What Is A Merchant Account? Your Guide To Merchant Account Processing, Fees, & Setup
Does your business need to start accepting credit card payments? Find out what a merchant account is, how you can set one up, and how much you'll pay.
It’s no secret that business owners who accept credit and debit card payments increase their sales and prevent the loss of potential customers. Although we’re a ways off from becoming a cashless society, these days, most consumers leave their checkbooks and cash at home.
Unfortunately, businesses can’t just begin accepting credit and debit card payments on their own. Business owners need to establish a relationship with a merchant services provider and obtain what’s called a merchant account to break into the world of card payment processing.
Once a merchant account has been set up, business owners can start accepting payments when customers use their credit cards to pay for a product or service. But what sets merchant accounts apart from other credit card processing solutions and how, exactly, do you integrate them with your business?
Let’s quickly cover what merchant accounts are, how they work, and why so many business owners use them to accept cashless payments.
Table of Contents
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
For a complete guide to negotiating a good merchant contract, download our interactive workbook, Never Overpay for Credit Card Processing Again.