Ever wondered why some businesses get paid smoothly while others face delays and hidden fees? The answer often comes down to how they handle merchant payment processing. This guide gives a clear view of how the process works, the pricing models, and how to compare providers offering merchant services.
What is merchant payment processing?
Merchant payment processing refers to the system that allows your business to accept and handle payments from customers. It covers the full journey from the moment a customer presents a payment method to when funds are deposited into your merchant account.
It is often confused with merchant services. Merchant services include the broader suite of tools and support, such as payment gateways, card readers, security tools, reporting, and settlement options. Payment processing is one component of merchant services.
When comparing payment service providers, businesses should check whether they are looking at a processor only or a full merchant services package.
The merchant payment process
The merchant payment process can be broken down into several steps:
- Transaction initiation: The customer begins a purchase by entering payment details, either through an online checkout or a physical terminal. These details are captured securely and passed to the merchant’s acquiring bank.
- Authorisation: The acquiring bank routes the request through the card network to the issuing bank—the customer’s bank. The issuing bank checks the account for sufficient funds and validates the transaction request.
- Authentication: In some cases, the issuing bank applies extra security measures. This can include verifying the CVV code or requiring the customer to confirm the purchase with a one-time password (OTP).
- Approval or decline: Once the issuing bank finishes its checks, it sends the decision back through the card network to the acquiring bank. The merchant then receives either an approval to complete the sale or a decline notification.
- Clearing and settlement: For approved transactions, the issuing bank releases the funds. The card network transfers them to the acquiring bank, which then deposits the amount into the merchant’s account. This usually happens within a few business days.
- Payment received: The merchant sees the funds arrive in their account, while the customer sees the charge reflected on their bank or card statement. At this point, the transaction is fully complete.
Merchant payment processing services
Online payment processing
Merchants can accept payments through websites and apps, including credit and debit cards, digital wallets, and in some cases direct bank transfers. This makes it possible to handle one-time purchases, subscriptions, or recurring billing online without manual invoicing.
Payment gateway
The gateway acts as the secure channel that passes payment details from the customer to the processor. It encrypts the data, connects to the acquiring bank, and communicates with card networks. Without a gateway, online businesses would need to rely on manual payment methods or redirect customers to third parties, which slows down checkout and reduces conversions.
POS systems and card readers
For in-store sales, processors supply card readers and point-of-sale (POS) systems. A modern POS setup doesn’t just process cards but also often links to inventory management, sales tracking, and even employee scheduling. This allows businesses like restaurants or retailers to handle transactions and operations in one system.
Security and fraud protection
Because payment data is a target for fraud, merchant services usually include safeguards such as PCI DSS compliance, tokenisation, and real-time fraud monitoring. For example, a processor may flag a transaction if a customer card is suddenly used in a different country within minutes of a local purchase. These measures help reduce chargebacks and protect customer trust.
Reporting and analytics
Beyond moving money, processors give merchants access to reporting dashboards. These tools track transaction volume, authorisation rates, settlement timelines, and chargebacks. Finance teams use these reports to reconcile accounts, plan budgets, and prepare for audits.
E-commerce integrations
Merchant services often include plugins for shopping carts, invoicing systems, and subscription platforms. For example, enabling a plugin for a global checkout system allows a business to accept multiple payment methods in different regions without building custom code.
Gift cards and loyalty programmes
Many providers also support branded gift cards and loyalty features. This lets merchants not only process payments but also build customer retention strategies—whether through reloadable gift cards or point-based rewards that encourage repeat purchases.
Merchant payment processing fees
Fees are typically a mix of per-transaction charges and service-related costs, which can add up differently depending on sales volume and setup. The most common components include:
- Transaction fees: Usually between 1.3%–3.5% of each card payment, often combined with a fixed charge (for example, 10–30¢ per transaction).
- Monthly fees: Regular charges for account maintenance, access to reporting tools, or bundled service plans.
- Setup fees: One-time costs for onboarding, account activation, or custom technical integration.
- Hardware costs: Applied when businesses need payment terminals, card readers, or full POS systems for in-store payments.
Payment processors generally use one of these pricing models:
- Interchange-plus: The provider passes through the actual interchange fee from the card networks and adds a fixed markup. This model is often the most transparent.
- Flat-rate: Every transaction is charged the same percentage, regardless of card type. Simple to calculate, but for high-volume merchants it may work out more expensive than interchange-plus.
- Tiered: Transactions are grouped into categories such as qualified, mid-qualified, or non-qualified. Each tier has its own rate, but the rules for how transactions are classified are not always clear, making this model less predictable.
Who provides merchant payment processing services?
Several types of organisations deliver merchant services and merchant payment processing:
- Payment processors: A processor is responsible for moving the transaction through the network—authorising the payment, communicating with banks, and settling funds into the merchant account. Processors focus on the technical side of payment handling.
- Banks: Some banks offer merchant accounts and basic processing services directly. While this can be convenient for businesses already banking with them, banks may not always provide advanced tools such as detailed reporting dashboards or specialised fraud detection.
- Payment gateway providers: These providers focus on securely transmitting payment data from the customer to the processor. They are critical for online transactions but typically need to be paired with a processor to complete the full payment cycle.
- Merchant service providers (MSPs): These companies package multiple services together, such as payment gateways, fraud prevention tools, and settlement support. They are often the “one-stop shop” for businesses that want a single vendor to handle both online and in-person payments. The terms merchant service providers and payment service providers are sometimes interchangeably, but they are not exactly the same.
For many businesses, a payment service provider (PSP) combines the benefits of these roles, offering unified payment solutions that simplify vendor management. End-to-end payment service providers like Antom can deliver both global coverage and local support.
Choosing the right merchant payment partner
Merchant payment processing and merchant services can be delivered by different types of organisations, each with a specific role:
- Transparency in fees – Hidden charges quickly erode margins. Interchange-plus models often provide the clearest breakdown.
- Payment options – Supporting credit card payment, debit cards, digital wallets, and local methods improves conversion and reduces cart abandonment.
- Global acceptance and local expertise – For businesses operating internationally, local acquiring relationships can improve approval rates and reduce cross-border costs.
- Security and compliance – Providers should offer PCI DSS compliance, tokenisation, fraud prevention, and chargeback management.
- Reporting and analytics – Real-time dashboards, reconciliation support, and consolidated reporting simplify financial oversight.
- Scalability – Your provider should support growth, whether that’s adding a new pos system or expanding into new markets with tailored online merchant services.
For many merchants, the most practical option is to work with a payment service provider that combines several of these functions. A PSP can reduce the complexity of managing multiple vendors and often provides global payment coverage along with local support.
