How To Choose A Merchant Service Provider: 7 Things To Look For
While credit cards have existed in one form or another in the United States for almost a century, it’s only been during the last few decades that their use has become commonplace. It wasn’t all that long ago that most people made just about every purchase with either cash or a personal check. Today, most consumers have a variety of credit and debit cards, and many prefer to use them instead of cash whenever possible. As a business owner, it’s more important than ever that you have the ability to accept credit cards, whether you’re running a traditional retail store or selling items online. Simply put, credit card acceptance translates directly into more sales and, hopefully, more profits.
Unfortunately, accepting credit cards is anything but free. Credit card associations, issuing banks, and transaction processors will all get a cut of every credit card transaction you accept. Obviously, you’ll want to minimize the cost per transaction as much as possible, but there are other factors that are equally important. The processor with the lowest processing rates might not provide the best overall service.
In order to accept credit cards, you’ll need a merchant account. This is simply an account with your credit card processor that you can use to both deposit funds from cleared transactions and also pay the various fees and per-transaction charges that you will incur. Merchant accounts can also include a variety of associated products and services that you’ll need to run your business, such as credit card terminals, mobile credit card readers, point-of-sale (POS) systems, and more.
We’ve identified seven different features that you need to look at very carefully in selecting a merchant account provider. They’re all equally important, and you’ll want to examine each of them when evaluating any merchant account provider you’re thinking of signing up with. While it’s unlikely that you’ll be able to come up with a precise estimate of your overall costs, you should be able to get a pretty good idea by evaluating these seven features.
Table of Contents
- Why “Low-Cost” Isn’t The Same As “The Best” When It Comes To Merchant Services
- 7 Essential Qualities In A Great Merchant Services Provider
- How To Make An Effective Merchant Account Fees Comparison
- Questions To Ask A Credit Card Processing Company Before You Sign Up
- Knowing What To Look For Will Help You Find The Best Merchant Service Provider
Why “Low-Cost” Isn’t The Same As “The Best” When It Comes To Merchant Services
Selecting the merchant account provider that’s best for you and your business is not an easy task. Too many merchants fall into the trap of simply looking for the provider with the lowest processing rates. This can turn into an expensive mistake over time, as the credit card processing industry is notorious for tacking on a host of pricey – and often undisclosed – monthly and annual fees for just about every service provided as part of maintaining your merchant account. So, don’t get too focused on processing rates – it’s the overall total cost over time that really counts. This includes processing rates, account fees, and other costs (such as chargebacks) that you might have to deal with. To complicate matters further, there are several different processing rate models that can make it difficult to directly compare merchant service providers.
Not all merchant accounts provide the same level of service. Popular small-business processors such as Square, for instance, don’t actually provide a full-service merchant account. While you’ll still be able to process credit card transactions, you won’t get certain features (i.e., a unique Merchant ID number, PCI compliance services, and robust customer service) that full-service merchant accounts include. That’s because those services use third-party processing, which aggregates all of their clients into a common merchant account. Businesses often find it easier and faster to qualify for third-party processing, but it comes with risks–complaints about frozen or terminated accounts and poor customer service being very common. For a very small business that’s just starting out, this might be a reasonable trade-off in exchange for the money you’ll save over a full-service account. However, once your business grows beyond a certain point, you’ll need to transition to a more stable, full-service account and the security features it provides.
7 Essential Qualities In A Great Merchant Services Provider
So if processing rates aren’t necessarily the deciding factor, what elements should you look for in a merchant services provider?
1. Hardware That Meets The Unique Needs Of Your Business
No matter what kind of business you run, you’ll need equipment to process your sales. Even a purely eCommerce venture is still going to need some hardware – even if it’s just your own personal laptop.
In the case of accepting credit and debit card payments, you’ll need tech that can read your customer’s credit card information and send it to your processor for approval (or rejection). For most other businesses, however, your hardware needs will be more extensive. In the case of eCommerce, this tech is mostly software, but if you have a physical retail presence, that means hardware.
