Merchant accounts are accounts set up through a bank to allow businesses to accept debit or credit card payments. The money is initially put into the merchant account and then later transferred to the business’s bank account. Transfers are done daily or weekly, depending on how you have it set up.
Merchant account providers, a financial institution, verify customer information and credit card details (address, card number). They also check for sufficient funds and if the card is reported as stolen.
Need for Merchant Accounts
In the digital era, cash is slowly becoming redundant, with online transactions and payments growing exponentially. Online payments are becoming the dominant, preferred, method of payment. People favor online sales due to the ease, convenience, payment time, and record history over cash. Most merchants prefer to accept credit cards because of the convenience and cost effectiveness of getting payment from customers; however, it can be taxing for the merchants to pay the high transaction fees to merchant account providers. The banks or the providers of these accounts charge setup fees, monthly and annual charges, terminal charges, and so on. There may also be a percentage charge on each transaction processed.
Obtaining a Merchant Account
To get a merchant account and accept debit cards and credit cards, you need to have a Merchant ID (MID). Issuing financial institutions maintain a list of criteria your business must meet before they approve your merchant account application.
- How risky your business is for returns and credit card fraud.
- How long you have been in business.
- What your business history is.
- How many previous merchant accounts are owned.
- Business owner’s personal credit history.
Some tips to ensure your application is accepted for a merchant account type are:
- Up-to-date, legit financial statements are one of the best tools to leverage favorable terms of approval.
- A strong processing history is essential because it tells the processor that you trade more and have a good processing history, which instills
- Writing a cover letter that elucidates the details of the business can go a long way. Your goal should be to address pertinent points that underwriters consider when reviewing your application.
Specific equipment is necessary to accept the debit and credit cards payments. This includes point-of-sale (POS) terminals, swipers, and PIN-pad and wireless terminals. While this equipment is for sale from other vendors, merchant service providers also rent and sell this equipment.
Merchant Account Fees
Merchant accounts fulfill the service of facilitating debit and credit card transactions; therefore, they charge substantial monthly and transactional fees to business owners. Some of the standard fees levied are as follows, though rates charged by each provider can vary:
- Application and setup fees
- Monthly statement fees
- Minimum monthly fee
- Monthly gateway payment
- Transaction fees
- Discount rates
- International Fees
- Credit card terminal fees
For some business owners, it is easier to obtain a merchant account through the financial institution they are currently using. Higher risk companies may have to pay higher fees in the beginning.
Internet Merchant Account
Most eCommerce owners provide online payment options; for this, you need an online payment gateway and a processor to accept debit card and credit card payments. Due to identity theft and stolen credit cards, internet merchant accounts normally have higher fees than a regular merchant account. For every type of credit card you accept, you need a separate internet merchant account. Some financial institutions offer internet merchant accounts; however, it may be more cost-effective to use a third-party merchant account provider.
Types of Merchant Accounts
The two types of merchant accounts available are dedicated and aggregate. If you want control over your funds and rates, dedicated merchant accounts are the best option.
Dedicated merchant accounts require the application to be thoroughly reviewed by an underwriter to ensure your business qualifies. Your payment gateway provider will set this merchant account up for you and only money from your business will be deposited. You will be able to negotiate transaction rates and when your payment is transferred to your bank account. The more merchandise you sell, the higher your rates will be.
- Aggregate merchants are not as flexible; however, they are easier to qualify. These accounts have multiple businesses depositing transactions into them. This means your money is transferred to your business bank account on a scheduled basis and rates are non-negotiable.
How Do Merchant Accounts Work?
The work of a merchant account starts by processing a credit card transaction. Information is sent to the payment gateway to check on the customer’s availability of funds. In retail, restaurant, or lodging transactions, this occurs at the point-of-sale machine where it reads the cardholder’s data, and cross-verifies with the credit card company before moving the transaction forward. Similarly, for online transactions such as mail-order companies, e-commerce, or internet merchants, this verification is done via the payment gateway.
Choosing a Merchant Account
Apart from getting the merchant account providers to approve your application, you have many types of merchant accounts you can choose from for your business. To help make the right decision, consider the following important factors:
- Make a list of reputable credit card processors and point-of-sale system vendors.
- Look for simple and straightforward pricing with no hidden agendas or costs. Beware of unrealistic promises.
- Be wary of blanket promises or far fetched statements declaring approvals of any type of
- Check with the processor on what type of documentation is needed and how much time it would take to get approved, and look for positive, reassuring answers.
- Get a copy of the merchant agreement before signing the contract. Be suspicious of contracts that lack an explanation of the process, or have no request for paperwork.
- Avoid multi-year contracts and steep early termination fees.
- Read the fine print on details such as transaction rates, swipe fees, monthly fees, and so on to prevent unpleasant surprises.
- If you want to sell online, make sure the merchant service provider offers all internet-based features such as virtual terminals and payment gateways.
- Consider the startup and monthly costs, equipment offered, customer service options, and whether a complicated approval procedure is involved.
- Ensure that the merchant accounts are prepared for usage on all channels and future upgrades such as NFC for mobile payment systems such as Apple Pay.
- Look for value-added components such as growth and features such as loyalty programs, special offers, and gift cards.
Alternatives to Merchant Accounts
PayPal offers two options for inexpensive online payment processing. One option is to add the PayPal button to your website. When a customer clicks the button, they are automatically redirected to PayPal’s website to continue payment processing. This option only charges a per-transaction fee.
The second option is to upgrade to the pro version of Paypal for a monthly fee. PayPal makes your website look more professional, and customers are not redirected to a different page. They can make their payments directly through the website using the PayPal payment gateway.
For a brick and mortar business, another alternative is to obtain a credit card reader from vendors such as Square, PayPal, or Intuit. These readers are small devices used with your smartphone or tablet.
Merchant accounts are becoming a necessity to keep up with the ever-changing world. With help choosing and setting up a merchant account right for your business needs, contact Flying Cow Design today!