[et_pb_section fb_built=”1″ admin_label=”section” _builder_version=”3.22″][et_pb_row admin_label=”row” _builder_version=”3.25″ background_size=”initial” background_position=”top_left” background_repeat=”repeat”][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” custom_padding__hover=”|||”][et_pb_text admin_label=”Text” _builder_version=”4.4.3″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” hover_enabled=”0″]
“Credit or debit?” When customers pay with plastic, they are often given a choice to ring the card through as a debit transaction or as a credit transaction.
Does it matter which option they choose? Should they decide to run a debit card as a credit transaction or as a debit transaction?
Although it might not seem to matter, whether a customer chooses debit or credit at the register can impact your bottom line as a business owner. The merchant fees for debit cards are different from those for credit cards. The choice between debit and credit can also affect the customer.
Take a look at the difference between debit and credit card transaction charges and learn more about what a customer’s choice means for them and your business.
Merchant Service Providers vs. Banks
When you start a small business, there’s one process that can be a little confusing — choosing a credit card processing service. Whether you’re a brick-and-mortar establishment or you’re starting up in the world of online retail, selecting a reliable service to process your payments is crucial to the success of your business. To ensure that money from your customers makes it into your bank account, your business needs merchant services.
Merchant services is a term that refers to the array of systems and products that allow your business to take credit and debit card payments. A point-of-sale (POS) system — terminal, software and all — fall under the merchant services umbrella. Merchant service providers (MSPs) are also called payment service providers (PSPs) or payment processors. When these services are provided for online stores, the provider is sometimes known as a payment gateway provider.
You have a range of choices when it comes to selecting a credit card processor, and one of the biggest decisions is whether to go with your bank or a merchant services provider. We’re going to break down what the differences are so you can confidently choose the right type of payment processor for your business.
How Payment Processing Works
Before picking a bank or MSP merchant account, it helps to understand how payment processing works. A lot happens in the few seconds it takes for a payment to go through in person or online. These are the basic steps happening behind the scenes after the cardholder presents their card to a merchant:
- The merchant transmits the details of the transaction to their acquiring bank or that bank’s processor via credit card machine, software or payment gateway.
- The acquiring bank or processor receives the information and sends it to the correct card network, which routes the information to the cardholder’s bank for approval.
- The credit card issuer gets the details of the transaction from the acquiring bank or processor. The issuer checks the validity of the transaction information and ensures the cardholder holds a sufficient balance.
- The result of the validation is sent from the card issuer to the acquiring bank, and the transaction is approved or declined.
An Emerging Alternative
For most of history, banks were the primary processors of any and all payments. Through individual merchant accounts, they housed the processing platforms and handled authorizations as well as all the connections to major credit card companies. Most business owners wouldn’t think twice before opening a merchant account with their bank, simply because there were no other options.
Unfortunately, banks caught on to the possibilities inherent in being the only game in town and began cranking up processing rates they offered to businesses. However, the rise of eCommerce came with complications banks hadn’t foreseen. It became obvious that it wasn’t sustainable for banks to support all the technology and services required to handle modern business transactions while still turning enough profit.
To meet the growing needs of modern business owners, third-party MSPs emerged. Banks still offer merchant accounts for small businesses, and opening a merchant account at your bank still has some perks. However, merchant service providers are designed to make payment processing easier and more affordable than what your bank can offer.
How Banks and MSPs Are Different
Opening a merchant account with your bank can seem like the most obvious choice from a convenience standpoint, but it may be less of a savvy decision than you think. Three huge differences with merchant accounts vs bank accounts might make you see bank-based merchant accounts in a different light.
Applying for a merchant account at your bank is more complicated than you might imagine. You need your business license on hand, and the application requires a ton of information. You may find yourself filling out information on your employment history, providing bank statements and pulling credit histories. On top of that, banks are still notorious for being slow. You may end up waiting for several days just to get your account approved.
Once you get the merchant account type your bank allows, your bank is likely to pass you off to an acquiring partner to set up payment processing and get the appropriate hardware and software — so you won’t even benefit from any relationship you have with the bank.
Banks are not the place to open a merchant account if you expect good service. Net Promoter Scores (NPS) is a metric commonly used to measure businesses based directly on customer feedback. The scores have a range of -100 to 100, and the banking industry scores a low average of 35. Several of the largest U.S. banks actually have scores reaching into the negatives.
Banks started offering merchant accounts and services because it was convenient for them. You won’t be able to call up your bank and ask questions about the hardware you’ve purchased, because they simply don’t have that expertise. The best third-party MSPs, on the other hand, treat customer service as a core offering and take pride in providing the best service and support to business owners.
Banks tend to be somewhat opaque when it comes to terms, conditions and fees for merchant accounts, and it’s one of the biggest disadvantages of bank card processing. They pitch their services as a convenience and expect you to pay extra for it. There may be fees attached to your application, or the bank may charge you an additional monthly fee to access your money if your business checking account is with another bank.
Annual fees, contract fees, statement fees and unexpected markups are all par for the course when using a bank for payment processing and other merchant services. A good MSP will be up-front and transparent about how they charge for their services, allowing you to make a more informed decision.
When a customer swipes their card or completes an order online, a credit card processor acts as the middleman between the merchant’s acquiring bank and the customer’s issuing bank. The processor ensures that each transaction can be covered by the purchaser’s credit limit or account balance.
They also route the request to the right card association, be it Visa, MasterCard, Discover, American Express or another company. Each day, the processor receives and transmits batch deposits for each merchant. Processors have to be certified and connected to the major credit card companies before conducting business.
