What Is a Merchant Account?

Introduction to Merchant Accounts

Merchant accounts serve as an intermediary between a business’s payment gateway and its business bank account. This financial service agreement allows businesses to receive funds from card transactions, ACH payments, or other cashless options. 

For example, when you go to an ecommerce store and make a purchase, you aren’t making a direct transaction with the store; you are requesting that your credit card pay a merchant account, such as Stripe. The merchant account then pays the store.

Whether it’s a small startup or a large enterprise, having a merchant account facilitates the handling of payments from debit and credit cards, a necessity in today’s digital marketplace.

Why Do Businesses Need Merchant Accounts?

Businesses need merchant accounts to offer flexible payment options to their customers, which can help increase sales. 

Unless you are meeting your customer directly, you cannot accept cash – a merchant account provides businesses with the ability to accept payment from their customers immediately, without cash, through the merchant account intermediary that ensures these transactions are handled smoothly and securely.

How Do Merchant Accounts Work?

Merchant accounts work by partnering with a payment processor who handles the communication between various financial networks. 

When a customer pays with a card, the transaction is first authorized by the card issuer, processed through the merchant account, and then the funds are deposited into the business’s bank account, usually within a few days:

1. The cardholder presents their card for payment to the merchant.
2. The payment is authorized through a payment gateway, which encrypts and securely transmits the transaction data.
3. The merchant account provider processes the transaction and requests money from the customer’s bank.
4. Once authorized, the funds are settled and transferred to the merchant account.
5. The merchant account transfers the funds to the business’s bank account.

Types of Merchant Accounts

High-risk merchant accounts are designed for businesses with a higher risk of chargebacks, fraud, periodic sales spikes, or regulatory issues. Low-risk merchant accounts are designed for businesses that have a consistent volume of sales, low returns/chargebacks, and are in well-established industries. 

If a high-risk business uses a low-risk merchant account, they may experience:

• Violation of terms
• Increased scrutiny
• Chargebacks and penalties
• Legal consequences

To avoid these issues, businesses must use the appropriate merchant account type for their industry. Using a low-risk merchant account for high-risk transactions can lead to various issues, such as violation of terms, increased scrutiny, chargebacks and penalties, and legal consequences.

Here’s a breakdown of the types of merchant accounts in each category:

Low-Risk Merchant Accounts

• Retail Merchant Accounts: Typically considered low risk due to physical card-present transactions, which usually have lower fraud rates.
• Internet Merchant Accounts: While some online businesses might be considered high risk, others with secure systems and low chargeback rates can be classified as low risk.
• Mobile Merchant Accounts: These can be low risk if used in low-risk industries and are equipped with appropriate security measures.

High-Risk Merchant Accounts

• High-Risk Industries: Certain industries are generally considered high-risk due to high chargeback rates, legal regulations, or the potential for fraud. These may include adult entertainment, gaming, travel, etc.
• Mail Order/Telephone Order (MOTO) Merchant Accounts: These can be high-risk due to a higher likelihood of fraud, especially when the card isn’t physically present.
• Offshore Merchant Accounts: Offshore accounts can be deemed high risk due to their association with offshore banking, which might raise concerns about compliance and regulation adherence

Benefits of Merchant Accounts

Merchant accounts are not just a means for businesses to accept non-cash payments; they offer a range of benefits that can contribute to the growth and security of your business. Understanding these advantages can help businesses decide whether a merchant account is the right choice for their payment processing needs.

• Credit and debit card payments; this is a basic customer expectation and many markets don’t accept cash
• Increase sales and revenue due to convenience and the psychology of not physically handing over cash to a merchant
• Improved customer experience through faster and smoother customer experience
• Reduced fraud by having another experienced party (the merchant account) as part of the process

Credit and Debit Card Payment Acceptance

• Accepting credit and debit cards is almost a basic expectation from customers in many markets.
• Ensures no loss of sales due to the inability to accept certain payment methods.

Increased Sales and Revenue

• Card payments remove the limitation of cash on hand, often leading to increased consumer spending.
• Results in a higher average transaction value and greater sales and revenue.

Improved Customer Experience

• Merchant accounts facilitate a smoother checkout process with various payment options.
• Offers faster transaction times, enhancing the customer experience and encouraging repeat business.

Reduced Fraud

• Advanced security measures by merchant account providers to detect and prevent fraud.
• Features can include encryption, address verification services, and secure customer data management.

Increased Business Credibility

• Processing credit and debit card payments adds legitimacy and professionalism.
• Signals to customers that the business is established and trustworthy.

Merchant Account Fees

When a business decides to set up a merchant account, understanding the associated costs is crucial. These fees can vary greatly depending on the merchant service provider, the type of transactions a business processes, and the terms of the agreement. 

Below are the common fees that most businesses encounter with merchant accounts:

Monthly Account Fees

Most merchant account providers charge a monthly fee for the use of their services. This fee may cover account maintenance, customer service, account statements, and the technology required to process payments. Typically, these fees are from $10 to $50.

Transaction Fees

For every transaction processed through a merchant account, there is usually a fee involved. This can be a percentage of the transaction value, a flat fee, or a combination of both.

Typical transaction fees for merchant accounts range from approximately 1.46% to 2.96% per transaction for the most popular credit card brands, with high-risk accounts possibly seeing rates from 3.49% to 3.95%.

The rate can vary based on the type of card used (debit vs. credit), whether the card is present at the time of the transaction, and the perceived risk of the transaction.

