What Are Merchant Services vs. POS Systems? What's the Difference?

If you’ve been researching different point of sale (POS) systems, chances are you’ve come across terms like merchant services, merchant point of sale or merchant pos, merchant accounts, payment processors, payment gateways, and many more. 

Some of these terms are used in articles and marketing materials interchangeably, but have slightly different meanings, only making things more confusing.In this article, we’ll break down the difference between merchant services and POS systems, as well as define other common terms you’ll see when looking into purchasing either. We’ll discuss:

• What merchant services are
• What a POS system is
• What are the different types of merchant services?
• How do card payments actually work?
• How pricing works for merchant services
• Examples of merchant service providers
• Integrated and non-integrated payments
• What are embedded payments?
• Merchant account providers vs. payment service providers
• How to choose the right merchant services

What are merchant services? 

Merchant services is a catchall term to describe the payment-related services and equipment that a business uses to process and accept credit card payments. 

Whether that’s a payment processor, payment gateway, credit card readers or the financial institution you have your business account with, merchant services ultimately enable the flow of money in and out of merchant accounts.

While this term is related to POS systems, these entities are not the same.

What is a POS system? 

A POS system, or point of sale, originally referred to the point at which a customer made a purchase. Most modern merchant POS systems do more than just ring up sales and process returns—they can also keep track of your inventory, pull insights on your business’s performance and even help you launch and run a loyalty program. Payment solutions integrate with POS systems, which is where merchant services come into play.

What are the different types of merchant services? 

Merchant service providers’ offerings vary and are usually tailored to each merchant, depending on its needs. Here are a few merchant services you would need to be able to accept credit card payments in store and online.

Credit card processing terminal

This is the machine that you insert your credit card into when you check out. Depending on the type of business you run, different terminals suit different needs. For instance, wireless, hand-held payment terminals that connect via Bluetooth are well-suited for businesses that run pop-up shops or have curbside pickup. Countertop terminals are a staple for businesses of all sizes and needs.

It’s important to use payment hardware that is compatible with your payment processor. Doing otherwise can lead to security and connectivity issues—incompatible terminals may not even work at all. 

A payment processor

A payment processor facilitates the transfer of funds between the issuing bank (a merchant’s account) and the acquiring bank (customer’s account), enabling secure transactions. 

The payment terminals you use only work if you also purchase a payment processing service. However, not all processors are created equal. While every processor will take a small fee with each transaction, it’s best to look for one with no hidden fees.

A merchant account

This is a type of business bank account that lets you accept and process card transactions. It’s not an “official” bank account, and isn’t meant to store funds for an extensive period. 

It functions more like a temporary storage space where funds can be deposited and frozen in case of fraud or chargeback claims. After a short period of time, and provided there are no chargebacks, these funds are deposited into your business bank account.

Some payment providers take on the responsibility of maintaining your merchant account, which helps save you time and hassle. 

An online payment gateway

Since you can’t insert a credit card into a physical terminal while you’re online shopping, you need a payment gateway in order to accept payments for your online store. 

A payment gateway is the software that authorizes online payments and enables credit card information to be sent from your online store to the payment processor.

A point of sale system

A point of sale system allows you to ring up customers. Most modern point of sale systems come equipped to handle card transactions, and can help you track sales, keep records, pull advanced reports and so much more. An integrated payment processor will link directly to your merchant POS to make for a more efficient checkout experience, as well as minimize fraud and human error. 

The hardware and software you use for your POS setup depends entirely on the needs of your business and customer base. It’s an important decision to make since you manage much of your business operations from your POS, so make sure you research options thoroughly.

How do card payments actually work?

Merchant service providers work together to help move money from a customer’s bank account or credit card account into your business bank account. Here’s a quick overview of what actually happens during a card-present transaction: 

• At the merchant point of sale in person, the customer taps, swipes or inserts their card into a credit card terminal. Your credit card terminal is connected to a payment processor. 
• The payment processor checks to see if the customer’s banking institution will approve the transaction.
• If the transaction is approved, then the purchase is complete and the customer walks away with their item. 
• The payment processor takes a small fee from the amount the customer paid and deposits the remaining amount into your bank account.

We can also break down the process of card-not-present (online) transactions:

• At checkout, the customer enters their credit card information.
• The payment processor verifies that there are available funds to process the transaction. 
• Once the sale is authorized, the customer’s account is debited and funds are deposited to your business account after the processor takes a small fee from the amount the customer paid. 

To learn more, read our detailed guide on how to accept credit card payments. 

How much does it cost to use merchant services?

Look carefully into pricing models when you’re shopping around for merchant services. It’s important to be aware of all the fees associated with a service to ensure you won’t exceed your budget. Sometimes these fees aren’t immediately clear, so be sure to read the fine print or contact providers for clarity. 

Let’s look at some of the pricing models and fees you’ll come across on your hunt for merchant service providers.