- Fraud Prevention and Detection
Fraudulent credit card activity is a major concern for business owners, especially when accepting card-not-present transactions. Legitimate third-party processors have software with watchdog features that can throw up a red flag when certain aspects of a transaction don’t seem to make sense.
For example, say a customer stops into a convenience store in Boise, Idaho, for a pack of gum and then the same card is used to buy a fur coat down in Florida. If you’re working with an MSP, their software will recognize the geographical discrepancy as a potential red flag and try to prevent the counterfeit transaction from going through.
Chargebacks can be a nightmare for business owners. A chargeback is the result of an error occurring with the transaction data itself, or the customer making a complaint. A customer might find that a service was not as described, or that an item is damaged or didn’t arrive. Chargebacks can also happen when someone steals a card or otherwise commits identity theft that allows them to make fraudulent purchases.
There’s no way around dealing with chargebacks, even when your business is not at fault. The bank or processor resolving the issue can lose a lot of time and money when a merchant makes an error, so credible MSPs screen merchants for their risk of chargebacks and fraud.
After a transaction is authorized, an MSP can clear it. You don’t receive the money as soon as a customer swipes their card — a few things need to happen first. The transaction has to be authorized and go through the interchange, as well as get approval from the issuing and acquiring banks. The transaction cycle occurs daily.
At the end of each day, merchants send out a file containing data on all their transactions for the day. This process is called “batching.” Merchants send their batched file to their processor, who reviews it. The processor sorts the transactions by card type and assigns different rates to transactions based on what type of card was used.
After this behind-the-scenes work is done, the merchant receives a deposit into their business bank account for the amount of that day’s transactions. The deposit clears within a specified time frame, usually between 48 and 72 hours.
- Value-Added Services and Perks
In some cases, your bank may be able to offer you some very competitive rates on a merchant account. However, there are some value-added services your bank couldn’t even dream of supplying. Some of the best MSPs offer web design and development or marketing services. In many cases, selecting an MSP that can cover some of these crucial needs ends up saving a lot of time since you’re dealing with one company instead of several.
You might also encounter MSPs that entice customers with promotional materials, cash advances or loyalty programs. The super-discounted rates third-party processors offer can add up to significant savings. Especially if you’re a start-up, these perks can save you time and hassle in trying to obtain the same services from alternative companies.
- Customer Service and Support
Even when business is smooth sailing, you will have questions about your account and services. Will your prospective MSP be up to the task? Find out what kind of access you’ll have to customer service reps. Will you have to deal with an automated phone line or spend an eternity on hold? Is the customer service team based 100% in the United States?
It also helps to have alternative options for service, such as email or a ticket submission system. Having confidence in your MSP’s customer service is a crucial element in your decision.
- Clear Fees
Disreputable MSPs will tack on hidden fees wherever they can get away with it, so make sure to go over your contract thoroughly before signing. Legitimate service providers don’t mess around with overly complex fee schemes or bait-and-switch rates.
A good MSP will make it clear which rates apply to which types of transactions, and show you a breakdown of all rates and fees you’ll be paying. For example, if an MSP is quoting you a rate that’s significantly lower than what you’re finding for comparable services, chances are they’re trying to get you in the door with an introductory offer that will disappear after a while, or they’re hiding fees in the fine print.
- A Range of Services
Merchant services aren’t an area where one size fits all. Businesses have varying needs, so an MSP must have the flexibility to meet those needs to be the right fit. Does the provider support both card-present and card-not-present transactions? A brick-and-mortar store with no online presence may not need an MSP that can process online payments but may find an MSP that offers both can provide a better rate than a competitor that only handles card-present transactions.
Your business may benefit from cutting-edge technology like contactless readers and other mobile payment systems. Or, you might want the capability to accept the occasional check. Choosing an MSP that gives you options is important when considering the future growth of your business.
Advantages of MSPs Over Banks
In addition to the differences in setup and service, MSPs have some capabilities that banks may or may not be able to handle. Consider these five benefits when deciding between a credit card processing company vs a bank.
How to Choose an MSP
Selecting the best merchant service provider can feel like searching for a needle in a haystack if you’re not sure what you’re looking for. Your MSP is going to be handling one of the most important aspects of your business, and you want to be sure that they’re up to the task. Ask questions about the following criteria to make sure you’re getting the best deal on your merchant services.
Gain Momentum With Velocity Merchant Services
MSPs are not created equal, and Velocity Merchant Services knows that. We work hard to provide your small or mid-sized business with the best value in payment processing, through exceptional client care and transparent pricing.
With more than 20 years of experience in the industry, Velocity Merchant Services can help you find the payment solutions that make sense for your business. We work with you to customize options, and even provide guidance to help you avoid paying for equipment and features that don’t benefit your business or your bottom line.
If you’re ready to work with an MSP with the flexibility and support your business needs to succeed, schedule a free consultation with Velocity Merchant Services. Our small business specialists are standing by to discuss how we can help you go further, faster.
How VMS Can Help?
The more payment options you can offer to your customers, the better. Although some people prefer to use a credit card for payments, others prefer to use debit.
Your customers may like the idea of accountability attached to paying with their debit cards. They don’t receive a monthly bill, there’s no penalty interest rate on their checking account, and they may find it’s easier to live within their means because they’re not borrowing against themselves only to pay off the debt later. For those people, as a merchant, you should always offer the option of PIN-based debit card acceptance so as not to miss out on potential sales.
If you’re interested in offering your customers the option to pay with either debit or credit cards, Velocity Merchant Services can help. We’ll set you up with a merchant account, help you choose the equipment that best meets your needs and will provide personalized customer service and tech support when you need it. We’ll also work with you to help you understand the fees involved with debit and credit transactions and will aim to provide you with the lowest rates possible. To learn more, contact us today.[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]