Demystifying merchant services for small businesses

What are merchant services?

Merchant services refer to the infrastructure and tools that let you accept and process customer payments, especially by card. That includes the merchant account, payment gateway, point-of-sale system (POS), and backend processors that move the funds.

A merchant account is different from your regular business bank account. It's a temporary holding area where card payments are authorised, captured, and then settled into your bank account.

The payment processor moves transaction data between you, the debit or credit card networks, the customer's bank, and your bank. Meanwhile, a payment gateway acts as the digital bridge if you're accepting payments online.

Why small businesses need them

Without merchant services, you can't accept debit or credit card payments, simple as that. And without card acceptance, you're likely turning away customers. Beyond convenience, it helps you:

• Improve trust, credibility, and customer satisfaction
• Reduce the risk of cash handling
• Capture more sales, especially online

Digital and mobile payments are fast becoming the default. You need a setup that works with how your customers choose to pay.

How merchant services work behind the scenes

The payment flow explained

Every card payment, whether made in-store or online, follows a multi-step process that ensures the transaction is authorised, secured, and settled correctly. Here's how it typically works:

1. Payment initiation: The customer initiates the payment by tapping their credit card, entering card details online, or scanning a QR code.
   
   
2. Authorisation request: The transaction data is sent through the payment gateway (if online) and then to the payment processor. The processor forwards the request to the customer's issuing bank via the relevant major credit card network (like Visa or Mastercard).
   
   
3. Authentication and fraud checks: The issuing bank performs security checks, including fraud risk assessments and, if required, triggers 3D Secure verification (e.g., SMS code or biometric login).
   
   
4. Approval or decline: Based on available funds and fraud check results, the bank either approves or declines the transaction. This response is passed back to the merchant in real time.
   
   
5. Capture: For approved transactions, the amount is earmarked (or held) on the customer's account. The merchant can then proceed to 'capture' the funds—this can be immediate or delayed, depending on the setup.
   
   
6. Clearing and settlement: The payment processor facilitates clearing between the issuing bank and the acquiring bank. The card network helps coordinate this, ensuring funds are transferred.
   
   
7. Funding: The merchant's acquiring bank deposits the settled amount into the merchant account. This may take 1 to 3 business days, depending on the provider.
   
   
8. Reporting and reconciliation: Finally, the transaction appears in the merchant dashboard, with reporting tools showing details for reconciliation and accounting.

Key players involved

Several parties work together behind the scenes to ensure a payment is processed correctly. Understanding each of their roles will help you troubleshoot issues, compare providers, and make informed decisions when setting up your payment stack.

In-person vs online payments

In-person (card-present) payments use POS systems, credit and debit card readers, or QR codes. Online (card-not-present) payments rely on hosted pages or embedded forms. Each has different risks, speeds, and costs.

Merchant accounts explained

What is a small business merchant account?

This account is set up by your service provider to hold payments temporarily until they’re cleared. It's a bridge between customer payments and your actual business bank account.

Standard vs high-risk

If you're in a sector with higher fraud or chargeback rates (e.g., travel, supplements, digital services), your account may be classed as high-risk. That can affect your fees, approval time, or require reserves.

Understanding payment infrastructure and components

Hardware and software you may need

Your payment infrastructure should match how and where you sell. Depending on your setup, you might need a mix of physical and digital tools:

• POS terminals: Ideal for retail or hospitality settings. These devices let you accept chip, swipe, and contactless payments in-store. Some models support tipping, receipt printing, and even loyalty tracking.
• Virtual terminals: Useful for phone orders or invoiced transactions. A staff member manually enters card details through a secure web interface—no hardware required.
• Mobile readers: Portable devices that connect via Bluetooth to a phone or tablet. Ideal for food trucks, pop-ups, or in-person service businesses that need to accept payments on the move.
• Hosted checkouts: These are secure payment pages embedded on your website. A hosted checkout reduces compliance headaches and lets customers complete purchases using cards, wallets, or bank transfers.
• Self-service kiosks or QR-based payments: Increasingly common in cafés, event venues, or service counters. Customers can scan a code or use a touchscreen to pay without staff intervention.
• Payment apps and dashboards: Beyond taking payments, you’ll need software that shows transaction history, allows refunds, and supports reconciliation with your accounting tools.