Interchange plus

Interchange plus pricing may seem complicated, but it offers the benefit of transparency. With this model, you pay the interchange fee (the fee established by the card network) as well as a flat processing fee for each transaction. 

This model gives you a breakdown on your credit card statement of all the fees you’re paying for each transaction. This information helps you understand your exact expenses, allowing you to budget accordingly. Knowing each and every fee you’re paying to process payments can help you cut costs and save money in the long run. 

Flat-rate

Flat-rate pricing is common among payment providers. This model involves the payment provider charging you a percentage of the transaction plus a small processing fee. Typically, there will be one flat rate for card-present transactions and one different flat rate for card-not-present transactions. 

For example, Lightspeed’s rate for card-present transactions is 2.6% + 10¢, while the rate for card-not-present transactions is 2.6% + 30¢.

Flat-rate pricing is easy to understand and predictable, which is helpful for business owners because they can better map their monthly expenses. 

Tiered 

Tiered pricing—also known as bundled pricing—is the priciest and least transparent, so we recommend that you steer clear of companies that offer this model. 

Tiered pricing involves a processing fee and transaction fee. It’s similar to the flat-rate model in that way, but the key difference is that transactions are split into three categories: qualified, mid-qualified, or non-qualified. Depending on the tier a transaction falls under, the fixed rate will vary. 

With this pricing model, it’s difficult for you to know how transactions will be categorized, as this information isn’t disclosed by the processor. You may think you’re getting a good deal when you sign up for a processor that offers tiered pricing, but it’s only because they’ll quote you the cheapest tier. Then after you’re locked in, they’ll charge you more than you expected by categorizing transactions into more expensive tiers. 

In this way, tiered pricing is deceptive and lacks transparency—you’ll likely end up paying much more than necessary.

Other potential fees

When sizing up merchant service providers, keep in mind that you have bargaining power when it comes to processing fees. Ask for quotes from the companies you’re interested in to get a better picture of pricing structures.

And we can’t say it enough: read the fine print before you sign any contracts. Check for extra “hidden” fees that companies may not list up-front. Some of these fees include:

• equipment fees
• chargeback fees
• payment gateway fees
• annual or monthly fees
• setup fees 
• PCI non-compliance fees

Which providers can I go to for merchant services? 

There are plenty of merchant service providers out there, all with varied offerings and pricing models. Depending on the kind of retailer you are, you may find yourself drawn to certain providers over others. For instance, if you’re an omnichannel retailer or plan to become one, it’s best to go with a merchant service provider that is adaptable to both your online shop and brick-and-mortar store. 

Here are just a few examples of merchant service providers: 

Lightspeed Payments

Lightspeed offers POS software and hardware as well as embedded payment processing. Lightspeed Payments allows you to manage and accept payments both online and in store. It’s perfect for omnichannel retailers as well as businesses that only operate online or in-store.

Lightspeed provides merchants with compatible payment hardware. Plus, for online payments, Lightspeed works directly with payment gateways to ensure funds are securely deposited in your account.

Lightspeed’s rate for card-present transactions is 2.6% + 10¢, while the rate for card-not-present transactions is 2.6% + 30¢.

PayPal 

PayPal is a payment provider that’s primarily used by online businesses. PayPal manages the payment gateway, meaning you don’t have to worry about using a separate gateway provider. 

For US customers, PayPal’s rate is 3.49% + a fixed fee.

Square

Square is a payment processor and POS provider that offers its services to both online and in-store retailers. Square also provides payment hardware, such as card readers, to merchants. 

Square’s processing fees for card-present transactions is 2.65% and 3.4% + 15¢ for card-not-present transactions.

Integrated payments vs. non-integrated payments

Payment processing can either be integrated or non-integrated with a merchant’s point of sale. (In fact, they can be integrated, embedded or non-integrated, but we’ll go into the difference between embedded and integrated payments later.) 

With integrated payments, your payment processor and POS work together, so that when a customer inserts their card, the amount they’re paying is automatically recorded in your POS. You can then use this data later on to see how many sales you’ve made and for which amounts and items. 

With non-integrated payments, you need to manually input the sale amount in your terminal, and then manually mark the sale as complete in your POS. This is much slower and inputting numbers manually means there’s a higher chance for errors. 

Integrated payment processing tends to be the better choice. Among other benefits, you’ll be able to process orders with more efficiency and save time closing out your day.

What are embedded payments?

Embedded payments and integrated payments are terms that are sometimes used interchangeably, but they are distinct.

In both integrated and embedded systems, your payment software communicates with your merchant POS system, eliminating the need for manual entry and helping merchants to save time and greatly reduce human error. 

Embedded payments are natively built into existing software. Think of it as a closed ecosystem in which the business owns every part of the customer journey. For example, if payments are built into a merchant’s website, customers won’t be taken to a third-party checkout page that the business has no control over.

