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 overall business strategy.

Types of digital payment services

The two most common types of digital payment services are merchant services accounts and payment service providers, or PSPs. Each has their own benefits and drawbacks, but both involve a complex back-end process that includes sending data between systems to confirm that funds are available, transferring them into the right account and ensuring there's no potential fraud.

This can be a difficult task to manage, which is why most small business owners open a merchant services account or use a third-party PSP to handle these types of transactions.

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

A PSP processes your transactions with other businesses before sending the money to you, and there's no separate account associated with it. A PSP is generally less expensive than a merchant services account, but technical issues with a third-party service like this are also largely outside of your control.

Generally speaking, merchant service accounts are best suited for online-only businesses and those with a larger volume of payment transactions per month, while PSPs are more ideal for smaller enterprises with a lower monthly transaction volume.

Using merchant services accounts

A merchant services account gives your business the equipment and software needed to accept both credit and debit card payments. A merchant services provider also handles the processing work behind each transaction, confirming that it processed and making sure your business gets paid for the sale.

You can open a merchant services account through your local bank or provider. They can offer a range of tools to help you accept payments digitally.

• Credit card terminals: These hardware systems—available to purchase or lease from your provider—physically accept card payments in store.
• Mobile payments: You can set up your smartphone to scan mobile payments from credit cards or attach a physical card reader to your device to process payments.
• Virtual terminals: You can add software to your computer to turn it into a credit card terminal, where you either enter the card information manually or swipe it using a connected card reader.
• E-commerce platforms: If you want to sell through your business's website, you can accept card payments online by setting up an e-commerce platform.
• POS systems: Once you're accepting card payments, you can connect them with a POS system to track sales and inventory levels.

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 first.

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.

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 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.

Contract flexibility

Before signing up, check the terms of the contract. Are you obligated to stay on for several years or pay a cancellation fee for terminating the contract, or is it month to month so you can move on if you're not satisfied? Also be cautious of contracts that renew automatically.

Customer service

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

Taking an omnichannel approach

The good news is you don't have to choose one service over the other. You can incorporate both a merchant services account and a PSP into your digital payment strategy.

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

To offset the charges for these services, you could integrate merchant and provider fees into the cost of your products or services. You might also consider setting a minimum threshold for credit card payments. Check state laws and federal guidelines that regulate how to set these limits.

The bottom line

Accepting credit cards 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.