Look for flexible options that let you scale. You might not need all of these upfront, but a good merchant service provider will make it easy to add tools as you grow.

The role of payment gateways and processors

Gateways and processors are both essential for moving payments securely and efficiently, but they serve different purposes. These gateways act as the first point of contact in an online transaction. They encrypt sensitive card details and securely transmit that data from your website or app to the payment processor. A gateway may also support fraud checks, customer authentication, and transaction routing logic. For example, it might choose the most reliable or cost-effective processor based on the card type or region.

These processors are responsible for executing the actual movement of funds. They communicate with card networks, issuing banks, and acquiring banks to authorise and settle transactions. Processors also handle disputes, reversals, and chargebacks.

Many providers combine these functions, but it helps to understand which tasks belong where, especially when troubleshooting failed transactions or comparing platforms.

Pricing models and fee structures

Common pricing models

• Interchange-plus: Transparent and itemised. You see actual costs plus a fixed markup.
• Tiered pricing: Groups transactions by type. Harder to audit.
• Flat-rate: One fee for all. Simple, but often pricier.
• Subscription: Monthly fee + low transaction cost. Good for predictable volume.

Understanding the fees

Fees are one of the most scrutinised aspects of any merchant services agreement, and rightly so. They can quickly add up, especially if your provider uses unclear or bundled pricing. Understanding where your money is going helps you stay in control of your operating costs and evaluate providers on a like-for-like basis.

Here's a breakdown of common charges:

• Transaction fees: This is the percentage taken from every sale you process. For card payments, it typically ranges from 1.5% to 3.5%, depending on your provider and risk category. For some businesses, blended rates or additional surcharges can push the effective cost even higher.
• Monthly or gateway fees: These are regular platform charges, sometimes bundled into your pricing model, especially for online merchants.
• Chargeback fees: If a customer disputes a payment, you’ll pay a fee even if you win the case. These can range from £20 to £80 per incident.
• PCI compliance fees: Providers often charge to cover the cost of maintaining security standards, or penalise you if your setup is non-compliant.
• Reporting or statement fees: Some providers charge for basic reporting tools or monthly account summaries.
• Other costs: You might also face fees for refunds, cross-border transactions, or using premium payment methods like certain wallets or BNPL options.

A small business earning $1.2 million annually might spend $19,550 to $24,440+ on payment processing over the course of a year.

Hidden fees to watch for

• Early termination charges
• Batch or minimum monthly fees
• PCI non-compliance fines ($5000 to $100,000 monthly)

Additional services to look for

Fraud prevention and chargeback management

Look for tools like CVV checks, address verification (AVS), and AI-based risk scoring. Chargebacks can cost $25 to $100 each.

Reporting and analytics tools

Real-time dashboards, downloadable reports, and reconciliation tools help you track performance and spot trends.

Subscriptions and recurring billing

Antom supports recurring billing models, letting you automate renewals, trials, and promotional cycles seamlessly.

Business tool integration

Choose providers that integrate easily with your POS, accounting, or inventory software. This reduces admin and speeds up reconciliation.

How to choose the right provider

Key features to compare

When evaluating merchant service providers, it helps to break down the key differentiators into practical areas. Here's a summary:

Legal, compliance and security must-haves

Your provider should meet PCI DSS standards and offer built-in tools like tokenisation, 3D Secure, and fraud screening.

What you’ll need to apply

Usually includes ID, business registration, bank details, and a website or product listing. High-risk industries may require more.

Explore Antom’s merchant services to simplify payment processing for your business.