The Complete Guide To Finding An Online Merchant Account
So you’re looking to take advantage of everything online selling has to offer and enter the world of eCommerce? Good for you! Of course, this will require you to be able to accept online credit card payments. To do this, you’ll need an internet merchant account.
Sounds simple enough, right? If only! Not all merchant accounts are created equal. When choosing an internet merchant account for your eCommerce business, you’ll need to understand how a merchant account interacts with the other elements necessary for selling online, such as payment gateways, payment processors, and shopping carts (not the kind you push around). Some services combine one or more of these elements, but it’s still important to distinguish these elements from one another.
Confused yet? Don’t worry — we’ll spell it all out for you!
Table of Contents
- What Is An Internet Merchant Account?
- What’s A Payment Gateway?
- PCI Compliance With Online Merchant Accounts
- How Much Does It Cost To Open An Online Merchant Account?
- How To Open An Internet Merchant Account
- Features To Look For In An Online Merchant Account
- Internet Merchant Account FAQs
- How To Choose The Right Online Merchant Account Provider For You
What Is An Internet Merchant Account?
A merchant account is a specific type of business account into which your customers’ money is deposited after they use their credit or debit card to make a purchase from you. After these payments are verified, the money is transferred to your business bank account, which is entirely separate from your merchant account. You have no control over the merchant account — it is merely the middleman between your customers’ money and your business bank account.
Why include this middleman at all? Wouldn’t it be easier to simply accept credit and debit card payments and get the funds deposited directly into your business bank account?
Unfortunately, credit card processing doesn’t work that way. When your customer pays you, the transaction ultimately still involves two other major parties. One is the issuing bank, which grants the customer cards and is responsible for collecting any payments from the customer. The other is the acquiring bank, which requests and collects payments from the issuing bank and then releases them to the merchant. The acquiring bank has to ask for the funds from the issuing bank, which has to verify that the customer has those funds available and then transfer them, making for a complicated payment process. The merchant account essentially functions as a holding space during this process or even as a sort of line of credit.
Internet Merchant Account VS Traditional Merchant Account
Even though the number of internet merchants has grown and online sales are booming, many traditional merchant account providers still focus primarily on in-person transactions and the tools those business owners need. But as an online merchant, your needs are very different. An internet merchant account, or online merchant account, focuses on eCommerce tools and services.
At the very least, this includes a payment gateway; some online merchant account providers may offer you an option for a shopping cart or online store. Additionally, you should expect your internet merchant account to be compatible with leading software vendors in the eCommerce space, including shopping carts, subscription software, and marketing tools.
Merchant Account VS Third-Party Processor
Selecting a payment processor means choosing between two different categories of providers: direct processors (the providers of merchant accounts like the kind described above) and third-party processors (also called aggregators or payment service providers), such as PayPal, Stripe, and Square.
Setting up an account with a third-party processor is simpler and quicker than setting up an internet merchant account. That’s because third-party processors aggregate all their merchants into one huge merchant account instead of giving each merchant their own account.
This means that merchant accounts offered by direct processors typically provide you with a higher level of account stability. This is due to the extensive underwriting and risk assessment you undergo to get your merchant account. With third-party processors, you undergo very little underwriting beforehand. Therefore, the processor scrutinizes your activities much more intensely, making it more likely that you’ll experience an account hold or termination.
The flip side of this is the cost advantage of third-party processors, which typically offer flat-rate pricing and pay-as-you-go agreements. There are few (if any) monthly or annual fees to pay, and you don’t need to meet a monthly minimum in card transactions, making it easy to start taking card payments with no business history.
With direct processors, you’ll be paying monthly and potentially annual fees, you’ll need to be processing at least $5K-$10K per month in card transactions, and the pricing is not normally flat-rate — your rates may vary depending on your business model and industry. Many merchant accounts still require you to sign a multi-year contract. Still, above that $10,000/month mark, merchant accounts do offer cost savings, and as your volume increases, you’ll qualify for even more discounts.
For more on third-party processors and how they stack up against traditional merchant accounts, check out these articles:
- The 9 Best Online Credit Card Payment Processing Services For Small Businesses
- The Secret To Accepting Credit Cards Without A Merchant Account? Finding A Great Third-Party Payment Processor
What’s A Payment Gateway?
