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Traditonal Merchant Accounts vs. Payment Service Providers (PayFacs)

by | May 22, 2024 | mobile payment processing, Nationwide Payment Systems

Beginners Guide To Credit Card Processing

Not all providers are created equal when it comes to credit card processing. While the fundamental process of handling credit card transactions remains the same, the type of credit card processor you choose can significantly impact your business’s operations and bottom line. There are two main types of credit card processors at their core: merchant account providers and payment service providers (PSPs). Let’s explore the differences between these two options to help you make an informed decision for your business. 

Merchant Accounts 

Merchant accounts have long been the traditional choice for credit card processing, and they still hold their ground as a preferred option for many businesses. A merchant account may be your best bet for securing competitive rates if your company deals with large transactions or processes a substantial volume of monthly card payments, typically over $10,000, excluding cash and checks. 

A key advantage of having a merchant account is its stability and reliability. Since merchant accounts involve banks and undergo rigorous underwriting processes, they offer a safer and more dependable payment processing option. Businesses applying for merchant accounts are subject to risk assessment, ensuring that only those within an acceptable risk range are approved. 

However, a merchant account may be more cost-effective for businesses processing under $5,000 per month than associated monthly fees and setup costs. Additionally, companies outside the acceptable risk range may need help to qualify for a traditional merchant account, leading them to explore alternative solutions. 

Payment Service Providers (PSPs) 

PayPal, Stripe, and Square are examples of Payment Service Providers. 

Enter payment service providers, also known as PSPs or third-party payment processors. These entities act as intermediaries between merchants and banks, pooling transactions from multiple users through shared accounts. PSPs are particularly attractive for businesses processing lower card volumes, typically $5,000 or less monthly. 

The appeal of PSPs lies in their flexibility and accessibility. With no monthly fees or setup costs, PSPs offer an easy entry point into credit card processing services, making them ideal for seasonal businesses or those with sporadic card transactions. Moreover, PSPs typically do not require the extensive underwriting process associated with merchant accounts, making it easier for new companies to get started. 

However, PSPs come with their own set of drawbacks. Due to their reactive nature and shared risk model, businesses may encounter funding holds or account terminations, especially in industries prone to charge disputes. While PSPs offer convenience and affordability, they may provide a different level of stability and security than merchant accounts. 

Choosing between a traditional merchant account and a PSP depends on your business’s specific needs and circumstances. A merchant account may offer the best value for companies with high transaction volumes and need stability. On the other hand, PSPs provide a cost-effective solution for businesses with lower transaction volumes and flexibility in payment processing. Understanding the differences between these two types of credit card processors is essential for making an informed decision that lines up with your business goals. 

When choosing any service for your business make sure that you reveiw the restricted and prohibited list. We have seen many business owners to be shocked after making a website or launching their business and then only to find out that their busienss type is not supported. Never assume check the websites of any payment provider and if you are talking to a traditional provider they will be able to tell you what you can expect.  

I can’t begin to count the times someone has called us and said I have a CBD website and signed up for XXX and they shut me down and said they do not support my business type.  

Make a good decision when it comes to getting set up to make payments While it is quick fast and easy to use a PSP it might not be the best solution in the long run for your business.  

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