Merchant Account Explained: Your Ultimate Guide

What does "merchant account" mean?

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Most business owners know how important it is to take payments and process transactions for their digital stores. If you want to be successful online, then you need more than just a good idea, you need a way of making a reliable income.

Virtually all of your customers will have a bank account and debit card, or a credit card to make their purchases online. As a product or service provider, it’s up to you to ensure that you have the right payment gateway or payment processing option to meet your customer’s needs.

Unfortunately, many business leaders fail to realize that accepting payments isn’t something they can do by themselves. You’ll need a strategy to get started, which often means creating a relationship with a merchant services provider.

Building your relationship with a merchant service provider means creating a merchant account. This is basically an account where you transfer funds from the credit and debit cards that your customers pay with, to your business. You don’t actually have direct access to this account. Instead, the merchant account service provider will transfer your funds to your business banking account. It’s a lot like having a middle man in your company, dealing with your finances.

An account that is issued by acquiring banks that allow businesses to accept debit and credit cards. The trader or merchant will receive the proceeds of sales into their merchant account. These sales can be both onsite and online and the purchase will have been made using a credit card or electronic commerce.

When trading both in stores as well as online it is essential that you accept as many different types of payment methods as possible. By opening a merchant account you will be able to receive global payments from anywhere in the world by simple credit card payments from the customer.

Most merchants find that the merchant account is a key aspect of their business, and this is especially true for ecommerce. Brick and mortar businesses could choose not to get a merchant account and work on a cash only basis, using a basic deposit account at any bank. Online ecommerce sites don’t have this choice, since electronic payments are their only option when accepting payments.

A merchant needs to establish a merchant account with an acquiring bank before they are able to accept electronic payments of any kind, including credit and debit cards. These merchant acquiring banks have a key role in the electronic payment process, and without them it would be impossible to efficiently process and settle electronic transactions.

When establishing a merchant account, the acquiring bank will require a detailed merchant account agreement that will spell out each detail of the relationship between the bank and the merchant, including all the fees and transaction costs that will be charged by the bank. There may also be base fees for certain services that are payable monthly or annually.

How do Merchant Accounts Work?

The term “merchant services” can apply to a wide range of payment processor solutions, including working with a merchant account provider. On the other hand, “merchant accounts” specifically refer to the accounts used to access payments from customers.

Without a merchant account, you would have to wait quite a while to receive your money after a customer paid for your goods or service via a credit card. That’s because there’s a gap between when a customer buys something on a credit card, and when they pay their credit card bill. Fortunately, if you have a merchant account, the account fronts your business the money, minus any fees, from a card transaction.

After a customer pays for goods or services with you, the card processor will send transaction details through a card issuer. Once the card issuer confirms that there’s sufficient funds in the account, the transaction goes through. Credit card networks like Mastercard and Visa oversee this data exchange process.

It might sound like there’s a lot of back-and-forth to worry about. However, merchant accounts actually reduce the amount of work you have to do to access your money as a business owner. Ultimately, they give you access to credit card processing, without the stress.

Why Businesses Need Merchant Accounts

If you want to process credit card transactions or purchases through your point of sale system, you need a merchant account. One of the biggest benefits of using merchant account services, is that the risk taken in processing payments switches from you to your merchant account provider. You basically just pay a fee to move some of the stress onto someone else’s shoulders.

Look at it this way, with every payment you take, there’s a risk that your customer will never actually pay up. They might not pay their credit card bills that month, or they could overdraw their account, which means that your payment bounces.

If you don’t have a merchant account, then you could never see the funds, even if you’ve already delivered the product or service requested. At the very least, you may find yourself waiting forever to see a payment that you processed with your card reader or payment service.

With merchant accounts, you can eliminate this risk. Merchant accounts give you the funds that you need directly from processed transactions. This means that it’s the merchant service provider that needs to handle the headaches if something goes wrong. You don’t even have to worry about waiting for your revenues to show up.

As a way to upgrade your payment processing solution, merchant accounts allow you to build an income for your store quickly. However, the advantages of merchant accounts do come with a price. Account providers will need to fortify themselves against the risk that they’re taking on your behalf. This means that you pay extra fees to access your service.

Merchant Account Fees

Merchant accounts do have a few fees to consider. The amount you pay for things like setup and transaction fees will depend on the account providers you work with.

Here, we’ll walk you through some of the basic expenses, so you know what to expect when building your budget.

Setup Fees

Merchant account companies will often charge small business owners a one-time fee upfront for getting everything ready for them. Unfortunately, most providers will only provide quote-based pricing here. This means that you might need to ask for a quote before you have any idea what you’re going to pay.

Your setup fee will depend on things like the kind of business bank account you have, whether you’re using POS hardware, and more. Some providers base setup fees on things like monthly or yearly sales volume too.