We’ve established what an online merchant account is, so let’s move on to payment gateways.
While a merchant account is where your payment processor sends your customers’ payments before they are transferred to your business bank account, a payment gateway connects your online store to your payment processor, facilitating your customers’ online transactions.
Payment gateways enable online transactions like so: the gateway integrates with your eCommerce store to securely capture the payment details for customer transactions. The gateway then routes that information to your payment processor or acquiring bank, which assumes control of the payment process. The gateway will then send an approval or decline message back to the merchant based on whether the processor/acquiring bank accepts the payment. Read our article about how payment gateways work for a more in-depth explanation.
PCI Compliance With Online Merchant Accounts
PCI compliance safety practices are essential for merchants. If your website merchant account provider deems you to be PCI non-compliant, you’ll face a PCI non-compliance fee of around $30 per month until your account is compliant. And if your non-compliance results in a data breach, you can be fined anywhere from $5,000 to $500,000!
PCI compliance is mandatory for any internet merchant. For most small businesses, that means being Level 4 PCI compliant. Level 4 is the PCI standard that applies to businesses up to a certain size — it’s the lowest bar to clear. Larger businesses must comply with higher PCI standards, with Level 1 standards applying to both the largest businesses and businesses that have suffered a data breach.
Most third-party processors manage PCI compliance for you. With an internet merchant account, you’ll have to handle some paperwork, so make sure your provider offers PCI-compliant software. Your provider should also provide assistance and/or guidance for completing quarterly network vulnerability scans and Self-Assessment Questionnaires (SAQs). The best online merchant accounts offer features that reduce your workload for maintaining PCI compliance. Read our comprehensive piece, The Quick Guide To PCI Compliance For Small Businesses: What You Need To Know & How To Become Compliant, to learn more.
How Much Does It Cost To Open An Online Merchant Account?
When choosing an internet merchant account, you need to understand the different pricing models offered by payment processors. There’s the flat-rate pricing model preferred by third-party processors, interchange-plus pricing (our preferred pricing model), and membership pricing. There’s also tiered pricing, but we warn against it because it disadvantages merchants.
Here’s a comparison chart that details the differences between these models.
|Pricing Model||Flat-Rate Pricing||Interchange-Plus Pricing||Membership Pricing|
|Definition||Pay a fixed rate for each transaction||Pay an interchange fee (set by the card networks) + a markup (set by the processor)||Pay a single monthly subscription fee + a flat per-transaction fee & interchange fees (usually)|
|Best for||Lower-volume merchants||Mid- to high-volume merchants||High-volume merchants|
|Sample pricing||2.9% + $0.30 per transaction||Interchange + 0.20% + $0.10 markup per transaction plus assorted monthly fees||Single monthly fee + interchange fees (with no markup) per transaction|
|Providers using the model||Square, PayPal||Dharma, Helcim||Payment Depot, Fattmerchant|
For most small businesses, using a third-party processor with flat-rate pricing (such as Square or PayPal) may be more affordable than using a full-service online merchant account. Of course, this entails a much greater risk of having your account frozen or terminated, which is, in itself, a very costly thing to happen to any business.
One factor affecting what your internet merchant account will charge you is the fact that CNP (card-not-present) transactions, including online purchases, cost more to process than in-person transactions do. That’s because the chance of chargebacks and fraud is higher with transactions where the card is not present. This gets factored into the cost of processing each payment.
Other fees you may or may not have to pay when selling online (depending on your processor and your feature needs) include:
- PCI compliance fees
- Payment gateway fees
- Fees for ACH acceptance and/or other alternative payment methods
- AVS checks and other fraud monitoring fees
- Monthly minimum (we typically recommend not using processors that charge a monthly minimum)
To learn more about the complex and relatively opaque world of internet merchant account pricing, read our Complete Guide To Merchant Account & Credit Card Transaction Fees.
How To Open An Internet Merchant Account
Now that we’ve discussed the types of website merchant accounts available and the pricing models used by different providers, let’s go through the steps you’ll take to open a merchant account online.
- Select the credit card brands you want to accept.
- Determine the pricing model that best fits your business (flat-rate, interchange-plus, etc.).
- Look for the merchant services provider that meets your needs.
- Get your eCommerce site ready to sell.
