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The Indian e-commerce industry is growing at an accelerated pace. In fact, it is expected to cross the USA to become the second-largest e-commerce market by 2034 globally. While this industry continues to expand worldwide, the number of economic transaction and (hence, need for merchant service providers) will also escalate.
Merchant service providers are the facilitators for e-commerce merchants for easy payment integrations, multiple payment options, payment security, and more.
Let’s dig deeper into this article to know what are merchant service providers, what they do, the types of merchant service providers, how to choose one, and how they work.
What is a Merchant?
A merchant is any business that wants to collect payments from its customers for selling goods or providing services. In other words, a merchant trades goods or provides services, and most merchants today exist online through their websites.
Some types of merchants include
- Retail merchants
- E-commerce merchants
- Affiliate merchants
- Wholesale merchants
Okay, so what is a merchant service provider? In other words, what services do you need as a merchant? Let’s find out.
What is a Merchant Service Provider?
A merchant service provider helps merchants grow their business by enabling them to offer simplified payment processes for seamless transactions. From facilitating credit/debit card payments to digital wallet payments, merchant service providers take care of the PCI (Payment Card Industry) compliances as well to ensure customers’ data privacy and security.
The merchant service providers support merchants in many ways, including offering technology-enabled payment solutions, collecting outstanding invoices, and processing payment information.
Let’s summarise what all merchant service providers have to offer to the merchants.
What Does a Merchant Service Provider Do?
The merchant service providers are essential partners in growing your online or offline business to the next level.
- Helps accept payments: The merchant service providers enable merchants with the technology that allows them to accept payments through multiple modes such as credit/debit cards, UPI (Unified Payment Interface), net banking, wallet, BNPL (buy now pay later), etc.
- Sets up an account: They also help merchants in setting up their merchant accounts and integrating their websites with multiple payment options using payment APIs.
- Offers high payment success rate: Merchant service providers offer higher payment success rates through payment gateways using advanced technology, including
- Auto retry options
- Save card options
- Dynamic routing among multiple banks and networks
- Ensures payment safety: They also help merchants comply with the PCI security standards to ensure payment transaction safety. Merchant service providers also ensure customers’ data security and privacy.
- Offers insightful payment analytics: Using artificial intelligence (AI) and machine learning (ML), merchant service providers issue insightful reports with payment transaction analysis to give you a better picture of your customer’s payment patterns.
- Effective payment reconciliation: Merchant service providers help you efficiently reconcile your invoice payments to find out outstanding invoices and enable their faster recoveries.
Thus, from onboarding you as a merchant to crediting customers’ payments, merchant service providers support a highly crucial activity of your business – Payments!
Let’s learn about the types of merchant service providers and how they operate.
Types of Merchant Service Providers
When online e-commerce businesses started in the early 2000s, banks were considered the most trusted service providers. However, as the technology advanced, merchants’ requirements increased, and customers started demanding more simplified payment interfaces.
There came the third-party modern players with the latest technology and more customised payment solutions for the merchants. Let’s learn about the two types and how third-party players disrupt merchants’ payment integration phase.
Legacy Banks
The brick-and-mortar banks also provide merchant services to integrate payment acceptances from multiple modes. However, their setup costs are too high, integrations are tedious and legacy systems may be outdated.
As a result, legacy bank integrations may not be suited for rapidly scaling small businesses and startups.
Third-Party Modern Players
Fintech companies offering merchant services, or merchant service provider companies other than banks, are the third-party modern players. They bring simpler and faster payment integration, a smooth onboarding process, and cost-effective payment merchant services.
For example, Cashfree Payments offers zero setup fees or annual maintenance costs (AMC) for its payment gateway or payment aggregator services.
Moreover, third-party modern players provide Interactive dashboards, actionable insights, and reliable customer support to merchants.
Thus, merchant service provider examples include big legacy banks (ICICI bank, HDFC bank) or third-party modern players like cashfree payments.
So, how do you choose a merchant service provider? Should you select legacy banks or modern, technologically advanced players? Let’s see the parameters to select merchant service providers in India.
How to Choose a Merchant Service Provider?
To select the best merchant service provider for your business, you should understand your requirements first. For example, if you want to include BNPL as one of the payment options, then you need to select the service provider that also provides smooth integration with the BNPL players.
Similarly, if your business exists on a global platform, you need to consider a service provider accepting international payments.
Thus, you must first understand your requirements, and once you have figured that out, you can check the 15-step checklist to select the right merchant service provider for your business.
- Payment security: A PCI-DSS-compliant merchant service provider is most trusted to keep your customers’ details private and safe. Thus, select a service provider that stores and processes your customers’ information in the most secure way.
- Payment options: A merchant service provider offering a wide range of payment options will help you scale your business since the more options you offer to your customers, the fewer chances they will abandon the cart.
Essential payment options include
- UPI payments
- Net banking
- Digital wallets
- Credit/debit cards
- Pay later, and Cardless EMIs
- International payment acceptance support: When you have customers buying your products or availing of your services abroad, you should choose a service provider offering international payment acceptance support.
One of the most challenging parts of international payments is to accept payments in multiple currencies. Thus, you should select the providers offering multi-currency payment integrations.
- Faster payment settlement cycles: Merchant service providers that offer faster payment settlements are preferred since they accelerate the payment receipts in your account as soon as the customers’ accounts are debited.