Maintenance Fees

Along with setup fees, some companies will charge you an ongoing fee for merchant services. This is usually the case if you’re accessing a range of tools with your merchant services, such as reporting. Typically, maintenance fees are a flat cost that come once a month. They’re separate from your transaction fees.

Transaction Fees

Transaction fees are probably some of the most significant extra costs you’ll need to consider when setting up your merchant account. The transaction fee you need to pay will depend on things like the type of business you run, and the card and payment processors you need to use.

Remember, all of the entities that make your card payments possible, from card processors, to card networks and card issuers, want their own cut for the transactions they support. These are the most common ways to handle transaction fees:

  • Flat rate fees: Here you’re charged the same rate for every kind of transaction you process. No matter what card issuer or network you use, flat rate fees could be something like 2.4% plus ten cents for every transaction.
  • Tiered transaction fees: With these kinds of transaction fees, you’ll pay different fees depending on the tier that a purchase falls into. Usually, you’ll pay a higher price for transactions that have more “risk” associated with them.
  • Interchange plus fees: These are some of the most transparent transaction fees issued on a merchant account. They include the amount it costs to process your payment, plus the fee charged by your merchant account. You also get interchange plus pricing, so you can see exactly how much each transaction is going to cost with an itemized statement each month.

How to Get a Merchant Account

Getting your own merchant account setup isn’t as complicated as it seems.

The most important thing to remember is that if you want to access the right payment solution, without spending a fortune, you need to do your research.

Read up on the merchant services provider you’re thinking of using. Each company comes with different features, pricing schedules, and processing fees. You might even find that switching to the right provider means that you can eliminate an unwanted monthly fee or get the funds from your debit card transactions faster.

As you may expect, just as there are plenty of great merchant account service providers out there, there are some terrible choices too. Some providers may ask you to wait several business days before a transaction goes through. Other companies will give you the speed you want, but the price will be too high for your budget.

It’s also worth looking out for things like automatic renewal clauses and cancellation fees. Early termination fee expenses can often reach anywhere from $300 to $600. This means that if you want to switch to another merchant solution with better customer support, you’ll have to pay a small fortune first.

Some providers even hit their customers with something called liquidated damage. This means that you get a penalty based on the processing charges that would have been incurred for the rest of your contract. The good news is that the industry is gradually improving when it comes to protecting businesses from unnecessary fees. There are leading providers on the market that will waive the ETF for small e-commerce businesses.

If you’re particularly concerned about termination fees, you can even find companies that allow you to pay for your transactions on monthly basis instead.

Setting Up Your Merchant Account

Just like finding the right credit card processor for your website, or looking for payment solutions like PayPal, finding an account is easy. Type “Merchant account services” into Google, and you’ll get a huge selection of providers to choose from.

Once you find a company that you think you can trust, the next step is interacting with the provider’s sales team. Sometimes, your merchant provider will outsource their customer services to an independent sales organization. This means that you might end up talking to someone who deals with dozens of different companies.

There are a lot of complaints online from merchants who have had to deal with service teams that didn’t understand their problem and couldn’t offer the right support. Some independent agents might even lie to you about important contract details because they’re trying to earn a higher commission.

Ultimately, it’s difficult to avoid dealing with independent agents completely. You can often protect yourself by carefully reading your contract before you agree to sign anything. Don’t trust that the agent is giving you the full details of what you’re paying for. If you’re thinking of taking on a new service, get the details in writing so you can double check them.

Once you’ve chosen a high-quality provider, you’ll need to:

  • Provide basic business information: Answer any questions required for your merchant account. You might need to go through a kind of underwriting process, where you provide your tax information, contact details, business name, and so on. You will also need your bank account and routing details. Make sure you give the bank details for your business account.
  • Submit to a credit check: You won’t always have to do this, but it’s very common for a merchant account provider to check your credit and business license before giving you an account. A merchant account is similar to a line of credit, because you need to deal with things like refunds and chargebacks.
  • Check the terms and conditions: Make sure you’re comfortable with the terms and conditions provided by your merchant account before you sign anything. Read all the “small print” and ask questions if you’re not sure.

Tips for Mastering your Merchant Account

Finding the right merchant account provider is often the toughest part of signing up for this kind of business service. However, it helps to have a strategy in place for how you’re going to get the most out of your investment.

Think about the kind of solutions you need from your account provider. Many of the leading companies offer features beyond the merchant account itself. For instance, you might be able to access special point of sale hardware with one provider that you can’t get with another. You could also find providers that give you access to a wider range of payment gateways.

Take the time to shop around for the best deal from a provider you can trust. This could also mean getting quotes from a number of company before you decide on one. Since some of the quote-based fees for a merchant account are only available once you’ve spoken to a provider, you won’t really know how much each company is going to charge you at first glance.

Other tips to consider include:

1. Prepare everything you need for a business profile

Your merchant account provider will ask you for a business profile that describes what your company does, and how you make money. The profile will include a lot of information that should advise your merchant account provider on the kind of service you need.

