When a customer makes a purchase at your store, they swipe their credit card and you receive their money, right? Yes, but it’s not that simple. There are several steps that payments have to be processed between your customer’s wallet and your business account. Unless you are a strict cash-only business, every online and physical store will need a merchant account. Setting up a merchant account can seem complicated since several key functions of a merchant account should be understood before choosing a provider. In this article, we are going to dive into what a merchant account actually does, as well as everything to take into consideration when selecting your provider. With this information under your belt, you’ll be accepting card payments in no time.
Essentially, a merchant account is an account separate from your business account where money from transactions is processed. Money from this account is then transferred to another account, such as your business checking account after the merchant account provider has taken out processing fees. In other words, the merchant account service acts as a middleman between you and your customers by processing credit card payments and ensuring that you get paid. While merchant accounts, in general, are required by all businesses that sell products and services, there are a wide array of merchant account services with various functions that may be appropriate for different businesses depending on their specific needs.
As stated above, if your business intends to accept credit card payments or alternative payments other than cash, a merchant account is required. Merchant accounts are set up through something called a merchant acquiring bank service.
A merchant acquiring bank or business is the entity that will set the terms for your merchant account. These terms are all laid out in a merchant account agreement. Certain elements that will be outlined in this agreement are:
The way a merchant acquiring bank plays into the equation of your business as follows. When someone makes a translation, their card information is sent from the point of sale terminal to the merchant acquiring bank. The merchant acquiring bank then communicates with the card processor as well as the card issuer to authenticate the purchase. Once the card issuer approves the transaction through security checks and validates the available funds, the merchant acquiring bank transfers the funds into the merchant account. Before the merchant can transfer money to their own business account, the merchant acquiring bank charges fees to the merchant account for their services.
One of the biggest factors to take into consideration is the fees associated with your merchant account provider. Merchant acquiring banks charge several different kinds of fees, including but not limited to:
Per-transaction fees will be the most common since they are charged every time a customer purchases your business. These transaction fees range anywhere from .5% to 5% of each transaction, plus an additional fixed amount ranging from $0.20 to $0.30. Traditionally, online purchases have a higher per-transaction fee since there are more security risks involved. Acquiring banks charge monthly fees to cover the handling of potential credit card risks and the service of settling funds into the merchant account.
Rather than simply opening an account, you will actually have to apply to your desired merchant account provider. When applying, there are several things the provider will take into consideration, including:
Of course, if you are a new business, you may not have an established record of the information provided above. A good workaround is to apply for an account at a bank where you already have established either a business or personal account. If the bank sees your company as a high risk, that doesn’t mean you will automatically be rejected. Instead, you may simply be charged higher transaction fees in order to compensate for this risk. Once your company is more established, these fees may be lowered.
One alternative to a traditional merchant account is something called a PSP, or Payment Service Provider. Some PSPs you may have heard of include Square and Stripe . Let’s go over how a PSP differs from a merchant account and when it may be an appropriate choice for your business.
PSP ’s are also known as third-party processors or aggregators, and just like merchant accounts, allow businesses to process credit card payments. However, one key difference is that while merchant accounts are often solely focused on providing payment processing, PSPs offer additional services. PSPs often offer hardware such as card readers to help get your business started. Additionally, they also offer business tracking software such as business reports and invoicing tools. Furthermore, you can purchase additional tools for an additional cost, allowing you to do things like send out email campaigns or start membership programs for your customers, all from a single service. Another key difference between merchant accounts and PSPs is the way they are structured. In the case of a merchant account, you receive your own account number, and the provider deals with each merchant directly. With PSPs, each merchant is a subset under one umbrella merchant account. Because of this, PSPs are easier to set up and include fewer fees when compared to merchant accounts. However, PSPs do come with their own set of drawbacks. Pros of PSP
Cons of PSP
Pros of Merchant Account
Cons of Merchant Account
Not all merchant accounts are made equal. Picking the right one will largely depend on the kind of business you are running. Let’s go over some of the key types of merchant accounts to help you determine which is best suited for your business.
If you run an eCommerce store, then an internet merchant account will be necessary. Internet merchant accounts specialize in encrypting credit card information entered online and ensure a safe and secure online payment process. Because of the added security risks and the fact that no processing equipment is required to be purchased by the merchant, per-transaction fees are often higher than other forms of merchant accounts.
If you run a brick-and-mortar store, a retail merchant account is an obvious choice. Even if you sell products online, as long as 70% of purchases are processed through the physical credit card terminal in the store, a retail merchant account is a way to go. These accounts will offer lower per-transaction fees than eCommerce accounts. However, you will need to purchase payment terminals and pay a setup fee. Retail accounts are ideal for businesses such as grocery and department stores.
While telephone and mail orders are less common these days than retail or eCommerce sales, some businesses still rely on them. Telephone and mail order processing is often bundled in with another merchant account or offered for a small fee. Additionally, the processing fees are typically inexpensive. Therefore, this service is ideal for businesses that generate most sales through call-ins from infomercials or sell their products via catalogs.
Wireless mobile merchant accounts are for businesses that don’t have a permanent physical location such as a food truck or flea market vendors. Rather than utilizing a traditional payment terminal, mobile merchants often process transactions via a simple card reader that plugs into a smart device, which is more affordable. However, transaction and processing fees are typically more expensive since mobile merchant sales tend to be less frequent than retail or eCommerce sales.
The perfect merchant account provider will vary depending on the size and nature of your business. Before you apply, it’s important to thoroughly research the cost of each provider, as they often include hidden fees which can slowly add up. Furthermore, make sure you are choosing a provider that offers services that suit your specific company so that you aren't paying extra for things you don’t need. While having to pay extra for a merchant account may seem like a burden for small businesses, you can help alleviate the financial burden by charging your customers additional fees to help cover payment processing. Whether you are an established retail business or a startup eCommerce store, we hope that the information discussed above will help you successfully choose your merchant account provider. Sources: Investopedia | What Is A Merchant Account? Business News Daily | How To Choose A Merchant Account Provider What Is A Payment Service Provider or PSP? | eCommerce-Platforms.com