The term "merchant services" is among the most misunderstood in the field of accepting credit card payments. Many credit card processing companies bundle merchant services with their card processing services, but the two terms are not the same.
Understanding Merchant Services
To understand what your merchant account is, you must first understand how credit card payments work. When you swipe a credit card through your POS system, the POS system forwards the transaction to your payment processor or "gateway." The payment processor sends the transaction information to the credit card association -- such as Visa -- who checks the validity of the transaction and forwards the transaction data to the bank that issued the customer's credit card.
Upon receiving the transaction information, the issuing bank verifies that the customer has sufficient funds or credit to cover the purchase. The bank forwards its approval to the credit card association. The association then confirms that the bank providing merchant services to you can collect the funds. The merchant services bank approves the transaction, and your customer receives the product that he or she purchased. After the bank providing merchant services to you collects the funds from the issuing bank, it forwards the funds to your bank account when you finalize the transaction.
Although processing and approving a credit card transaction requires many steps, the speed of modern online communication allows all of it to happen in just seconds.
Do I Need a Merchant Account?
Not necessarily. Opening a merchant account can sometimes be a lengthy process. The merchant services bank will verify the stability of your business and finances. You may need to pay a setup fee to open your account. You may need to sign a long-term contract as well. The benefit of having credit card merchant services, though, is that the merchant services bank thoroughly verifies your legitimacy before you can accept credit card payments. If you happen to process an unusually large transaction, the merchant services provider probably won't lock your account suddenly to investigate "suspicious activity."
On the other hand, you could use a comprehensive credit card processing solution such as Square. Square interfaces directly with merchants, so you don't need a merchant account to utilize their services. When you finalize a transaction, the money will go directly to your account. The downside of not using a merchant services provider is that the fee you pay per transaction will likely be higher. As with everything else in business, you should examine any contract carefully before you sign it.