- Smooth integration facility: Service providers that offer smoother and simpler integrations will help you optimise your customers’ experience on different devices (mobile, laptop).
To effectively integrate payment solutions on your website, you must consider the following:
- Web integrations
- API integrations
- Mobile application integrations
- E-commerce plugins like shopify, wix etc.
- Recurring billing options: You may want to consider offering recurring billing options to your customers when they purchase a particular item frequently and quite regularly. For example, an online grocery store would have frequent monthly orders for a snack item from one customer.
- Customer-friendly payment innovation: The customers want every comfort they can expect from you when they buy online from your platform. Hence, you should select a provider that allows payment innovations such as ‘scan and pay’, sound payments, near field tech-enables POS (Point of Sale) machines, etc.
- Swift onboarding: A complete merchant onboarding takes more than 2 days to open a fully functional account ready to accept payments. Thus, to avoid any poor account setup experience, you should select your provider wisely.
- Reliable and timely support: The service provider must constantly be available for any queries or difficulties you face while accepting payments. Some providers also offer email assistance, live chat, and toll-free call center numbers to assist you with your queries.
- Real-time reconciliation: The service provider should offer you a dynamic dashboard with real-time payment reconciliations to match your business income and expenses with the bank transactions.
- Preauthorizations: This feature allows no-cost refunds to your customers by blocking the customer receipt for 7-9 days. Hence, if the customer cancels the order, he gets the full amount, and you can save on the transaction discount rate.
- Value-added payout services: Instant refunds, bulk payments, employee salary, and reimbursements, payment link disbursements, etc., are additional services certain merchant service providers offer.
- Payment analytics: Smart payment dashboards help you analyse and predict customer buying behaviour and patterns. It ultimately helps in growing and scaling your business using dynamic payment analytics.
- Personalised checkout experience: Self-hosted checkout processes allow you to offer personalised checkout experiences to your customers. Thus, you can gain your customers’ trust by selecting a service provider that allows a personalised checkout experience.
- Pricing: It is crucial to understand all applicable charges while selecting your merchant service provider. Some may have hidden service costs; hence, you should clarify all the charges before availing of their services.
Now that you know how to select the best merchant service provider that suits your requirements let’s see how they work.
How Does a Merchant Service Provider Work?
Five key players complete an entire payment flow supported by the merchant service providers:
Merchants: As a merchant, you enable your customers to perform smooth checkout using the merchant service provider’s platform.
Customers: They initiate payment transactions based on the payment options provided by the merchants at the checkout.
Issuing Bank: It authorises the customers’ transaction and card/account details and issues funds to the merchants’ accounts.
Card Networks: Card networks perform fraud checks and other necessary controls to verify the authenticity of the payment transaction.
Acquiring Bank: The merchant’s acquiring bank requests funds from the customer’s issuing bank after necessary approvals and authorizations from card networks.
Thus, a payment transaction routes through these players through a common platform provided by the merchant service provider. Let’s see how they work.
- The customer initiates the payment transaction at the checkout page and the payment gateway provided by the merchant service provider will encrypt the customers’ details to send for fraud checks.
- The merchant’s acquiring bank sends the encrypted customer’s details to the card network company to verify the authenticity.
- The card network company (after verifying the fraud checks) forwards the details to the customer’s issuing bank.
- The issuing bank authorises the transaction if the details match and send the approval/denial to the card network company.
- The card network company will then send the approval/denial message to the acquiring bank.
- The merchant’s acquiring bank requests the funds from the customer’s issuing bank through the merchant service provider.
- The funds will then be kept in the merchant’s account provided by the merchant service provider.
Usually, the merchant service providers settle the funds in the merchant’s accounts within 2 to 4 days from the transaction date (T + 2 to 4 days). However, certain merchant service providers like cashfree payments can settle the funds within 15 minutes.
FAQs on Merchant Service Provider
- Merchant service provider vs merchant account: what is the difference?
The merchant service providers offer a technology-enabled platform and help route the online payment transactions from customers’ accounts to the merchants’ accounts.
Whereas the merchant accounts are business bank accounts held by the merchant service providers for the merchants, and they receive customer payments in these accounts. After the funds are received in these accounts, merchant service providers send them to the merchants’ bank accounts (it is called the settlement of funds).
- What is the difference between the payment service provider vs merchant acquirer?
The payment service providers are the merchant service providers that help merchants offer innovative payment solutions from a common platform to their customers.
On the other hand, the merchant acquirer is the acquiring bank that will collect the funds from the customer’s issuing bank after necessary fraud verifications.
- What is the difference between the service provider and vendor?
The service provider acts as an enabler of convenient payment solutions for the merchants/vendors to allow their customers to use their preferred payment methods.
On the other hand, the vendors are the merchants who want to receive payments from the customers for the goods they sell or the services they offer.
- Merchant service provider vs ISO (independent sales organizations): how do they differ?
The merchant service providers offer a common platform through which the payment transactions flow smoothly through various parties involved (acquiring banks, customers, issuing banks, card network companies) irrespective of having any association with or being a community member.
Whereas ISO merchant accounts are provided by the banks directly to the merchants for receipt of the payments. However, the ISOs need to be issued from ‘association member banks’ with the card networks and other players involved.
- What is the difference between merchant and business accounts?
The merchant accounts enable you to manage your credit/debit card transactions efficiently. Whereas business bank accounts let you manage all your funds, including credit/debit cards, net banking, UPI transactions, etc.