Options for reading credit cards are a lot more robust today than they were just a few years ago. In addition to the traditional wired credit card terminals commonly seen in retail establishments, there are now numerous wireless terminals and mobile processing systems that combine a smartphone with a very basic credit card reader to offer the same capabilities as a dedicated terminal. Many of these even support EMV chip reading.
Wired credit card terminals are still the most commonly-used card readers out there, and they offer a number of distinct advantages. Perhaps most importantly, they’re simply more reliable. You don’t have to worry about your wireless internet connection suddenly going down and leaving you unable to process a sale. Wired terminals are also generally better at supporting newer features such as contactless payments using near-field communications (NFC), such as Apple Pay, Samsung Pay, Android Pay, and others.
Today, wired terminals are more affordable than ever, and we highly recommend that you buy your own terminals outright rather than leasing them from your merchant account provider. Unfortunately, the credit card processing industry figured out a long time ago that they could make a lot of money by leasing terminals to their merchants rather than selling them directly. Here’s how the scam works: You sign up for a traditional merchant account, which comes with a three-year contract. You need terminals to actually process your customer’s cards, so you lease them from your merchant account provider. What you don’t realize (and your sales agent usually won’t tell you) is that the lease agreement for the terminals is actually with a separate company – and it’s for four years, not three. Not only that, but your terminal lease is non-cancellable, meaning that you’ll still have to pay for all of the remaining months on your lease if you try to cancel early. Even if you close your account and send the terminals back, many companies will still charge you for every remaining month of your lease. The end result? You’ll wind up paying literally thousands of dollars for a piece of equipment that you can buy outright today for as little as $100.00. Some companies will even try to tell you that it’s more cost-effective to lease your terminals rather than buy them. Don’t believe it! In almost all cases, this is simply not true.
If you read the terms of your leasing agreement and most importantly, do the math, it should be pretty obvious that, in most cases, those “low” monthly leasing fees and associated charges will add up to far more money out of your pocket than simply buying your own equipment. One possible exception to this general rule is if your business needs a large number of terminals, but you don’t have the capital available to buy them all at once. That said, businesses large enough to need a lot of terminals generally aren’t short on capital, so this is a pretty unlikely scenario.
Another unique exception is if you sign up with CDGcommerce, one of our favorite processors. Rather than lock you into an expensive, four-year contract, CDG provides their terminals in exchange for a $79.00 per year insurance fee. This works out to about $6.59 per month, far less than what most other processors will charge you in leasing fees. This fee also includes any necessary re-programming and software updates, plus you can also exchange your terminal for a newer model. It’s the one exception we’ve found where you’ll get a good deal by “renting” your terminals from your merchant account provider.
When shopping around for terminals, there’s one last thing to bear in mind. With the advent of EMV terminals in the US in 2015, there are a lot of older, magstripe-only terminals still out there. You don’t run into them as often as you used to, but it’s still a recent enough change that you may stumble across one in the wild. Not only are these terminals essentially obsolete, they’re also potential liability traps with the EMV liability shift that occurred on October 1, 2015. Avoid non-EMV terminals at all costs. Even in cases where the customer needs to use their magstripe, pretty much all EMV terminals are capable of doing magnetic swipes as a backup.
In addition to EMV, you’ll also want a terminal that supports contactless payments through near-field communications (NFC). NFC-based payment systems allow customers to leave their wallets behind and use their smartphone to make a payment. Apple Watch and Android Wear users can also use the technology to make payments with their smartwatches. Currently, the world of NFC-based payments is very splintered, with Apple Pay only working on Apple devices, Android Pay only working on Android devices, and Samsung Pay being proprietary to Samsung’s Android-based smartphones. Despite the confusing choices out there, NFC payments are currently the most secure form of payment that’s available.
Wireless terminals are also available, and while they’re not necessary for a traditional retail establishment, they can be very useful for any type of business where you have to go to the customer, rather than having the customer come to you. Plumbers, electricians, and others in similar trades will find them essential. If you’re in a business that needs a wireless terminal, realize that 1) the terminal itself will be more expensive than a wired terminal, and 2) wireless terminals also require a wireless data plan (typically about $20.00 per month). Depending on your needs, it might make sense to go with a mobile processing solution, such as Square, as a lower-cost alternative.
Point-of-sale (POS) systems are also very popular with merchants today, combining transaction processing with database capabilities that allow you to track not only sales, but also inventory, customer relations, employee performance, and numerous other metrics. Modern POS systems truly bring “big data” concepts to small and not-so-small businesses. Again, your merchant account provider will usually have a POS solution that they’ll want to sell to you. Whether you truly need (or can afford) their “solution” is another matter. While a modern POS system is ultimately a software solution, the hardware required to input and display the data involved can vary from a dedicated terminal (such as Clover) to a tablet-based system that runs on your iPad or Android tablet. For most small businesses, we recommend a cloud-based POS solution rather than a far more expensive dedicated terminal. See our Best Small Business POS article for more specific recommendations.
2. Software To Keep Track Of Your Business And Help It Grow
The days of tracking your sales in a paper ledger and collecting a shoebox full of sales receipts are, thankfully, long gone. Today’s merchant accounts harness the power of the internet to track and store your account data digitally. Cloud-based systems make that data available just about anywhere, on any internet-connected device. Physical and eCommerce businesses alike will need the appropriate software to take advantage of these capabilities.
If your business operates out of a physical location and you don’t make any sales online, your needs will be pretty simple. One useful product to consider is a virtual terminal. This is simply a software program or web service that allows you to process credit card transactions on your computer using a USB card swiper. Most will also grant you the option of keying in a card manually, which can be handy during hardware malfunctions or in cases where you need to take a card over the phone.
eCommerce merchants will have more extensive needs in order to run their virtual businesses. For online sales, you’ll have to have a payment gateway as part of your merchant account. Payment gateways connect customers wanting to make a payment with the bank or merchant account provider that processes the transaction. Most merchant account providers in business today will offer a payment gateway as part of their services, usually through Authorize.net. One of our highest-rated providers, CDGcommerce, will offer you either their own proprietary Quantum gateway or one through Authorize.net – for free. Most other providers, however, charge a monthly fee for payment gateways.
For eCommerce merchants, an online shopping cart that allows customers to select items and place orders is also essential. Shopping carts integrate directly into your website rather than functioning as a stand-alone feature. Shopify, one of our favorites, is perhaps the most well-known online shopping cart. For a good overview of the best shopping carts available, check out our Shopping Cart Comparison chart.
3. Reasonable, Transparent Fees
Merchant accounts don’t come cheap. In addition to the processing rates you’ll have to pay on each transaction, your merchant account provider will also charge you a bewildering variety of one-time, monthly, and annual fees for the privilege of maintaining your account. For a small or recently-launched business, these fees can quickly eat up your profits and threaten the growth of your business.
Just as there’s no such thing as a free lunch, you’re also never going to find a free merchant account. Merchant account providers have to make a profit in order to stay in business, and they have to charge reasonable fees in order to do so. Traditionally, merchant account providers have relied on tacking a lot of nickel-and-dime fees onto your bill to compensate for the low processing rates they offer to entice you into signing up with them. These fees allow a processor to make money from a merchant account regardless of your monthly processing volume. In fact, they often still make money even if you’re not processing any transactions at all. Fortunately, a number of newer, more technology-focused merchant account providers are disrupting this old business model by offering accounts with low, fully-disclosed fees. It’s no coincidence that many of our highest-rated providers fall into this category.
In evaluating any merchant account provider, you’ll want to look for a fee structure that is both reasonable and transparent. Fees that are in line with the industry average aren’t necessarily reasonable, as there are still a lot of “junk” fees out there. For our purposes, a reasonable fee is one where the account provider actually provides a valuable service in exchange for that fee, and the fee is reasonably related to the value of that service. Fees should also be transparent or fully disclosed before you sign up for an account. While all of our favorite providers fully disclose their fees right on their websites, most traditional processors do not. Instead, they’re buried in pages of fine print and often not disclosed by sales agents.
So, what kinds of fees might you be charged? Here’s a brief overview of common fees associated with merchant accounts:
- Account Setup Or Application Fees: You don’t see these as often as you used to, but some merchant service providers charge a one-time setup fee when you begin the service. Usually running around $150 (!), a setup or application fee is a clear red flag that you should avoid doing business with that account provider. The actual amount of labor required to set up your account is minimal; this is just a bonus haul for the MSP.
- Monthly Or Annual Account Fees: Almost all providers – good and bad alike – charge some sort of fee to maintain your account. This might be billed monthly, or charged as an annual fee. Either way, it’s something of a catch-all charge to cover all the things your account provider isn’t charging you for directly. This can include things like PCI compliance scans, “free” credit card terminals, “free” virtual terminals, and other services that come with your merchant account. What constitutes a reasonable account fee will depend on how many services come with your account and whether or not you actually need them.
- Monthly Minimums: Not a fee in itself, a monthly minimum is a requirement that your business process a sufficient total amount in transactions to incur at least a specified amount (typically $25.00) in processing charges. As a hypothetical example, if all of your transactions were charged a flat 2.0% processing rate, you’d have to process $1,250.00 in total sales in order to meet the $25.00 minimum. You only have to pay if you fail to meet the minimum, and even then you only pay the difference between your actual processing charges and the amount specified as the monthly minimum. While they won’t affect a large, established business, they function as a penalty for very small, part-time, and seasonal businesses. If you fall into that category, you’ll want to avoid any provider that includes a monthly minimum in their contracts.
- PCI Compliance Fees: Your merchant account must comply with the Payment Card Industry Data Security Standard (PCI DSS) security standards. This protects both you and your customers who, after all, are entrusting you with their credit card information. Since an in-depth discussion of PCI compliance is beyond the scope of this article, you’ll want to read this post explaining PCI-DSS compliance for a good overview of the subject. PCI-related fees come in two flavors: 1) PCI compliance fees, which are fees for services that your processor provides in order to ensure that your account remains PCI compliant, and 2) PCI non-compliance fees, which are effectively penalties for not being PCI compliant. See our article on the subject for more in-depth information. PCI compliance fees are a reasonable cost of doing business as long as a) your provider is actually doing PCI scans and taking other steps to protect your account and your customers’ data, and b) the fee is reasonable ($99.00 per year is the current industry average). On the other hand, you should never have to pay PCI non-compliance fees. If your provider can’t keep you compliant, find another provider. Also note that some of the newer providers do not charge a discreet PCI compliance fee. In most cases, you’re still paying for this as part of your monthly or annual account fee.
- Statement Fees & Other “Junk” Fees: Traditional merchant account providers are notorious for adding any number of miscellaneous fees to your monthly bill, often with little or no actual service provided to you in exchange. While most of these fees are pretty minor and won’t add much to your costs, things like statement fees can add up quickly.
- Early Termination Fees: Most of the traditional merchant account providers in the industry will sign you up for a long-term contract (typically three years), and will charge you an early termination fee (ETF) if you try to close your account early – for any reason. ETFs are expensive (typically around $495.00) and are designed to discourage you from switching your account to a different processor. Luckily, this fee is avoidable if you select the right service. None of our favorite processors charge an ETF, allowing you to maintain your account on a month-to-month basis with no penalty for closing it.
- Chargebacks: Any time your processor has to reverse a charge and issue a credit, you’ll be hit with a chargeback. Chargebacks can occur due to technical errors, returned merchandise, or actual fraud. Even though you as the merchant probably haven’t done anything wrong, most processors will still charge you a chargeback fee (typically about $20.00) to investigate what happened and issue a refund. For more information, see our article on avoiding chargebacks.
