Merchant Services: What Retailers Need To Know


Customers want to have the freedom and flexibility when choosing how to pay for your products. As many as 79% of them prefer contactless payments, and digital wallet payments are rapidly replacing cash.

The global payment processing market size is responding—it’s set to grow to nearly $250 billion by 2028, from $90.88 billion in 2021.

For you, the retailer, this is where merchant services come in. It’s how you can give your customers freedom and flexibility with payments. This guide outlines what you need to know about merchant services and the criteria to keep in mind when choosing your provider.

What are merchant services?

Merchant services is a term for tools and systems that allow you to process electronic payments as a retailer safely.

These payments can include credit cards, debit cards, contactless payments, mobile payments (like Apple Pay), and gift cards.

Merchant services are essential for both brick-and-mortar and retail businesses.  Have you ever considered an online bank account? You should consider it.

In a 2020 study, only 19% of all payments were made by cash, down from 26% the year prior.

Another report found that when businesses start accepting digital payments, they increase their revenue by 17% on average.

How merchant services work

A merchant service provider acts as an intermediary between your business, your customer, and the bank. It facilitates a transaction seamlessly through a secure (and rather complex) process in the back end.

  1. Your customer presents their payment method, like swiping or tapping a card on your point of sale (POS) terminal or entering payment details online
  2. Your merchant service provider sends payment information to your bank
  3. Your bank sends the transaction to your merchant service provider and the card company, like Visa, Mastercard, or American Express
  4. The card company sends the transaction to the customer’s bank and requests an approval
  5. The customer’s bank either approves the transaction and sends an approval code to the card company, or declines the transaction
  6. The card company sends the approval code to your bank
  7. Your bank sends the approval code to your payment terminal
  8. Your payment terminal confirms the transactions and prints the receipt
  9. The customer’s card or bank account gets charged by the amount on the receipt

All of this happens seamlessly and in only a few moments.

Start taking in-person payments instantly

Every Shopify plan includes built-in payments processing with quick payouts and low rates, starting from 2.4% + 0c USD. Skip lengthy third-party activations, accept all popular payment methods, and start taking payments online and in-person faster.

Types of merchant services

  • POS system
  • Payment processing
  • Payment gateway
  • Payment terminal
  • Loyalty programs and rewards

The job of your merchant services provider is to collect your customer’s transaction and payment details, receive authorization from their bank, collect that payment, and send that payment your way.

Here are different types of services and tools a merchant service provider can offer to do this job for you.

POS system

A point of sale system is a combination of a physical, in-store terminal and a back end system that keeps track of sales, stock levels, and customer information.

A powerful POS system will allow you to offer frictionless shopping options, like buy online, pick up in store (BOPIS) and browse in store, buy online. You can also use it to forecast demand based on previous sales data, adjust stock as needed, and track staff performance from one place.

💡 PRO TIP: Take control of your cash flow with Shopify Payments. Get a complete view of your business finances, know when to expect payouts, track in-store and online sales and payments, and manage your money where you run your business.

Payment processing

Payment processing is the core of merchant services. Merchant services exist to make sure the money for an in-store or online purchase moves from your customer’s hands or bank account to your merchant account.

Payment gateway

A payment gateway is a technological platform you need to process online payments that come through your ecommerce store. It’s how you can accept and process secure credit or debit card payments online.

Payment terminal

A payment terminal is to a brick-and-mortar store what a payment gateway is to an online store. It’s a piece of hardware with a card reader that customers can use to dip, swipe, or tap their credit or debit card—or tap their NFC or RFID-enabled mobile device—to complete their purchase.

Some providers also offer a virtual terminal for credit card processing, which is a web-based app you can use to take payments over the phone or online.

Loyalty programs and rewards

By integrating your loyalty program with your payment processing system, you can instantly and automatically reward repeat customers. By matching customer purchases with their profile and previous activity, you can reward customers without extra work on your end.

📌 GET STARTED: Choose from hundreds of loyalty apps in the Shopify App Store and start rewarding shoppers for purchases they make both online and in-store.

Merchant services fees and costs

  • Flat rate
  • Tiered
  • Interchange plus
  • Incidental fees

There are three main ways your merchant services provider will charge you for processing payments.

One of the main factors in these pricing structures are interchange fees, which is a percentage of each transaction you pay to credit card companies or banks when processing a card payment. These fees exist because card companies and banks assume risks like fraud or payment issues on every transaction.

Flat rate

A flat rate pricing model is straightforward. It’s usually a small percentage of the transaction plus an additional fixed fee.

