In this guide, we will lay out in simple terms exactly what a merchant service provider is, what they do, and how modern technology is redefining the landscape when it comes to credit card transactions.
0
min read
When you peruse the global financial system as it stands today, you will surely see all sorts of digital payment systems that are being used from the streets of India to the hawker stalls in Singapore. That being said, credit card payments for businesses in the UK, particularly online ones, are still far and away the most essential.
The infrastructure that sits behind said credit card payments is unique and complex, but they all have one thing in common: A merchant service provider. The merchant service provider is the entity that accepts and processes your card transactions, and this is of vital importance.
A merchant service provider is a company that enables a business to accept card payments from customers. It is not a payment network like Visa or Mastercard. but rather an intermediary that helps facilitate those payment networks. They help set up and manage the merchant account, a special account where funds from card transactions are held before they are settled into your business bank account. Global behemoths Square and PayPal are two merchant service providers almost everyone has heard of.
A merchant service provider typically supplies the merchant account, the tools needed to accept payments online or in person, guidance on card-network rules like Visa and Mastercard, and the systems that screen for fraud, handle disputes, and process chargebacks. When a customer pays by card, the money does not move to the business bank account right away. The transaction is authorised, then captured, then settled, and the provider oversees each step to make sure the funds clear correctly. For example, an online retailer using Stripe relies on it to approve the card, route the payment through the right network, screen for fraud, and release the money to the business once settlement is complete.
{{iwoca-pay-cta="/components"}}
Although often discussed together, a merchant service provider is NOT the same thing as a payment gateway or payment processor. A merchant service provider manages the merchant account and the overall ability for your business to accept card payments. Think of it as more of a “macro” element to the entire payment journey. A payment gateway is a secure digital tool that collects and encrypts the customer’s card details during checkout, especially for online and remote payments. A payment processor is responsible for sending the transaction information through the banking networks to approve or decline the transaction. These three elements work in sequence and are symbiotic. Just as planktons can not exist without their host whales, so payment gateways and payment processors cannot exist without their host merchant service providers.
Let’s break down the differences more simply below:
Many providers bundle the gateway, processor, and merchant account into one system, which is why it’s sometimes difficult to distinguish between them. The terminology is often used interchangeably, but the underlying functions remain separate parts of how card payments move from the customer to your business bank account.
Here are some widely used merchant service providers operating in the UK:
Some of these providers focus on point-of-sale card machines for shops, cafés, and service businesses. Others are built primarily for online checkout, invoicing links, or integrated e-commerce payments. Traditional banks also offer merchant accounts through their business banking products, often as part of a broader financial relationship.
For businesses that are new to card payments or that don’t have so much in terms of cash flow, pay-as-you-go providers are easier to start with. The UX is generally very simple and fast, and the commitment is minimal. Businesses like pay-as-you-go providers for the following reasons.
The goal of most businesses is to scale, and to scale as quickly as possible. When a business grows, it takes on higher payment volumes, and at that time, a traditional merchant account might become better cost-wise. In most cases, the transaction fees will be lower, service/maintenance fees might be lower, but the terms are often rigid and not suited for businesses like fast-growing tech startups. With a pay-as-you-go merchant service account, or another variety, the system is much more malleable; sculpting itself to the exact position that the business might find itself in.
This example shows how pricing can shift as card sales grow. At lower volumes, paying a simple percentage fee can be more predictable and cost-effective. As monthly card sales increase, the lower percentage rates offered by traditional merchant service providers can become a better value, even with a monthly fee. The point at which one becomes cheaper than the other depends on how much you process each month.
As mentioned above, amerchant service provider helps your business accept payments and manages your merchant account.
A payment gateway securely passes card details between your checkout page and the payment processor.
The two are connected and often bundled, but they perform distinct roles.
When comparing providers, it’s useful to look beyond the surface price and consider how payments will work day to day. The total cost is shaped not only by the transaction percentage, but also by whether the provider charges monthly fees, how quickly funds are settled to your bank account, and how chargebacks or refunds are handled. Contract length can also vary. Some providers offer flexible, no-commitment plans, while others may require a longer agreement with notice periods for cancellation. It’s also worth checking whether the provider supports the payment methods you use most frequently, and whether their hardware or software integrates well with your point-of-sale system, online store, or invoicing tools.
Assumptions:
This chart shows how total processing costs increase when using a pay-as-you-go provider, where the fee is charged as a percentage of each card sale. Because there are no monthly fixed fees, the cost rises in a straight line with sales volume. This model is simple and predictable, which is why many smaller or newer businesses start here.
This second chart shows the same monthly sales volumes, but with the traditional merchant service provider pricing structure. Here, the percentage fee is lower, so the variable cost grows more slowly. However, a fixed monthly charge is added on top, which means the total cost is slightly higher at lower volumes but becomes more cost-effective as sales increase.
{{find-out-iwocapay-cta="/components"}}
If you want to accept payments without setting up a traditional merchant account, there are now several workable alternatives. Pay-as-you-go payment platforms allow you to start taking card payments quickly, with no long contracts and straightforward pricing, although the percentage fee per transaction is usually higher. Some businesses prefer to use online invoicing tools, where customers pay directly from a secure link, which can be particularly useful for services, trades, and project-based work. E-commerce platforms also increasingly provide built-in checkout and payment handling, which means you can sell online without needing a separate payment gateway.
For businesses selling to other businesses, Buy Now, Pay Later (BNPL) options are becoming more common. These allow customers to spread payments over time, while the supplier receives the funds upfront. This can help smooth out cash flow and reduce the time spent chasing invoices.
If you’re looking for this kind of flexibility without the complexity of traditional merchant services, iwocaPay’s trade credit (B2B BNPL) allows you to offer your customers payment terms while your business still gets paid upfront. It provides predictable cash flow and removes the need to manage credit control or wait on delayed settlement, making it easier to offer payment flexibility while keeping working capital steady.
Articles source:
