Merchant Service Provider vs Payment Processor — Key Differences!

​Businesses are seeing a boom in the market of cashless payments. The trend toward digital payments has grown, making it essential for companies to establish efficient and secure payment systems. Merchant Service Provider and Payment Processor are terms that are often used interchangeably. They refer to distinct entities with specific roles in the payment processing ecosystem. 

Let’s compare the differences between merchant service providers and payment processors and how they collaborate to facilitate seamless transactions. 

What are merchant service providers?

Merchant Service Providers offer services that help businesses accept and process electronic payments. These services include point-of-sale (POS) systems, credit card readers, payment gateways, and online transaction processing. Merchant Service Providers are the bridge between businesses and financial institutions. They help streamline the payment acceptance process and ensure compliance with payment regulations. 

What is a payment processor? 

A payment processor can be a company or a service provider that facilitates the three fundamental functions of any transaction between a business and its children: authorization, processing, and settlement.  They enable businesses to accept various payment forms, such as credit cards, debit cards, electronic checks and digital wallets, while acting as an intermediary between the companies and the customer’s financial institution. They ensure that transaction information flows securely and efficiently, facilitating the authorization and settlement of payments. Payment processors are integral to the backend operations of electronic transactions, managing the communication between various financial entities to complete transactions. 

The three fundamental functions of payment processors include: 

1. Authorization:

Payment processors verify customers’ payment information, such as the card number and expiration date. They also check sufficient or credit availability to complete the transaction without the probability of failed transactions. 

2. Processing: 

Process fund transfers from customers’ accounts to merchant accounts by securely transferring transaction details between relevant parties, such as banks and card networks.

3. Settlement: 

Payment processors ensure that the business receives funds from the customer’s account. This happens when customers deposit funds into the business’s bank account through payment processing. 

Difference between Merchant Service Provider and Payment Processor: –

Difference	Merchant Service Provider	Payment Processor
Scope of Services	Merchant Service Providers offer various services beyond payment processing, including setting up merchant accounts and providing hardware like POS terminals. They also ensure compliance with industry standards such as PCI DSS and offer customer support.	Payment Processor focuses primarily on the technical process of transmitting transaction data and facilitating fund transfers between banks. It mainly works with payment gateways and does not typically provide additional services such as hardware provision or compliance assistance.
Merchant Accounts	They set up and manage merchant accounts, which are specialized bank accounts that temporarily hold funds from card transactions before transferring them to the business’s primary bank account.	Payment Processors do not provide merchant accounts but work with MSPs or acquiring banks to process transactions.​
Relationship with Businesses	Merchant Service Providers offer a more personalized relationship, often providing businesses with tailored solutions and dedicated support.	Payment Processors operate more as behind-the-scenes entities, ensuring the technical execution of transactions.

How do payment processors and merchant accounts work together?

To better understand how a payment gets from your customer’s pocket to your business bank account, it helps to see how payment processors and merchant accounts work in tandem. Though they serve different functions, they’re two halves of the same coin when completing digital transactions.

Step-by-Step Breakdown:

Customer Initiates the Payment:

A customer enters their payment information—either online through a checkout form or in-store via a POS terminal—and that data is collected through tools often provided by a merchant service provider.

Payment Processor Transmits Data:

The payment processor jumps into action, taking the customer’s payment details and securely sending them through the card network (Visa, Mastercard, etc.) to the customer’s issuing bank (the one that gave them the card).

Authorization Happens:

The issuing bank checks:

• Is the card valid?
• Are there enough funds?
• Is the transaction suspicious?

The bank sends back an “approved” message if everything checks out. If not, it’s declined.

Merchant Account Holds the Funds:

Once approved, the transaction amount doesn’t go straight to your business bank account. Instead, it lands temporarily in a merchant account—a holding account designed for this exact purpose.

Funds Are Settled:

After the transaction clears, the funds are transferred from the merchant account into your actual business bank account—usually within 1 to 3 business days.

Without a payment processor, your transaction would never be authorized or completed. But without a merchant account, you wouldn’t have a place for those funds to land before they’re deposited into your business account. The two work hand-in-hand:

• The processor moves the money.
• The merchant account holds it safely until it’s yours.

