How Does Merchant Services Work?

by Devra Gartenstein; Updated September 26, 2017

Merchant Services Overview

Merchant services is a system that enables businesses to accept credit and debit card payments from customers. Merchants buy or lease a processing terminal that either hooks up to a telephone line or to an Internet connection. They swipe or input customers' credit or debit card information into this terminal, which sends the data to be verified and approved. The terminal prints copies of the receipt for the merchant to keep and for the customer to sign, unless they have opted for paperless transactions. After a given period of time--a few hours or a few days--the merchant will close the batch of sales by electronically sending it to the bank, and in a day or two the funds will transfer directly into the merchant's bank account.

Costs of Merchant Processing

Merchant processing includes fees for merchants, who pay monthly charges, fees for each transaction and percentages of each sale processed through their merchant services account. Fees vary, and it can be tricky and confusing to weigh all the variables and choose the right package. Merchant services agreements often come with multiple-year contracts, so even if a merchant finds a more economical package, they may incur fines for breaking their contract, or they may even have to continue paying monthly fees until the period of the contract expires. In addition, leasing a terminal and printer can be expensive. Purchasing one tends to be cheaper in the long term, but more expensive in the short term.

Benefits of Merchant Services

Although the costs of of merchant services can be high, most businesses still opt for credit and debit card processing systems because they enable them to make sales that might otherwise be impossible. As credit card accounts and debit card purchases have become ubiquitous, many consumers don't carry enough cash to make all their purchases. If a business has a credit card system in place, then these customers will be able to buy from them, but if they have no merchant services account, then they lose the sale.

About the Author

Devra Gartenstein has owned and run a variety of food businesses for more than 20 years. She has published two cookbooks: "The Accidental Vegan" and "Local Bounty." Gartenstein holds Master of Arts degrees in philosophy and English literature.