If you’re launching a new business or expanding into ecommerce, one of the first steps you’ll need to take is setting up merchant services and payment processing. These tools are essential for accepting credit cards, debit cards, and digital wallets—both online and in person. But for many entrepreneurs, the terminology and setup process can feel overwhelming. What are merchant services? How does payment processing actually work behind the scenes? And how can you make smart decisions that reduce fees and prevent fraud? In this guide, we’ll break down every key component and walk you through how to get started with confidence.
What Are Merchant Services?
Merchant services refer to the financial infrastructure that allows businesses to accept and process payments from customers. At the core, they include merchant accounts, payment gateways, credit card terminals, and backend services that handle settlement and fraud monitoring. Merchant services aren’t just for large businesses—they’re critical for small shops, online stores, mobile vendors, and subscription platforms[1]. By working with a merchant services provider, a business can connect to major credit card networks like Visa and Mastercard, ensure PCI compliance, and gain access to customer insights through transaction data. Without merchant services, accepting modern payments simply isn’t possible. Understanding how these systems work is crucial for long-term growth.
How Payment Processing Works Behind the Scenes
While a credit card swipe or online checkout might take seconds, the process behind it involves a multi-step data exchange. When a customer makes a payment, the card information is first encrypted and sent through a payment gateway to the acquiring bank. The acquiring bank contacts the issuing bank (the cardholder’s bank) via the card network (like Visa or Amex) to authorize the transaction. If approved, the funds are captured and eventually deposited into the merchant’s account. This series of steps happens in real time but must be highly secure and compliant. For merchants, understanding this flow can help troubleshoot issues and identify where fees are incurred—from interchange fees to gateway and markup costs[2].
Choosing a Merchant Account Provider
Setting up a merchant account is one of the first steps in accepting payments. A merchant account acts as a temporary holding area for funds before they are deposited into your business bank account. There are two main paths to getting one: through an independent sales organization (ISO) or a full-service merchant services provider. Factors to consider include the types of payments you accept, your industry risk level, average transaction size, and whether you need recurring billing or mobile POS support. For high-risk industries, such as CBD or digital downloads, a specialized provider with fraud tools and chargeback prevention is essential. Comparing processing rates and contract terms upfront ensures your provider aligns with your business model.
Setting Up an Online Payment Gateway
For ecommerce businesses, the payment gateway is what allows you to securely collect card data online. It encrypts sensitive information and routes it to the appropriate payment networks for approval. A good payment gateway integrates smoothly with your website or ecommerce platform and supports tokenization, 3D Secure, and other fraud prevention layers. Some providers bundle gateways with merchant accounts, while others require third-party integration[3]. Popular options include Authorize.net, NMI, and Stripe. If you’re in a high-risk industry, make sure the gateway you choose supports advanced verification checks and won’t freeze your account under pressure. The right gateway reduces friction for customers and risk for your business.
Understanding Different Payment Types
Modern merchant services support a wide array of payment types beyond just swiping cards. You can now accept payments via EMV chip cards, contactless methods (like Apple Pay and Google Pay), mobile wallets, ACH transfers, and buy-now-pay-later platforms like Affirm or Klarna. Each method comes with different costs, risks, and compatibility requirements. For example, recurring subscription businesses often rely on card-on-file transactions, which require secure storage and tokenization. Brick-and-mortar stores benefit from tap-to-pay and PIN debit systems. The broader your accepted payment types, the more customers you can serve—but that also means more complexity[4]. Evaluate your customer base and sales model to prioritize which methods matter most.
Managing Fees and Reducing Risk
Every transaction you process comes with fees. These include interchange fees (set by card networks), assessment fees (set by the card brands), and processor markups (set by your merchant services provider). High-risk businesses may also face rolling reserves and chargeback fees[5]. To manage these costs, it’s essential to monitor your chargeback ratio, use AVS and CVV checks, and maintain clear refund and delivery policies. Many providers offer fraud prevention tools like real-time transaction scoring, velocity filters, and two-factor authentication. Regularly reviewing your statements and comparing provider fees helps you keep costs low. Risk management isn’t optional—it directly impacts your ability to negotiate better rates over time.
Setting Up a Point-of-Sale (POS) System
If you operate a physical storefront, a POS system is where transactions happen. Modern POS systems do much more than ring up sales—they track inventory, store customer profiles, manage loyalty programs, and sync with accounting software. Many systems now support cloud functionality, mobile terminals, and integration with ecommerce platforms. When choosing a POS, consider the number of checkout stations, inventory size, industry-specific needs, and whether it integrates with your payment processor. Some merchant services providers bundle POS solutions into their packages. A good POS not only streamlines operations but also improves the checkout experience, which leads to better customer satisfaction and increased sales.
Integrating Merchant Services with Your Business Tools
Successful businesses don’t view merchant services as a standalone tool—they integrate them with CRM systems, accounting software, and ecommerce platforms. This creates a seamless flow of financial data, improving reporting accuracy and decision-making. For example, syncing your payment processor with QuickBooks or Xero can simplify reconciliation and tax preparation. Integrations also enable automated invoicing, recurring billing, and real-time sales analytics. Before choosing a provider, ensure it offers APIs or native integrations with the platforms you already use. Businesses that automate their financial operations with merchant services tend to scale faster and more efficiently.
Common Mistakes to Avoid When Getting Started
Many businesses make avoidable errors when first setting up merchant services. One common mistake is choosing a provider based solely on price without considering support or features. Others neglect to ask about cancellation fees, reserve policies, or contract length. In some cases, merchants sign up with platforms that don’t support their industry, only to have their accounts frozen or shut down. Failing to implement fraud prevention or not understanding how disputes work can also lead to financial loss. Avoid these pitfalls by asking detailed questions, reading terms carefully, and selecting a provider with experience in your business category.
Final Thoughts
Merchant services and payment processing are the financial foundation of any modern business. From understanding what merchant services are to selecting gateways, POS systems, and fraud tools, there are many decisions to make—but also many ways to set your business up for success. Whether you’re just starting out or restructuring your current systems, Payment Nerds helps high-risk and traditional merchants alike find reliable, cost-effective payment solutions tailored to your industry, risk level, and growth goals.
Sources
- Visa. “Getting Started with Merchant Services.” Accessed June 2025.
- Federal Trade Commission. “Small Business Payment Safety Guide.” Accessed June 2025.
- Harvard Business Review. “What Every Business Owner Should Know About Payment Processing.” Accessed June 2025.
- McKinsey & Company. “The Future of Payments: Innovation & Inclusion.” Accessed June 2025.
- PCI Security Standards Council. “Data Security Standards for Payment Processing.” Accessed June 2025.