Who should you partner with a Merchant Service Provider or a Payment processor?

When accepting payments, especially for small and mid-sized businesses in the U.S., the decision between partnering with a merchant service provider (MSP) or a payment processor depends on what kind of support your business needs. 

If You Need Simplicity and Speed:

Payment processors are a solid choice if you’re looking for a straightforward way to start accepting payments online or in-store without too many bells and whistles. Companies like Stripe, Square, or eCheckplan are examples of processors that offer a bundled solution. They combine processing tools with other features, so you don’t have to open a separate merchant account. This is often called an “aggregated account,” where your business shares a more extensive merchant account with others.

They are ideal for:

• Freelancers
• New e-commerce stores
• Low-volume businesses
• Those who need a quick setup with minimal paperwork

If You Need Control, Flexibility, or to Deal with High-Volume Transactions: –

On the other hand, merchant service providers usually give you access to a dedicated merchant account. That means your business has its own account for receiving funds from card transactions, which can help with stability and fewer surprises as your volume increases.

Merchant service providers often include:

• A dedicated account representative
• Risk management support
• Chargeback assistance
• Tools for recurring billing, invoicing, and integrations
• More flexibility for high-risk industries

They are Ideal for

• Growing businesses with increasing transaction volume
• Companies in regulated or high-risk industries (like travel, CBD, or supplements)
• Businesses want more control over their payment setup
• Those who value having human customer service

So, what is the right move for you?

There’s no universal “right” choice. It depends on where your business is at. A payment processor might be all you need if you’re just starting and want to test the waters. But a merchant service provider could offer you the support and stability you’re missing if you’re scaling up, working in a more complex industry, or experiencing payment challenges like chargebacks or failed transactions.

Feature	Payment Processor	Merchant Service Provider
Setup Time	Quick, often instant	It may take a few days due to underwriting.
Merchant Account Type	Shared (aggregated)	Dedicated to your business
Ease of Use	User-friendly, plug-and-play	Slightly more complex but customizable
Customer Support	Mostly self-service or chat	It often includes a dedicated account manager
Best for	Startups, freelancers, small businesses	Growing, high-risk, or high-volume businesses
Risk Management	Basic fraud tools	Advanced fraud detection, chargeback support

Market Insights and Trends: –

The U.S. payment processing landscape is both vast and dynamic:

• Transaction Volume: In the second last year, the U.S. payment processing market handled transactions exceeding $2 trillion, underscoring the critical role of electronic payments in commerce. ​
  
  
• Growth Projections: The industry is projected to grow annually by 5% to 7% over the next five years, driven by technological advancements and evolving consumer preferences. ​
  
  
• Business Demographics: With approximately 30.7 million active businesses in the U.S., 99.7% are classified as small businesses. This highlights the demand for scalable and adaptable payment solutions. ​
  
  
• Fee Structures: On average, merchants incur processing fees of around 2.4% per credit card transaction, which can vary based on factors like transaction type and business size.

How to find the best payment processor or merchant service provider for your business: –

When deciding between a Merchant service provider  and a payment processor, consider the following:

1. Business Needs: A Merchant Service Provider may be preferable if your company seeks an all-in-one solution with comprehensive support. A payment processor might suffice for those with existing infrastructure requiring only transaction processing.​
2. Transaction Volume: High-volume businesses might benefit from the tailored services and better rates offered by Merchant Service providers.​
3. Technical Capabilities: Evaluate whether your business has the technical resources to integrate and manage payment processing systems independently or would benefit from the additional support provided by a  Merchant Service Provider.​

Final Thoughts: –

Understanding the distinctions between merchant service providers and payment processors is essential for U.S. businesses aiming to optimize their payment systems. While Merchant Service Providers offer a broad range of services, including merchant accounts and customer support, payment processors specialize in the secure transmission of transaction data. Aligning your choice with your business’s specific needs and growth objectives will ensure efficient and secure payment operations, ultimately enhancing customer satisfaction and operational efficiency.​