An example of a fixed fee is 2.9% + $0.30 per transaction. This pricing structure is simple and predictable. It makes it easy to plan your merchant services expenses based on the number of sales you do in a given time period.


A tiered pricing model has different pricing levels based on the level of risk the payment processor is taking with each payment type. For example, one tier defines rates for in-person credit card or debit card payments and the other one specifies rates for online card payments.

In-person card transactions usually have the lowest rate as they’re deemed the safest. Payment methods like international online payments come with more risk for the payment processor, so the processing fees for those are higher in a tiered pricing model.

Interchange plus

The interchange plus model indicates that you’re paying the existing interchange fee plus a markup—an additional percentage or fee per transaction.

The main difference between interchange plus and the other two pricing models is that it outlines exactly what you’re paying for. It makes it easy to spot how much you’re paying for interchange fees compared to the provider’s markup so you can potentially shop for a better-fit provider for your needs.

Of course, the level of detail can also be overwhelming for retailers to understand and analyze, which is where flat or tiered pricing can gain an edge.

Incidental fees

There are also additional costs your merchant service provider may charge you. These are called incidental fees. Here are some that you may see:

  • Account setup fees
  • Recurring charges for having an account with the provider, like annual or monthly fees
  • Minimum processing fee in case you don’t meet a specified number or size of transactions
  • Chargeback fees if customers dispute the charge and wins
  • Payment card industry (PCI) compliance fee
  • Statement fees
  • Batch fees for settling many transactions at once
  • Cancellation or termination fees in case you cancel the service before your contract is up
  • Non-sufficient funds (NSF) fee when your bank account doesn’t have the funds to cover the transaction

How to choose a merchant services provider

You know what merchant services providers can offer. You know the pricing structures they might use. Finally, here are the key points to keep in mind as you research different providers.

Review customer support structure

If something goes wrong with the way you accept payments in your store, your entire business stops until the issue is solved. This is why it’s crucial to go with a provider that takes problems seriously and tackles them quickly.

Look at review sites like G2 or Capterra to read reviews from fellow business owners and learn about their direct experience with the provider. Filter reviews by star ratings. Look for mentions of factors that matter to you and issues that would be a deal breaker if they happened to you.

Can a provider help you out quickly and efficiently if there’s an issue with the hardware, the backend, data security, and more? Or do you have to wait several hours just to get their attention? What channels can you use to reach customer support? Make this the core of your search.

Look for transparent pricing

Different pricing structures will work for different stores. Flat rate is often the best for small businesses, while tiered and interchange plus models can work best for businesses with a higher sales volume.

The key is to understand exactly what you’re paying for and what your bill is made of. This is how you’ll avoid hidden fees that can build up over time and cut into your profits.

Ideally, the pricing you get should make it easy to know if you’d be paying more or less with a different provider if you did the same sales volume. And if your store grows and your business needs change, you’ll have a much easier job finding the best provider to support your growth.

Consider your payment methods

Almost 50% of customers who can’t use their preferred payment option will abandon a purchase. The best provider, then, is the one that lets you offer all the payment options your customers need from you. This can include:

  • Cash, checks, and echecks
  • Credit cards and debit cards
  • Mobile payments, like Apple Pay, Google Pay, and Samsung Pay
  • Gift cards and store credit
  • Custom payments, like split payments, partial payments, and zero payments

The payment methods your provider offers should also align and work with how your customers prefer to purchase.

For example, a customer wants to discover products in store, have them shipped to their address (known as ship-to-customer), and pay using split payments. The ideal merchant service provider will make these two processes seamlessly integrated.


💡 PRO TIP: Ship-to-customer order fulfillment is the easiest way to turn your store into a showroom. Rather than being limited to selling products you have in stock, you can sell products in-store and ship them to customers from your warehouse or another store location that has inventory.

Find the right merchant services for your business

There are two big advantages of having reliable merchant services in place. One is that your customers always have the payment options and methods they need, which means they can shop with ease.

The other one is your peace of mind. Cash flow is more stable because the money hits your account within one or two business days. Payment processing simply works, without your interference, so you have the time and energy to focus on your products, marketing, and customers.

Go with a provider that matches your needs and budget—the effort will be worth it.

Take control of your cash flow

Always know when to expect payouts. Every Shopify plan comes with Shopify Payments, which lets you track in-store and online sales and payments from the same back office.


This originally appeared on the Shopify Retail Blog and is made available here to cast a wider net of discovery.
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