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A small business guide to merchant services

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Last editedMar 20203 min read

In the past, a cash-only business may have been feasible, but today, card is king. According to research from East & Partners, Australia could become a cashless society by 2022, with cash predicted to make up just 2% of all payments within the next five years. Put simply, the ability to accept card-based transactions is vital for small businesses, which is why it’s so important to have a solid understanding of merchant services. Find out everything you need to know about business merchant services with our definitive guide, from our merchant service provider definition to what to look for from the best merchant services for small businesses in Australia.

What are merchant services?

Merchant services – sometimes described more broadly as credit card processing – is the umbrella term used to describe all the financial services that you need to accept credit or debit card transactions, as well as other electronic payments like mobile payments. So, when you hear people talking about business merchant services, they could be referring to any of the services and products that are needed to accept card payments from customers, from software to hardware.

The term “merchant services” is often associated with Merchant Service Provider (MSP). What’s the merchant service provider definition? Essentially, this refers to any company or organization that provides transaction processing solutions to merchants. In other words, they’re one-stop shops offering all the essential services you need to accept credit or debit card payments. So, what are the actual solutions that fall under the umbrella of merchant services?

  • Credit card terminals – MSPs provide all the hardware you need for payment processing, namely, a credit card terminal (also known as a card reader). Remember, you’ll need an internet connection so that your card terminal can connect to the merchant account and payment gateway, so be sure you have access to a modem or router.

  • Virtual terminal – For e-commerce businesses that accept credit card transactions online, a virtual terminal is a necessity. They’re essentially virtual card readers that enable you to process credit and debit card payments over the internet.

  • Payment gateway – Payment gateways are essentially the software that encrypts and sends transaction data when a customer makes a purchase. Some payment gateways offer more advanced features, such as fraud detection and address verification, which are particularly useful for businesses that are selling online.

  • Payment processor – Merchant services also account for payment processors, which are used to authenticate and secure the transaction. Essentially, they communicate payment information from your customer’s card to the acquiring (yours) and issuing (customer’s) banks, and assuming there are enough funds in the account, payment can be made.

  • Merchant accounts – Finally, there are merchant accounts, which are a specific type of bank account allowing you to accept payment from credit or debit cards. After a payment has been authorized, the funds will be deposited in your account, where they’ll sit for a predefined “settlement period” before being deposited in your business bank account.

How do merchant services work?

To fully understand business merchant services, it helps to have a thorough understanding of credit card processing. Here’s a simple guide to processing a credit card transaction:

  1. The customer pays for their purchase through your credit card terminal or virtual terminal.

  2. Then, the terminal sends their details to the payment gateway, before it’s passed onto the payment processor, which requests authorization to make the payment.

  3. After this, the transaction data is transferred to the card network, which in turn transfers it to the customer’s bank.

  4. Assuming the account has enough funds, a response is submitted back to the card reader, which completes the transaction.

  5. Then, the funds are sent to your business’s merchant account, where they will sit before being transferred to your business bank account.

What are the best merchant services for small businesses in Australia?

Merchant services is a crowded market, so it’s important to select an MSP that is well suited to the specific needs of your business. First off, think about which payment methods you need to be able to accept. Just credit and debit card payment? What about over-the-phone payments, payments by e-wallet, or contactless payments. You should also check that the software and hardware provided by the MSP can easily integrate with your existing software.

Of course, when it comes to the best merchant services for small businesses in Australia, you also need to consider fees. A broad range of costs may be included in the fee structure, including chargeback fees, setup fees, and termination fees. Before signing up to anything, you need to be certain that you have the right budget. If lack of budget is an issue, you could also consider renting or leasing the hardware, rather than purchasing outright.

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