A merchant account allows businesses to accept and process card and electronic payments.
It establishes a connection between the business owner’s bank account and the issuing bank for the credit or debit card.
You should own a merchant account if you run an on-site or online business and want to seamlessly receive card payments.
Make sure you thoroughly evaluate the costs before opting for a particular service provider.
Merchant account can be easily opened by following the four-step process.
For most businesses (even small businesses), receiving payment from customers has become a matter of cards and electronic transfers. And while this does not mean cash is completely out of circulation, businesses that do not yet have a means to accept online and card payments from customers are at an increased risk of going out of business.
However, you cannot talk about card payments without mentioning merchant accounts. So, what then is a merchant account, and why would your business need one?
What Is a Merchant Account?
A merchant account is a kind of business account that allows businesses to accept and process card and electronic payments. A merchant account establishes a connection between the business owner’s bank account and the issuing bank for the credit or debit card used for the transaction. It also ensures that transaction amounts are duly debited from the customer and credited to the business account at the point of transaction.
How Does a Merchant Account Work?
Before we delve into how a merchant account helps business owners secure payments from their customers, below are the definitions of each item involved in the process.
The merchant account issuer usually provides the card processor. It is a system (a POS, or card-reading terminal) that reads and collects data from a credit or debit card for transmission to the card network provider.
The card network is the system that retrieves the card details from the terminal and sends them to the issuing bank. This network can be Visa, MasterCard, Discover, or American Express, as these are the most popular card networks.
An issuing bank is a bank that issues credit or debit cards to customers. So, it is responsible for approving or denying transactions from the card in question. Consequently, this bank also manages the card user’s fund. It is responsible for sending funds to the merchant account after verification.
A merchant account is where funds processed from a customer’s issuing bank are sent before they can be withdrawn from a business account.
A business account is a registered account that serves as a repository for all of a business’s funds – including payments processed through a merchant account. From this account, business owners complete most of their business payments, such as payroll.
Essentially, the flow of action that occurs before a customer’s purchase is deemed successful is outlined below:
- A POS terminal retrieves the credit or debit card details and forwards them to the card network.
- The card network contacts the card-issuing bank to verify the state of the linked account.
- Suppose the funds in the linked account are sufficient for the transaction. In that case, the issuing bank sends the amount from the customer’s account to the store’s merchant account.
- After about a day or two, funds from the merchant account are transferred to the business account and can be withdrawn.
Who Should Use a Merchant Account?
A merchant account is the fastest and least expensive way to accept card and electronic payments from customers. Hence you should own a merchant account if:
- You run an on-site business and do not want to limit your payment method to cash alone.
- You run an online store and need your customers to pay virtually by simply keying in their card details.
How to Choose a Merchant Account
As soon as you decide to accept card and electronic payments in your business, you must consider a few factors before choosing a merchant account service. These factors include:
- Your business needs: Your choice of a merchant account service would depend heavily on what your business needs are at the moment. Always ensure that you make your research and find out which provider renders the services your business needs before committing to any merchant service provider.
- Hardware Requirements: Before you opt-in to use a merchant account provider, you should find out the hardware requirements of their service. Compare this equipment with your business and its immediate capacity. Do not also forget that merchant account hardware comes with price tags.
- Features: A merchant solution, such as Helcim, should provide features that ensure your business’s smooth running. Suppose you run a large restaurant, for example. In that case, you’d want to go for merchant account providers with features like tableside ordering. You may also look out for advanced features like reporting and inventory management.
- Pricing Structure: You can term this ‘cost,’ as it is typically what you pay for using a merchant service.
Merchant Account Pricing Structure
There are certain fees you may pay when you use a merchant account. These fees include:
Set Up Fee
This is the fee you pay when your provider initializes your merchant account, the service software, and the corresponding hardware. Nevertheless, for some providers, you only get to pay for the equipment, not the setup itself.
Depending on the pricing structure used by your merchant service provider, you may be charged a monthly fee for your account maintenance. This fee can also include the cost of specific transactions on your merchant account.
