Merchant accounts are essentially intermediaries that allow businesses to accept debit or credit cards provided by customers for a sales transaction.
They are a special type of bank account meant to accumulate or hold funds from credit or debit card sales. They are provided by banks and financial institutions (processors) usually for a charge.
Merchant account providers verify customer information and credit card details (address, card number) provided are accurate; and whether the card has sufficient funds and not reported as stolen.
For your business to accept credit cards and get merchant accounts, you need to have a Merchant ID (MID). It is important to note that a merchant account is a legal agreement with specific terms and conditions between you, the business, and the provider.
For merchant accounts to function effectively, different equipment is necessary to accept the debit and credit cards. This includes point-of-sale 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.
Because merchant accounts fulfill the service of facilitating debit and credit transactions, they charge substantial monthly and transactional fees to business owners for these services. Some of the standard fees levied are as follows, though rates charged by each provider can vary:
- Monthly statement fees
- Minimum monthly fee
- Monthly gateway payment
- Transaction fees
Types of Merchant Accounts
- Regular Merchant Account: This is a merchant bank account that usually allows both credit and debit card transactions and retains payments until the business receives them. When the funds are approved, the merchant service providers deduct the necessary commission and transfer the money to your business bank account.
- Retail Merchant Account: This account is in place for retail businesses that operate from storefront locations where the customer physically swipes the debit or credit card through the payment terminal.
- Internet Merchant Account: This account is for online businesses where credit and debit card information is collected and processed online through e-commerce websites.
- Mail or Telephone (MOTO) Merchant Account: This account is for businesses that collect and process payments through the telephone or direct mail.
Need for Merchant Accounts
In the digital era, cash is slowly becoming redundant, with online transactions and payments growing exponentially and becoming not just the dominant mode of payment but also the preferred method. People favor online transactions due to the ease, convenience, payment time, and record history over cash, which can be tedious to carry or withdraw each time money is needed. 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 banks. 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.
How Do Merchant Accounts Work?
Merchant accounts work in the background to process electronic payments. At the time of a credit or debit sale, funds are withdrawn from a customer’s bank and deposited into merchant checking accounts. The money then passes the processing protocols, and transfers to the regular bank account of the business, either daily or weekly, based on the system it follows. In the case of a refund, the process is reversed.
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.
How to Set Up a Merchant Account for Your Business
The account setup process has the following two core steps:
- A company needs to decide how it wants to deal with its customers, whether in person, through a point-of-sale system or traditional credit card swiping machine, or remotely via the internet or phone.
- After the company chooses its preferred payment method, it can decide whether a merchant account is required or if it wants to connect directly to its bank.
For your business to obtain a merchant account, credit card processors follow a screening or application process (which usually requires you to pay a fee) and grant approvals to mitigate their risk. Because merchant accounts have the potential to lose money each time a transaction is processed, approval involves many requirements and can be a complicated process.
The following pointers are helpful to increase the chances of getting your applications for merchant accounts approved:
- Up-to-date, legit financial statements are one of the best tools to leverage favorable terms of approval.
- A strong processing history is important because it tells the processor that you trade more and have a good processing history, which instills confidence.
- 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.
Apart from getting the credit card processors 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 farfetched statements declaring approvals of any type of account.
- 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, ensure 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 in all channels and future upgrades such as NFC for mobile payment systems such as Apple Pay. Also, look for value added components such as growth and features such as loyalty programs, special offers, and gift cards.
Merchant accounts are becoming a necessity for all businesses based on the trend of a cashless economy that is gaining popularity and momentum every day. The merchant account arena is vast with several nuances and points to consider. You will need to research and analyze a lot of information to conclude which merchant account will be suitable for your business. Being honest about your expectations, asking questions about approval, comparing the responses, and highlighting any concerns will help you make a better decision. A merchant account processor should be enthusiastic to help you get approval for a mutually beneficial long-term partnership. To understand merchant accounts better and envision one for your business, professional advice or opinions can be helpful.