- Get all the required documentation ready.
- Submit your application to your chosen processor.
Essential Information & Documents For Opening An Internet Merchant Account
When applying for internet merchant account services, you’ll need to have some documents and other information ready to present to your prospective account provider to demonstrate your readiness to start accepting payments.
- Certificate of Incorporation
- Certificate of Incumbency
- Documents detailing your company structure, including company directors and owners
- Your company’s location, as proven by a bank statement, rental agreement, or another official documentation
- ID copies for your company’s owners and directors
- Your business plan
- Your live website (including your business’s terms and conditions)
- A description of the products and/or services you offer
- Your suppliers’ details (if applicable)
- Your delivery process (if applicable)
Features To Look For In An Online Merchant Account
Let’s go through some of the features that may be included in your internet merchant account package.
When you use a third-party processor, the service typically includes a payment gateway. With direct internet merchant accounts, you may have a choice of several gateway options depending on the features you need. Authorize.Net is one of the most widely available (and widely compatible) payment gateways, but it’s not the only option. In fact, your merchant account online may offer its proprietary gateway to ensure a seamless experience.
Some providers will include the gateway as part of your standard online merchant account fees; others will tack it on as a separate charge. And some internet merchant accounts might charge a fee for a gateway only if you opt to use something other than their proprietary product.
Multiple Payment Methods
We’ve established that you’ll want to be able to accept credit and debit cards. However, there are other payment methods your customers may want to use, and you want to be able to accommodate them. From mobile wallets on the web (such as Apple Pay and Google Pay) to ACH payments to Click To Pay, the more payment methods your payment gateway (and payment processor) supports, the better.
Global Payment Support
Some internet merchant services only accept payments in USD. If you expect to be able to attract any international business, that won’t be good enough. Thankfully, many providers can set you up with a multicurrency eCommerce merchant account so that you can expand your global reach. Just know that you’ll likely pay currency conversion fees (if they aren’t passed to your customers). PayPal and Stripe do very well in this regard, and Stripe supports many localized payment methods across Europe and Asia.
Some processors offer dynamic currency conversion (also referred to as localized currency displays). That means your website will automatically convert the price from your default currency to whatever currency is most common in the customer’s region. This improves the shopping experience for international customers, potentially increasing your sales.
Included Shopping Cart (Or Other Software)
An online shopping cart integrates with your website to facilitate eCommerce. The shopping cart enables your customers to look through your available products, select different product options (size, color, etc.), select the quantity, and more. Most merchant accounts can be integrated with major shopping carts, but if you can find one that includes a good shopping cart already, you’ll save money.
Other features to look for include a customer credit card vault that allows you to store your customers’ card information securely while keeping it off your own equipment and subscription tools that let you create and manage customer subscriptions. Stripe is an example of a processor with built-in subscription tools and a card vault. You can also opt for a third-party provider to get recurring billing functions.
Processors with integrated developer tools (such as Stripe) allow developers to use APIs (application programming interfaces) to integrate the payment platform using various programming languages. For the business with developer talent, integrated developer tools can help you build custom solutions for your eCommerce outfit. Third-party processors typically excel in this area, but online merchant account providers can hold their own, and many gateways offer tools to help with customization as well.
Good customer service and availability are critical in an internet merchant account. Your ability to do business relies on all your systems working correctly 24/7, so reliability and quick response times are crucial. Do some research on providers to weigh the experiences of other online merchants when dealing with any issues that pop up, and make sure that the available support channels jibe with your preferences.
Internet Merchant Account FAQs
How To Choose The Right Online Merchant Account Provider For You
We know we’ve just hit you with a boatload of information. If you’re feeling overwhelmed, don’t panic! Merchant accounts are Merchant Maverick’s original specialty, and we’re here to help you delve into the essence of merchant account pricing, features, and provider options. We’ll also warn you about the practices and services that should be avoided.
Here are some articles to help you learn more about merchant account options, features, and more:
- The 9 Best Online Credit Card Payment Processing Services For Small Businesses
- The Best eCommerce Merchant Services & 4 Essential Features For An eCommerce Merchant Account
- How To Use A Payment Gateway To Process Credit Card Payments
- The Complete Guide To Processing Payments Online: Website Credit Card Processing, Invoices, & More