4. Fair, Understandable Processing Rates
The processing rate is simply the total percentage of a transaction that you’ll have to pay to your merchant account provider in exchange for processing the transaction. Processing rates can be very complicated and confusing, especially since the processor only keeps a portion of whatever they charge you. Fees (called the interchange) have to be paid to the credit card association (i.e., Visa, Mastercard, etc.) and also to the bank that issued the card, with the remainder going to the processor. Companies have devised several different pricing models to pass these costs onto you, including the following:
As its name would suggest, the interchange-plus pricing model consists of an “interchange” and a “plus.” As we’ve noted, the interchange is paid to the issuing bank and also the credit card association. The “plus” is simply the amount that your processor actually keeps from each transaction. Interchange-plus rate quotes are often expressed as “interchange + X %,” with the X % being the “plus.” Some processors also charge a fixed per-transaction fee (typically $0.10 to $0.25) as part of the “plus.” Because you can easily see exactly how much your processor is keeping from each transaction, it’s considered the most fair and transparent pricing model. It’s also usually, though not always, less expensive overall than tiered or flat rate pricing.
The tiered pricing model consolidates dozens of different processing rates into three tiers: qualified, mid-qualified, and non-qualified transactions. Which tier a transaction will fall into depends on a number of variables, such as whether the card was swiped or manually entered, what the items purchased were, when the transaction was actually sent to the processor, and many others. Companies offering tiered pricing often only advertise their qualified rates, with phrases like “rates as low as…” In reality, most transactions will fall into the mid-qualified or non-qualified categories, where the rates are almost always much higher. It’s usually best to avoid providers that use tiered pricing.
eCommerce-focused companies, such as Square and PayPal, offer flat-rate pricing as an alternative to traditional pricing models. Each transaction is charged a flat percentage rate, and often a fixed per-transaction fee as well. Rates are simple, easy to understand, and fully disclosed right on the companies’ websites. Flat rates are usually higher than what you’ll get with interchange-plus pricing, but companies that offer them also charge you a lot less in monthly and annual fees.
Which pricing model is right for you is going to depend on a number of factors, with your monthly processing volume being one of the most important ones. For small or newly-established businesses with a low processing volume, flat-rate pricing is more economical because you’ll avoid most of the nickel-and-dime fees that make maintaining a traditional merchant account so expensive. On the other hand, a larger business that isn’t as concerned about fees will save money with interchange-plus pricing. For more information about processing rates, please see our Complete Guide to Credit Card Processing Rates and Fees.
5. Honest, Non-Misleading Marketing & Advertising
Online advertising has now become the single most important way to market any business, including merchant account providers. A website can tell you a lot about a company, both good and bad. Unfortunately, most merchant account providers have very poor websites. Filled with misleading advertising gimmicks and lacking any sort of educational information, they frequently tease you with claims of low processing rates, while failing to disclose any of the actual rates or fees you’ll be paying. You’ll know that you’re dealing with a good, ethical company if their website includes some (or all) of the following features:
- Full disclosure of processing rates and all monthly and annual account fees
- Educational articles that discuss the details of credit card processing
- A detailed knowledge base for customer self-service
- Clear options for contacting customer service (telephone, email, and chat)
- No misleading low rate claims or “lowest rate guarantee” gimmicks
- Positive testimonials from actual merchants, including full personal and business names
As far as agents go, you’ll want to try to work with an MSP with in-house sales staff rather than independent contractors who work purely on commission. The latter tend to have less industry knowledge and are over-incentivized to make a sale, even if it results in a bad business relationship.
6. Month-To-Month Contracts
The credit card processing industry has an absolutely horrible (and well-deserved) reputation when it comes to contracts. Signing up for a merchant account typically locks you into a long-term contract, usually for three years. If that wasn’t bad enough, most contracts also include an automatic renewal clause that will extend your contract for an additional year if you don’t take very specific steps to cancel it ahead of time. Most processors will also include an early termination fee in your contract, which serves as a penalty (typically around $495.00) for terminating your contract early. Some of the worst processors will even include a liquidated damages clause in their contracts, which could potentially cost you even more money if you try to get out of your contract.
Naturally, these one-sided contract provisions have generated a huge number of complaints from merchants over the years. Fortunately, the industry is responding in a positive way, albeit very slowly. Most of our highest-rated processors will allow you to sign up for an account on a month-to-month basis. There’s no long-term contract, no early termination fee, and no liquidated damages clause. Given a choice between the two, there’s simply no reason whatsoever to sign up for anything other than a month-to-month account.
