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What Is A Merchant Account? Your Guide To Merchant Account Processing, Fees, & Setup

What Is A Merchant Account?

A merchant account is similar to a regular bank account, in that it stores and collects cashless payments. Most businesses begin using a merchant account to accept credit card online payments. These accounts are established by a contract between the business accepting payments and a merchant acquiring bank. With a merchant account, businesses can accept debit and card payments on-site.

How Does A Merchant Account Work?

Small businesses that use merchant accounts can accept online payments from customer credit cards. But what is the process really like? How does a merchant account work, and how many steps does it take to accept card payments with a merchant account?

Typically, the whole cycle begins with a credit card network, like MasterCard or Visa. A customer finds and purchases a product or service online with their card and, within minutes, their card processor relays their transaction to their card network.

Once a credit card processor sends over a customer’s transaction info to its network, that credit card network gets ready to route the transaction to the designated issuing bank. The issuing bank approves the transaction sent over the network and allows for transaction funds to be deposited into a merchant account.

Only after transaction funds are deposited into a merchant account can a merchant receive their funds in their business bank account. A merchant’s credit card processor sends funds to a business bank account from a merchant account, whereafter a merchant may finally collect and use their funds.

It often takes at least a few days for a credit card processor to transfer funds from a merchant account to a bank account. This process can last as few as two days and as long as fourteen days.

How To Get A Merchant Account

Obtaining a merchant account begins with your business needs. You must decide on the method you’ll use to accept cashless and credit card payments. Merchant services contracts can often last years, so you need to do your best to find a merchant account provider with whom you can negotiate a favorable contract that can provide you the equipment and information you require to accept cashless payments.

There are a few factors to consider as you search for a provider that’s best for you:

  • Processing Volume: Think about both your total revenue numbers as well as how you split that amount of money between types of credit cards. Once you’re certain of the amount, use it to predict your growth projections and account for how much you’ll be paying for a merchant account provider in six months as well as in five years.
  • Hardware: Consider the hardware requirements you have. You may be looking for mobile readers and POS systems, or you may simply want a traditional payment terminal or two in your store. Either way, you need to think about your hardware requirements when searching for a provider.
  • Features: Features such as custom integrations and loyalty rewards are available with certain account providers. You should be sure of the payments features you’re searching for before you sign a contract with a merchant account provider. Arm yourself with pointed questions for potential providers, like whether they offer loyalty programs or custom POS integrations.

Always remember to compare merchant account providers as you search for the provider that’s best for your business needs. The biggest things to look out for include the pricing structure (flat pricing, tiered pricing, interchange, etc.) an account provider uses; additional and non-upfront fees such as cancellation fees, statement fees, and batch fees for receiving, uploading, and settling statements; and the range of tools such as additional payment solutions like PCI compliance scans that or third-party gateways that a merchant account provider offers.

Finally, it’s time that you begin an application to send to a potential account provider and begin the underwriting process.

To start, fill out an online application or an application provided through an account provider’s sales member. Complete your application, submit it, and then wait while the underwriting process begins. Underwriters are responsible for thoroughly searching for your personal and business finances as well as conducting a credit check to determine whether you’re a suitable applicant. Application times can often be long and laborious, which is why it’s important to connect with an account provider whose sales representatives pay your application the complete attention to detail that it deserves.

6 Essentials You Need To Apply For A Merchant Account

There are a few things you’ll need handy to complete your account registration with a merchant account provider. Below are the six most important things you need to apply for a merchant account:

  1. Bank Account & Routing Info: One of the first steps to take when applying for a merchant account is separating personal and business finances. This provides to your potential account provider that you take the separation of personal and business expenses seriously and can mitigate potential liability relating to your personal assets.
  2. Financial Statements: Financial documents such as statements from your bank can prove to an account provider that you’re financially competent and responsible. In addition to bank statements, it’s common for businesses to furnish processing statements to prove to account providers their average amount of expenses processed over a given period.
  3. Business ID: Your business ID, more commonly known as an Employer Identification Number (EIN), is basically the social security number of your business. This is the number you’re required to use when filing your business’s taxes and is often a unique identifier that’s found on your tax and legal forms.
  4. License: Certain businesses may be required to possess one or more business licenses such as a sales tax registration license or special professional/occupational license. Verify with your potential merchant account provider whether specific business license requirements they impose on merchant account applications.
  5. PCI Compliance: PCI compliance guarantees a degree of protection for a customer’s payment information. Payment processors and merchants must both adhere to PCI compliance to apply the appropriate security measures when processing customer card data.
  6. Additional Supporting Documents: Additional supporting documents often include marketing materials, a business plan, your business’s return and shipping policies, and inventory reports. Merchant account providers require various amounts of supporting documents, so check with your account provider as to their supporting document requirements for applications.

Merchant Account Fees: How Much Should You Pay?

Setup fees are often the first charges customers need to pay. Setup fees are one-time only and are an upfront requirement to set up a new merchant account. Many providers offer a quote-based pricing structure for their setup fees; avoid this condition if possible and instead incur setup fees that are not based on a merchant account provider’s quote.

The majority of merchant account providers charge their customers a monthly fee. A general range of monthly maintenance fees can cover anywhere between $10/mo to $30/mo. These monthly fees are imposed to cover merchant account services your account provider offers and is often referred to as a merchant account statement or monthly fee.

On average, companies charge anywhere between 1.3% and 3.5% on each credit card transaction that you process. The amount that you pay in fees depends on your payment network, the card types you’re processing, and your business’s merchant category code.

The typical types of credit card processing fees and costs associated with a merchant account provider include:

  • Interchange Fees: The bank that’s responsible for issuing a credit card receiving interchange fees on your cashless and card transactions.
  • Payment Processing Fees: Payment processing fees are paid to the company accepting payment expenses and routing them to a payment network. Depending on the payment processing company, payment processing fees can include per-transaction fees; monthly service fees; and the price of hardware and equipment required to process transactions.
  • Assessment Fees: The payment network that routes your transaction info receiving assessment fees for each transaction that uses a payment network-related card. For example, Mastercard would obtain assessment fees on any transaction made that used a Mastercard credit card.

Alternatives To Merchant Account Processing

Several merchant account alternatives exist for businesses that have higher-than-normal requirements to obtain a merchant account or are unable to fit a merchant account provider into their current budget:

  • Third-Party Payment Processors: Third-party payment providers and payers like PayPal and Square are great alternatives for businesses processing online and offline credit and debit card transactions. This is a full-fledged alternative to merchant providers for businesses with a lower-than-average volume of payment transactions or that are trying to avoid the complexities of applications and underwriting that come with merchant account provider services. Third-party payment processors are convenient in that they offer the ability to process transactions via email and offline methods, but they can also come with per-transaction fees that can be pretty expensive. Look for a provider that offers a low cost for the payment options you’re interested in.
  • Money Transfer Services: Money transfer services such as Zelle and Venmo transfer money electronically from one location to another. Money transfer services are typically highly secure and favorable payment methods for larger businesses and corporations. Wire transfers are particularly secure because they deal with a bank or a trusted financial entity. However, the fees associated with these transfers are often high, especially for international transfers. What’s more, these transfers are non-reversible; they’re also anonymous, making it difficult to identify potential scammers and thieves.

Is A Merchant Account Right For Your Business?

A dedicated merchant account is often a good choice for businesses that want to have direct control over the way they accept card and cashless payments. If you’re considering getting a merchant account, you’ll actually be improving your infrastructure to accept card payments.

The majority of businesses both big and small are more than ready and willing to accept card payments. To that end, it’s often at least worth considering using a business merchant account. The inability to accept card payments, these days, is an impediment to business growth that simply can’t be overlooked.

If you’re ready to apply for a merchant account, take some time to look around and compare providers that offer you the best mix of costs, convenience, and range of services. Ensure beyond a shadow of a doubt that you’re getting what you paid for and aren’t exposing your business to unnecessarily complicated or lengthy contracts, early terminations, or cancellation fees and penalties.

How credit card processing works

The steps of credit and debit card payments processing explained

Business owners and managers tend to also be savvy consumers. That’s understandable since you routinely evaluate the many products and services needed to keep your business running smoothly.

Accepting credit cards enables you to get paid. That means you’ll need to select a credit card processing company. Credit card processors are important partners beyond the core service of processing payments, making it a critical business decision. You don’t need to become an expert, but you’ll be a better consumer if you know how credit card processing works.

To understand how payments processing works, we’ll look at the actors and their roles.

Who are the actors in a credit and debit card transactions?

  • A cardholder obtains a credit or debit card from an issuing bank, uses the account to pay for goods or services.
  • A merchant is any type of business that accepts card payments in exchange for goods or services.
  • A merchant bank establishes and maintains merchant accounts. Merchant banks allow merchants to accept deposits from credit and debit card payments.
  • Payment processors are companies that process credit and debit card transactions. Payment processors connect merchants, merchant banks, card networks and others to make card payments possible.
  • Issuing banks are the banks, credit unions and other financial institutions that issue debit and credit cards to cardholders through the card associations.
  • Card associations include Visa, Mastercard, Discover and American Express. The card associations set interchange rates and qualification guidelines, and act as the arbiter between issuing banks and acquiring banks among other vital functions.

What does credit card processing look like in motion?

Credit card processing works in three distinct processes: 

  1. Authorization
  2. Settlement
  3. Funding

First, let’s look at credit and debit card authorization process.

  1. The cardholder presents their card (swipe, tap, insert or other secure method i.e. contactless or by entering number for online credit card payment) to a merchant in exchange for goods or services. The request might originate from a credit card terminal or point of sale system in a brick-and-mortar store, an eCommerce website gateway, through mobile or in-app payment acceptance.
  2. The merchant sends a request for payment authorization to their payment processor.
  3. The payment processor submits transactions to the appropriate card association, eventually reaching the issuing bank.
  4. Authorization requests are made to the issuing bank , including parameters like CVV, AVS validation and expiration date.
  5. The issuing bank approves or declines the transaction. Transactions can be declined for insufficient funds or available credit, if the cardholder’s account has been closed or expired, if a payment is past due or other factors.
  6. The issuing bank then sends the approval (or denial) status back along the line to the card associationmerchant bank and finally to the merchant.

That’s the credit card authorization process in a nutshell. The card authorization process takes only a matter of seconds.

Now let’s look at the credit card settlement and funding process. This part is essentially how the merchant gets paid from the credit cards they accept.

  1. Merchants send batches of authorized transactions to their payment processor.
  2. The payment processor passes transaction details to the card associations that communicate the appropriate debits with the issuing banks in their network.
  3. The issuing bank charges the cardholder’s account for the amount of the transactions.
  4. The issuing bank then transfers appropriate funds for the transactions to the merchant bank, minus interchange fees.
  5. The merchant bank deposits funds into the merchant account.

The settlement and funding processes that used to take days are now almost always handled overnight, helping merchants get paid quickly.

That’s the simplified credit card payment process.

To learn even more about how credit card processing works, connect with one of our payments experts. We’re happy to answer your questions and walk you through the easy setup

What is credit card processing?

Most businesses rely on credit card processors to handle the details of accepting credit and debit cards. Credit card processing is a critical service—it ensures that customers can simply and quickly checkout.

This quick overview will help you understand the basics of credit card processing.

How does credit card processing work?

