by email, or through your website.
What is the difference between a merchant service provider and my EPOS?
If you use an electronic point of sale (EPOS) system, it is likely that your EPOS will be operated by your merchant service provider. For example, if you use the popular iZettle EPOS system, you’ll have to use iZettle for payment processing too.
However, this isn’t always the case. In some circumstances you may choose to buy or lease specific EPOS equipment, which you can ‘plug into’ a merchant account of your choice. Alternatively, you may wish to take card payments but have no need for EPOS equipment - for example, if you’re only taking payments online. In these cases you will have a broader choice of merchant account and merchant service provider.
How do I choose the best merchant service provider?
So now we understand what a merchant service provider is, how do you choose the right one for your business? There’s a range of factors that might influence your decision. These include:
• Do you need EPOS? Remember that your merchant account may be tied to your EPOS system. If you need EPOS equipment, make sure that you take into account the specific costs associated with that, for example hire fees or initial cost. For more information, read our guide to Point of Sale systems.
• Transaction types. Most merchant accounts will allow you to accept most or all of the payment types you’ll need. However, you should check to see whether your potential choice allows for things like telephone payments. Remember, too, that American Express transactions are treated differently.
• Processing fees. This is the big one. Credit and debit card transaction fees typically range anywhere between 0.5% and 3%. You may also be charged an authorisation fee of around a few pence per transaction. Compare prices and don’t be afraid to negotiate.
• Minimum monthly fee. Some providers will require you to spend a minimum amount on merchant fees per month. So, if your monthly minimum is £15 but you rack up fees of only £10, you will still be charged the full amount of £15.
• Minimum contract length. It’s important to check if you are tied into a contract and, if so, for how long. Contracts with merchant account providers typically range from one year to four years and can be very costly to terminate early, so make sure you know what you’re signing up for. Also, beware that with some providers your contract will automatically renew unless cancelled well before the initial term expires. If you’re looking for flexibility, then some PSP’s, such as iZettle, Square, and SumUp offer contracts with no minimum term.
• Chargeback fees. Chargebacks occur when customers dispute a card charge, for example due to fraudulent activity. You will be charged for the full amount of the transaction as well as an additional fee of around £15 on top.
• Hidden fees. Beware that some providers will charge extra fees on top of those already mentioned. These can include set up fees as well as PCI compliance fees. PCI compliance is a legal requirement for businesses that handle card payments and typically costs between £2.50 and £5 per month.