Guide to choosing a digital payment service

From digital wallets to online payment services like PayPal, Square and Stripe, customers now have several ways to pay businesses for their services—many of which don't involve cash.

And while credit card transactions and other types of payment methods come with increased expenses, using them can benefit your business by making the customer experience more seamless. Here's what to consider as you incorporate digital payments into your business strategy.

Understanding types of digital payment services

The two most common types of digital payment services are merchant services accounts and payment facilitators, or PayFacs. Each has its own benefits and drawbacks, but both use a complex back-end process that sends data between systems to confirm that funds are available before transferring them into the right account. Both technologies also have checks in place to reduce fraud risk.

Payment collection can be a difficult process to manage, so most business owners open a merchant services account or use a third-party PayFac to handle these types of transactions. Before making your own decisions on payment collection, it's important to weigh the pros and cons of each.

A standard merchant services provider gives you a standalone account with a merchant ID number for processing and tracking credit card transactions. You'll sign a contract and pay fees with this type of account, including a flat monthly fee and a processing charge on every transaction.

A PayFac, meanwhile, processes your transactions with other businesses before sending the money to you, and there's no separate account associated with it. Setting up a PayFac account can take less than creating a merchant services account, but it also comes with limitations—and not all merchant types are eligible for the PayFac model.

"While a PayFac might be a strong choice for smaller businesses with low transaction volumes, they'll still find value in the services offered through a merchant services provider," says Kathryn Chappelle, Vice President of Business Service Sales Enablement at First Citizens. "For larger businesses, the merchant services route may be the best option due to pricing, transaction insight and complexity of onboarding and solutioning."

Using merchant services accounts

In addition to providing the equipment and software needed to accept both credit and debit card payments, a merchant services provider handles the processing work behind each transaction to confirm your business gets paid for each sale.

"A direct relationship with a merchant services provider can give a business multiple layers of interaction and support, which may be limited with a PayFac," Chappelle says.

You can open a merchant services account through your bank if it offers this service. It may also have a range of tools to help you accept digital payments, including:

• Credit card terminals: Hardware systems—available to purchase or lease from your provider—that physically accept card payments in store
• Mobile payments: Smartphone technology that lets you process mobile payments from credit cards
• Virtual terminals: Software that turns your computer into a credit card terminal by entering the card information manually or swiping with a connected card reader
• E-commerce platforms: Services that enable sales through your business's website by accepting card payments online
• Point-of-sale, or POS, systems: A place to track sales and inventory levels once you’re accepting card payments

"Today's consumers want quick and easy transactions and make purchase decisions based on ease of checkout," Chappelle says.

Choosing a merchant services provider

If your business handles considerable volume and you're leaning toward choosing a merchant services provider, consider the following factors as you shop around.

Software and tools

Not every merchant services provider will offer every tool. Whether you want a good POS system, an e-commerce platform or the option to accept mobile payments, make sure the provider offers everything you need.

Although merchant services packages vary, Chappelle says businesses can expect fraud and security solutions, online access for card processing visibility, chargeback management and reporting. "More specific services are also available based on the package selection," she notes. "For example, your business might benefit from gift card integration, loyalty programs or inventory management."

Fees and rates

Merchant services providers charge processing fees for each transaction but may also charge additional fees, so it's important to know what they are. These additional costs can include a setup fee, monthly fee, chargeback fee for returned transactions, contract early termination fee and payment card industry, or PCI, compliance fee.

Fraud protection

Check to see what the provider specifically offers for PCI compliance and fraud detection, including encryption, tokenization and compliance scans. If there's a data breach and you lose customer information, it can damage your reputation and potentially lead to fines or costly lawsuits. It's a good sign when your provider understands and prepares for cybersecurity risks.

Contract flexibility

Before signing up, check the contract. Are you obligated for several years or is it month to month so you can end your contract if you're not satisfied? Also be aware that contracts may renew automatically.

Customer service

If your card-processing system goes down, your business could lose out on sales. Ensure your chosen provider is available 24/7, especially if you offer online sales.

Taking an omnichannel approach

It's best to select one service to streamline card transactions, but it doesn't mean you can't provide different payment options to suit customers' varying needs. Managing various methods through one centralized platform gives customers more flexibility while allowing you to modernize processing and reporting for your business.

For example, you'll need a POS system or credit card reader for in-store payments so customers can swipe their cards, as well as a secure online payment gateway. You'll also want to integrate these same solutions into the digital user experience by adding a shopping cart to your website.

To offset charges for these services, you could integrate merchant and provider fees into the cost of your products or services. Other options like surcharging and online site fees are available, depending on how you accept payments. Check state laws and federal guidelines that regulate how to set these limits.

The bottom line

Accepting credit cards and other digital payments can reduce manual processes associated with managing cash, increase revenue and help you track business expenses. It can also enhance the customer payment experience.

Customers want to do business with companies that make it easy to interact with them, and offering credit card payments can give them a compelling reason to spend their hard-earned money with you.