How To Choose A Merchant Service Provider: 7 Things To Look For

Options for reading credit cards are 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 basic mobile credit card reader to offer the same capabilities as a dedicated terminal.

Wired credit card terminals are still the most commonly used card readers out there, and they offer several 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, and others.

Today, wired terminals are more affordable than ever, and we highly recommend that you buy your terminals outright rather than leasing them from your merchant account provider.

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 rather than a far more expensive legacy POS solution.

See our best small business POS article for more specific recommendations.

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.

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.

Point-of-sale (POS) software will be important for most in-person businesses. POS combines transaction processing with database capabilities, allowing 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.

• 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 depends 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) 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 in total sales to meet the $25 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. PCI compliance fees are a reasonable cost of doing business as long as a) your provider is doing PCI scans and taking other steps to protect your account and your customers’ data, and b) the fee is reasonable ($99 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) 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) to investigate what happened and issue a refund. For more information, see our article on avoiding chargebacks.

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 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 several variables, such as whether the card was swiped or manually entered, what the items purchased were, when the transaction was 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.

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.