Remember, although you’re taking a risk when you choose your merchant account, and hoping that you’re getting the right deal, your account provider is taking a risk too. They’re fronting the revenues of your card transactions. That means that some account providers might refuse to work with you if you don’t have the right details in place.

Think about:

  • How you accept payments: If you have a brick and mortar location, then you might need to take offline swipe payments through a POS terminal or credit card system. You might take payments through online services and ecommerce shopping carts.
  • How many sales you’ll process: Obviously, you can’t always predict with absolute accuracy how much money you’re going to make, or how many sales you’ll get. However, if you’ve been in business for a while, then you should know your average volume. Have your general number of transactions ready to share.
  • What’s your average ticket price: In other words, how much does each customer usually spend with you? You can find this out by dividing your total sales revenue by your total number of sales.
  • What’s your business seasonality like: Do you make more money in certain times of the year, and less in others? If so, you’ll need to ensure that your merchant provider is prepared for this by giving them plenty of information. Some merchant providers even offer discounts for companies that experience seasonal downtime.

2. Be careful when you’re applying for your account

Choosing a merchant account isn’t the same as picking a website builder or an email service provider. You choose your merchant account services, and the company you pick needs to be comfortable accepting you in return.

With all your business credentials ready, you should be ready to apply for the account that’s right for you. Make sure that you read over the terms and conditions provided by each company carefully. The last thing you want is for a mistake on your application to prevent you from being approved.

Make sure your chosen account providers can get access to your credit history. Additionally, it’s important to know in advance whether you’re a high-risk company or not. Some industries are riskier than others, which means that you may need to pay higher fees.

3. Negotiate terms and rates

Many business owners are so keen to start taking online payments as quickly as possible, that they forget to negotiate with their account provider.

While discussing your options with a sales rep can be a daunting process, it’s an excellent way to make sure that you get the right range of payment options with the lowest price. Remember, just like other financial institutions, your account provider needs you more than you need them.

Don’t be afraid to haggle with the company that you choose. Let them know that you’ve found plenty of other great quotes elsewhere. If you can negotiate with the company that you choose, then they might be able to give you extra things for free, like PCI compliance tools.

Setting Up Your Merchant Account

Once you’ve negotiated a good deal for your merchant account, you’ll be ready to jump into your sales. You’ll have to integrate your MSP tool with your shopping cart through an online payment gateway. Every payment gateway and shopping cart combination is different. Make sure that you work with the support teams offered by your payment gateway provider and your MSP.

If you’re running an offline store, then you’ll need to set up some terminals and POS systems. Usually, merchant service providers will have technicians available to help you with this.

With your accounts set up, make sure that you keep a close eye on everything that happens with your cash. It’s important to ensure that no unexpected fees or issues crop up out of nowhere.

Merchant Accounts and PSPs

If you’re concerned that setting up a merchant account is a complicated process, there is another way. Payment service providers are a slightly different approach to MSPS. With a payment service provider, you get a more modular solution to managing payments.

PayPal, Square, and Stripe are all common examples of payment service providers. These companies can work with you to help with processing payments both online and offline. You can even handle your payments through a phone or iPad.

Payment service providers aggregate a lot of users into a much larger merchant account. When you sign up for the service, you don’t get a true merchant experience. There’s no individual ID number, but you do reduce your costs significantly, and reduce your monthly fees. Because PSPs usually offer flat-rate pricing, processing fees are also easier to understand.

Payment service providers offer more flexible pay-as-you-go pricing, which makes them ideal for seasonal and smaller businesses. You also don’t have to worry about things like long-term contracts and massive termination fees.

While PSPs have significant benefits over merchant accounts, it’s worth noting that there are some downsides. For instance, PSP accounts can sometimes be shut down without notice for a range of reasons. A single large-ticket transaction may have your account frozen.

PSPs often struggle to provide the best customer support too. As your business grows, you might need more support from your service provider to ensure that you can manage payments reliably.

Ready to Explore Merchant Accounts Yourself?

At first glance, merchant accounts can seem pretty overwhelming. These tools come with a lot of things that you need to consider, from extensive fees to contracts. However, if you’re getting ready to run a business that needs to constantly take credit card payments, a merchant account may be essential.

The best thing you can do to ensure that you get the right deal is take the time to compare your options carefully before you sign on the dotted line. Exploring the industry and finding out what kind of support you can get will help you to make a more confident decision. You might decide that having a payment service provider instead of a merchant account is better for you.

PSPs do give you more flexibility when you’re getting started and might be a good way to begin accepting payments if you’re a smaller business. What sort of payment processing solution are you using? Let us know in the comments below!

Rebekah Carter

Rebekah Carter is an experienced content creator, news reporter, and blogger specializing in marketing, business development, and technology. Her expertise covers everything from artificial intelligence to email marketing software and extended reality devices. When she’s not writing, Rebekah spends most of her time reading, exploring the great outdoors, and gaming.

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