First, a customer presents their credit card information for payment. In store, consumers swipe magnetic stripe cards, dip EMV chip cards, tap contactless cards, and use digital wallets like Apple Pay mobile payments solution with their smartphones. Online, consumers present credit and debit cards through websites and apps via payment gateways. For phone orders, a virtual terminal offers secure credit card processing with a personal computer.

The payment information is then sent to the processor, who communicates with the customer’s bank via the appropriate card networks (such as Visa or Mastercard). The customer’s bank approves or denies the transaction. Approval is dependent on detailed verification including card number validity, sufficient available funds, and other factors.

That approval is sent back through to your payment processor and then finally back to your terminal or credit card reader. Approved transactions are batched for settlement typically at the end of each business day. Your customers’ accounts are charged for the transactions, with deposits then made into your merchant bank account.

How to evaluate credit card processors

Credit card processing is a complex service involving multiple moving parts, emerging technologies, payment networks, regulatory bodies and financial institutions. Like any service involving that level of complexity, credit card processors often vary in quality.

When evaluating potential credit card processors and merchant acquirers, ask questions about these four critical areas where the quality of payment processing matters most to your business:

  • Transaction speed
  • Strong uptime record
  • Fair and transparent rate structure
  • Access to helpful customer support

How is your transaction speed?

Customers appreciate the ability to pay with debit and credit cards and expect payment to be fast. Even short delays can cause big annoyances. You’ll want to choose a processor that’s proven to processes a large volume of transactions safely, accurately, and quickly.

What counts as “fast enough” is a bar that’s always on the rise. Today, credit card processors commonly complete transactions in under two-seconds.

Speed is important, though it isn’t everything. Some “friction” is good, like when it means keeping your business and your customers safe from fraud. Consumers are as concerned about security as they are about convenience. Your credit card processor should deliver both.

Look for proof of reliable uptime

Payment system outages are tough on businesses. A credit card processing outage means your business as good as shut down. It’s not just the downtime itself that hurts. Customers turned away during an outage may view your business as untrustworthy and/or inconvenient. That’s not the brand association business owners are looking for.

Credit card processing outages are rare, but all complicated interdependent systems are vulnerable to downtime. Ask about a credit card processor’s uptime history and the steps they’ve taken to minimize service interruptions. Reliable processors have solutions to help merchants stay operational during a network outage, as well as redundant servers to reduce their own risk of going down.

Transparent rate structures

Credit card processing can be complex, but the cost of that service should be clear and straightforward. The rates and fees you’ll pay depend on many factors, starting with the interchange category applicable to your business.

Interchange pricing varies based on the risk factors of different types of businesses. Though payment processors charge their own rates and fees on top of interchange, the cost of interchange is set by the card brands and is the same for all processors.

Rate structures are especially relevant if most of your transactions qualify as “small tickets” or “convenience purchases” according to the card brands. Quick service restaurants, convenience stores, and movie theaters are examples of businesses that may benefit from being placed on an interchange level that will charge a high-volume, low-ticket business differently.

When it comes to your money, transparency is essential. Ask for clear, concise and complete explanations of rates and fees from any credit card processor you may consider.

Customer support can make or break your day

As a business owner, you know that troubleshooting and maintenance is part of dealing with almost any complex system. Dealing with technology and managing complex systems is part of modern life. How essential service providers respond to those difficulties can make a big difference to you, and your bottom line.

When things go wrong you need to be able to count on support from real people who know how payments work, how they can go wrong and how to resolve them. You need to be able to speak to someone right away when you call—whether it’s in the middle of the night, or even on a busy holiday.

Not all credit card processors offer 24/7 live customer support. If your point of sale is mission critical, make sure that any processing company you consider offers the level of service your business demands. Leading payment processors keep track of their call waiting times and resolution scores, so be sure to ask about those as well.

We can help connect your business to payment solutions that work for you. To learn more about credit card and other payment processing, connect with one of our payment experts. First, we’ll take the time to learn about the way you do business. Then we’ll customize a solution that enables every payment: anywhere, anytime and anyway your customers want to pay.