7. High-Quality Customer Service & Support
Service after the sale is just as important for merchant accounts as it is for anything else – maybe more so. Things can and will go wrong. Credit card terminals will suddenly stop working on a busy day. Mysterious, unexplained charges will show up on your statement. Chargebacks will occur, despite your best efforts to prevent them. For all of these and many other possible issues, you’ll want solid customer service and support from your merchant account provider.
For minor issues, self-service should always be an option. Good providers maintain extensive FAQs and knowledge bases on their websites, allowing you to fix a problem on your own. This is particularly handy during non-business hours.
Most processors (even the bad ones) offer support via telephone or email. Chat support through the company’s website is also becoming more common. Telephone support that’s available 24 hours a day, seven days a week, and 365 days a year is ideal. Be aware that many companies offering 24/7 telephone support outsource that function, so you might end up talking to someone who may or may not be able to resolve your problem. Some companies will assign you a dedicated account representative, which is about the most personalized support you can hope for.
How To Make An Effective Merchant Account Fees Comparison
With three different types of rates and a nearly limitless array of fees that may or may not be charged, merchant services providers don’t make it easy to make apples to apples comparisons between them.
So how do you compare MSPs?
The most common way is to use something called the effective rate. The effective rate is your total processing fees divided by your total sales volume, with the result expressed as a percentage. If you currently have a merchant account, you should be able to find all the necessary information on your monthly statement.
We estimate that a “good” rate falls somewhere between 3-4%, although you shouldn’t necessarily panic if it’s slightly higher than that. If you’re a high-risk merchant, for example, you should expect to pay higher rates.
There are additional factors to consider on your bill: for example, any non-percentage flat fee ($0.10, for example) in your processing rate will put a greater burden on businesses that process lots of small transactions than a percentage-based fee. The reverse is true if you process mainly large transactions.
If your effective rate is high, be sure to go through your fees and see which ones look reasonable and which ones look like junk fees.
Questions To Ask A Credit Card Processing Company Before You Sign Up
Now that you’ve got an idea of what to look for in advance, you can formulate some useful questions to ask your prospective MSP before you sign up. Here are some potentials:
- What Are Your Replacement Times For Hardware? You’ll want to know what kind of downtime you’re looking at when your hardware needs to be replaced or upgraded.
- Are There Processing Limits? Just like there can be minimum processing thresholds, MSPs may have limits on the amounts you can process. These limits are usually expressed as a proportion, ie, $1000/$5,000, which would have a limit of $1,000 per transaction and $5,000 per month.
- What Are Your Funding Times? You definitely aren’t getting a merchant account for the fun pricing systems, so you probably want to know how long they’re going to hold the funds from your card sales before releasing them to you.
- What Are Your Batch Times? This ties into the previous question since time-to-funding begins when you submit your batch, so you’ll want to know when your sales are being transmitted.
Knowing What To Look For Will Help You Find The Best Merchant Service Provider
Now that you know more about merchant accounts, let’s wrap up. If you’re just starting out, or your business is never going to be anything more than a side gig, you might not need a full-service merchant account. Low-cost providers such as Square will allow you to process credit cards without having to pay for many of the bells and whistles that come with a true merchant account. At the same time, you won’t have a unique merchant ID number for your account, increasing your risk for account freezes and terminations. Square also doesn’t provide much in the way of customer service, although they are getting better. Larger businesses will definitely need a full-service merchant account for the security features and robust customer service that come with it.
What if your business falls in the high-risk category? If you’re a high-risk merchant, your options are more limited and you might not be approved for an account by some of our top-rated processors. Many of the processors that will give you an account will charge you higher rates and fees than the industry average.
Despite all the unscrupulous practices in the processing industry, there are some good companies out there that offer high-quality service at a fair, reasonable cost. For a side-by-side comparison of our top-rated processors, see our Merchant Account Comparison Chart.