Integrated payment processing is a system in which your payment software communicates with your POS system, but the two systems are connected by APIs. The APIs facilitate integrations between two providers, but at the end of the day the business still has to rely on two separate providers. 

Businesses using embedded payments only have to deal with one system–no APIs or multiple vendors required.

With this embedded system, we don’t have variances [in transaction amounts]. The only variances that could happen is if someone took, you know, a penny instead of a dime or vice versa. So,  it takes 90% less time for sure. Ten minutes closing procedure now. — Tyan Parent, President, The Brande Group

Merchant account providers vs. payment service providers

Merchant account providers are companies that offer merchant accounts, which are bank accounts needed to accept credit card payments. Merchant account providers help you open this type of bank account and can also pair you with other necessary tools to take payments, like a credit card terminal, payment gateway and POS system.

Instead of giving each business their own merchant account, payment service providers put funds from all the businesses they work with into one merchant account, and then distribute them accordingly into each business’s bank account. 

Like merchant account providers, payment service providers can also set you up with related software and hardware (POS, payment gateways, etc.). It’s typically faster and easier to sign up and get started with a payment service provider than a merchant account provider. 

Choosing the right merchant services for your business

There are many different components that make up merchant services, so you have a lot of options for your business. Here are the five key areas to consider in order to make the best decision for you. 

Essential features

As with any other business decision, the first step is to assess your business needs and identify your specific payment processing requirements. For example:

• Do you need to be able to take payments in store, online, or both?
• Do you need a POS system, a credit card reader, a payment gateway or all three?
• Which payment methods do you need to be able to accept? 
• Do you want to use an integrated, embedded or non-integrated payment processor?

The answers to these questions will help you decide which features and services you need versus those you could either handle internally or don’t really need for the moment. 

That said, don’t forget to take your growth plans into account. Where do you see your business in 1, 3 or 5 years? Ask yourself:

• What is your current volume of transactions?
• What does your projected growth look like?
• Will this provider be able to scale with your business?

If the provider you’re considering can’t scale with you, it might make more sense to sign up for a more costly system that can support your business as it grows, avoid costs incurred from switching providers and save you time and frustration. 

Security

Fraud and data breaches are a serious threat to your customers and your business—from out-of-pocket expenses like chargebacks and fines to the immeasurable cost of losing your customers’ trust. 

Make sure the merchant service provider you go with has top tier security features built in. This includes:

• PCI DSS validated compliance
• end-to-end encryption (for both online and offline transactions)
• fraud management tools such as 24/7 server security monitoring

Integrations  

You want to choose a merchant services provider that can integrate seamlessly with your existing systems—such as your ecommerce platform, accounting software, customer relationship management (CRM) system, etc. 

For example, if you’re a brick and mortar using QuickBooks for your accounting needs, it’s going to make your life infinitely easier to choose a payment processor that can integrate with QuickBooks. This will ensure smooth operations and allow for more efficient data management. 

If you’re strictly selling online, integrations with Google and social media platforms like Facebook, Instagram and TikTok can vastly improve your reach and help you drive more sales. By confirming which software services your payment processor already offers and which software integrations they support can help you save time and avoid a lot of frustration down the line.

Fees and terms

As we discussed above, merchant service providers have varying pricing models and fees. It’s super important to clarify if the processing fee is a flat rate or a percentage of your transaction volume, as this can make a big difference in what you end up paying monthly. 

Set up fees, monthly fees, equipment rental fees, chargebacks, account change fees—these are often charged in addition to your processing fees, and they can add up quickly. Just make sure you know exactly what you’re getting into before signing a contract. 

Speaking of contracts, you’ll also want to make sure you understand the exact terms. Make sure you understand how long your contract is and what happens if you want to end the contract early. For example, if there are any cancellation or early termination fees or if there are any auto-renew clauses you should know about.

Support

Good customer support is essential for preventing and fixing payment-related issues that can cost your business money. When choosing a provider, make sure you find out:

• When can you get support? (Try to find a provider with 24/7 support.)
• How can you get support? (Can you phone, email, live chat, etc.?)
• Is the support team outsourced or in-house?
• Are you able to get free support or will you be invoiced for every touchpoint?
• Are the provider’s current and past clients happy with the provider’s support? (Check out the provider’s online reviews.)

You may be tempted to put support into a “less important” bucket, but if you’ve ever had to deal with an unexpected processing outage, you know how important it is to be able to get good help when you need it.

Get started with everything you need to take payments in store and online 

Flexibility is the new normal when it comes to payments. From contactless to gift cards to Apple Pay and Google Pay, customers expect your business to accept payments in many different forms. 

Looking for merchant services that integrate seamlessly with the rest of your business? Talk to an expert to learn more about how Lightspeed Retail, Payments and eCom can help you work smarter.