While using a merchant account, there are three ways the merchant solution provider can charge you for your transactions. These are called the merchant service transaction fees, and they vary according to the following structures:
- Flat-Rate: This pricing structure is most suitable for startups and small businesses with very few profit margins. This pricing system charges a fixed, flat rate (as a percentage of your transaction amount).
- Interchange-Plus: This pricing structure covers the cost (interchange) in percentage charged by the card network for the payment process, plus the markup, which indicates how much the merchant company charges for each transaction. This structure is transparent because you’ll know exactly what you’re being charged for each transaction. Nevertheless, this pricing system can make analyzing your merchant account statements quite a hassle.
- Tiered: The tiered pricing structure is the most popular structure used by merchant service providers. Depending on the card network provider, it categorizes your transactions as qualified, mid-qualified, and non-qualified. The qualified transactions incur the lowest rates, and why the non-qualified incur the highest processing rates. It is worth noting that this pricing system is quite fair and doesn’t make your statement difficult to comprehend.
To accept card payments, you’ll need to use equipment like terminals, POS, and card readers to read customer data off credit and debit cards. For most merchant service providers, the cost of using this equipment comes separately. It may even be eliminated when you opt for third-party equipment. However, using the hardware sold and recommended by your merchant account provider is always advisable.
Early Termination fees
Should you terminate your contract with your merchant account provider before the proposed end of your contract period, you’ll pay a token known as an early termination fee. But then, not every merchant service provider charges this fee when you terminate your contract beforehand.
How to Open a Merchant Account
To open a merchant account, you’ll first need to:
- Apply for a merchant account with an acquiring bank.
- Upon the approval of your application, you’ll go on to submit your business information, financial statements, and other necessary documents.
- Afterward, the provider analyzes your business based on the information you provide to ensure that your business is eligible for a merchant account. This is known as underwriting and takes between a few minutes and a couple of business days.
- If the underwriting process is complete, your merchant account provider will set up your merchant software and hardware. You can start processing electronic and card payments.
Why Your Business Needs a Merchant Account?
You may be wondering why you even need a merchant account in the first place. Why can’t your funds be sent directly to your business account from your customers’ issuing banks?
Merchant Accounts Give You Control Over Your Cashless Payment
A merchant account does not only allow you to receive electronic and card payments for your business, it also gives you control over these processes, keeping you ahead of each transaction’s status. And like standard bank accounts, merchant accounts also come with periodic statements that help you analyze your cashless payments after a specified period. This feature is especially good for reporting and business growth forecasting.
They Speed Up Your Card Transactions
Whenever a customer makes a purchase from your business, a merchant account (as well as other entities) helps you complete the payment process in a matter of minutes. Suppose you were to link your customers’ issuing banks directly to your business account. In that case, you might have to wait a long time to complete each transaction. Your bank and the issuing bank would want to confirm each transaction before approval. Your customers may also have to return in a few days to have the purchased goods or services. Or… they might as well not return to your store again.
Secure and reliable
Since merchant accounts serve as intermediaries between an issuing bank and an acquiring bank, they help secure merchants’ funds. Most merchant account providers are PCI compliant and provide advanced security and support to users regarding funds and transactions.
Encourages Business growth
Card transactions are super convenient for most consumers. Hence, you give customers reasons to come back when you own a merchant account and can process payments from cards. Consequently, you’ll be growing your business when you put other factors in place.
Furthermore, most merchant account providers render online/cloud-based services to merchants, which is also convenient as you’ll be able to access your account and receive support from remote locations.
How Does a Merchant Account Differ from a Business Account?
You can manage all your funds from a business account and even make business payments like payroll. But a merchant account only allows you to receive payments processed from cards.
What Is the Main Difference Between a Merchant Account and a Payment Gateway?
A payment gateway is a technological platform that facilitates card and online payment processing. On the other hand, a merchant account is simply the intermediary between a customer’s issuing bank and a business’s bank.