Merchant services (also known as credit card processing) is the term for the system of providing payment cards to merchants. It consists of several different components working together, but overall it allows customers to pay for goods or services using a form of payment other than cash or check. The decision to use merchant services generally comes down to cost and convenience. These services offer a way for consumers to pay for goods and services with a credit card while ensuring that the merchant does not bear all of the costs associated with accepting payment cards.
Most businesses use merchant service providers to provide them with access to equipment and software, so they can accept credit and debit cards from consumers. A business needs an average of 20 to 25 credit card transactions a month to recoup the costs of setting up merchant services.
Merchant services industry overview
The cost of accepting credit and debit cards has been decreasing, but merchants must still weigh processing fees against the potential value added by accepting cards from customers. Merchants who offer their shoppers convenience through an electronic payment system, such as a mobile app, may find greater success in increasing sales.
However, the costs of processing credit and debit cards continue to be a small portion of merchants’ revenue. In 2012, transaction fees represented an average of 1.08 percent of total gross volume for retailers who accepted credit cards and 0.58 percent for those that accepted debit cards. These figures were not significantly different than 2010, when transaction fees in the U.S. totaled $9 billion in credit card and debit card transactions totaling more than $2 trillion.
Merchant services industry facts
As of November 2014, there were 335 million payment cards in circulation in the United States. In 2012, approximately 2.6 million merchants were accepting debit cards and 1.4 million merchants had the capacity to accept credit cards (although some may not have used it). Also, that month there were 588,000 ATMs in the United States.
During 2009–2013, Citibank was the largest merchant acquirer of U.S.-based card issuers by purchase volume, followed by JPMorgan Chase & Co. and Wells Fargo. In 2012, the top 10 acquirers accounted for approximately 65 percent of all U.S.-based credit and debit cards purchased during that year.
Merchant services industry history
The use of bankcards has been around since the 1920s in Europe. However, it was not until 1958 that the Diners Club issued the first bankcard in the United States. Bankcards were all Master Charge (now MasterCard) products and came with quite a few limitations. They could be used only for travel and entertainment expenses, for example, and were at that time looked upon as competitors to cash rather than credit cards.
It was not until the late 1960s and early 1970s that business people began to take advantage of the concept of using bankcards for everyday purchases rather than just travel expenses. Bankcard issuers began to experiment with universal cards that could be used anywhere, which allowed merchants to accept all cards without worrying about what type was being used.
The bankcard industry experienced rapid growth in the early 1970s, and by 1975 there were more than 200 million bankcards in circulation. This number grew to 1 billion at the end of the decade. The expiration of many credit cards also led to a new type of card—the replacement card—which allowed merchants that did not have terminal equipment to process all types of bankcards.
In 1978, the Interbank Card Association (ICA) formed and began working on a standard for card processing. The first automated payment system was introduced in 1979 and allowed merchants to swipe cards through a terminal and get immediate authorization and settlement. That same year, Visa officially became an international organization when it merged with Eurocard.
The first debit cards were introduced in the early 1980s through the New England Merchants Bank and Barclays Bank (U.K.). At that time, many people thought they would replace credit cards because they allowed customers to pay directly from their checking accounts without carrying cash or writing checks. Customers liked them as well because merchants could not use transaction disputes as a reason to refuse to accept them.
The first ATM cards also came about in the early 1980s and were used for such transactions as checking balances, withdrawing funds and transferring money between accounts. Also during this time, some banks began testing electronic check conversion terminals that allowed customers to swipe their checks through a terminal instead of filling out a paper check.