Chargeback Fees

A chargeback occurs when a customer disputes a charge and the funds are returned to the cardholder. Merchant account providers often charge a fee for this process due to the administrative work involved in disputing the chargeback. 

These fees can be significant, especially for businesses with higher rates of returns or disputed transactions.

Gateway Fees

If a business processes online transactions, it typically uses a payment gateway, which may come with its own set of fees. Gateway fees are charged for the service of securely transmitting transaction data from the merchant to the payment networks and back.

Understanding these fees is important for businesses to manage their operating costs effectively and choose the right merchant services provider that fits their budget and transaction needs. 

For instance, some providers may offer lower transaction fees but higher monthly fees, or vice versa, so businesses need to assess which fee structure aligns best with their sales patterns and revenue model.

How to Choose a Merchant Account Provider

Selecting the right merchant account provider is a critical decision for any business that wants to accept credit and debit card payments. 

A suitable provider can offer competitive fees, reliable customer support, and services tailored to your specific business needs. 

Here’s a step-by-step approach to choosing the right merchant account provider:

Consider Your Business Type

• Determine whether your business is online, brick-and-mortar, or mobile.
• Consider how many transactions you process and the average transaction amount.
• Identify your industry – working in a high-risk industry can affect your merchant account options and fees.

Compare Fees and Services

• Research and create a list of merchant account providers that cater to your type of business.
• Look for transparency in pricing and compare the fees across different providers.
• Determine which additional services are provided, such as payment gateway integration, POS systems, or fraud protection.

Read Customer Reviews

• Use third-party online platforms to find reviews from businesses similar to yours.
• Pay attention to repeated complaints or praises that could indicate the provider’s strengths and weaknesses.
• Find responses from the provider to customers and note their helpfulness and tone.

Ask About Support Options

• Check if the provider offers support via phone, email, or live chat.
• Try reaching out to their support team to see if they’re timely and knowledgeable.
• Make sure their customer service is available during your business hours (or 24/7 if necessary).

By meticulously evaluating each of these factors, you can choose a merchant account provider that not only meets your current needs but can also grow with your business.

How to Apply for a Merchant Account

Applying for a merchant account is a process that requires preparation and an understanding of what merchant service providers are looking for. 

The application process can vary slightly from provider to provider, but most will require detailed information about your business and its financial health. 

Below is a guide to help you navigate the application process.

What Information Do You Need to Apply?

Some of the typical information you may need to apply include:

• Your business name, address, tax ID, and detailed information about your company’s structure and ownership.
• Recent financial statements or processing statements if you’re already accepting card payments
• Estimated average transaction amounts and monthly sales volumes
• A clear explanation of your products or services, your business model, and your delivery method
• Your business bank account information (this is where the funds from the processed transactions will be deposited)

How Long Does the Application Process Take?

The initial application can often be completed in one sitting if you have all the necessary information on hand.

After you submit your application, the provider’s underwriting team will review it. This can take anywhere from a few hours to several days, depending on the provider and complexity of your business.

Once approved, setting up your merchant account to begin processing payments can vary from a day to a couple of weeks.

How Do I Get Approved?

Providers look at several aspects of your business, including your:

• Credit History: Providers will look into the credit history of the business and possibly the owners.
• Business Type and Industry: Certain industries are deemed high-risk, which can make it more difficult to get approved.
• Sales Volume and Transaction Size: High volumes and transaction values can increase the chance of approval but may also affect the fees.
• Previous Accounts: Your history with other accounts, including any terminations, fraud history, or excessive chargebacks, will be considered.
• Compliance and Legal Considerations: Ensure your business is in compliance with all relevant laws and regulations, as this will be a part of the approval process.

By thoroughly preparing and understanding what’s required for your account application, you can improve your chances of a quick and successful approval process.

Merchant Account Troubleshooting

Running into issues with your merchant account can be a stressful experience, especially when it affects your business transactions. Knowing the common problems and how to address them can minimize downtime and maintain your business operations smoothly.

Common Problems

• Transaction Declines: Customers’ cards may be declined for various reasons, such as entering incorrect information or insufficient funds.
• Funds Hold: Sometimes, a merchant account provider may hold funds due to suspicious activity or a sudden increase in sales volume.
• Technical Issues: Problems with hardware, such as a card reader, or software, like the payment gateway, can prevent transactions from being processed.
• Account Holds or Freezes: If a provider suspects fraudulent activity, they may place a hold or freeze on the account until the issue is resolved.
• Settlement Delays: There might be delays in funds being settled into the merchant’s bank account, which can disrupt cash flow.

Resolving Account Problems

• Verify the Issue: Confirm whether the problem is with your equipment, the card being used, or the merchant account itself.
• Contact Customer Support: Reach out to your merchant service provider’s customer support team for assistance with account-specific issues.
• Update Equipment: If the problem is technical, ensure all your equipment is updated and functioning correctly.
• Review Account Activity: If there are funds holds or account freezes, review your recent transactions for any unusual activity and be prepared to discuss this with your provider.
• Maintain Communication: If there’s an issue like a funds hold due to a spike in sales, communicate with your provider about the cause of irregular activity.

Where to Get Help

• Merchant Service Provider: The first point of contact should be your merchant service provider’s customer support line or helpdesk.
• Technical Support Lines: For hardware or software issues, use the technical support or helplines provided by the equipment or software providers.
• Online Resources: Forums, FAQs, and knowledge bases can provide quick solutions to common problems.
• Professional Networks: Other business owners or professional networks may offer advice based on their own experiences with similar issues.
• Financial Advisors: For complex issues related to funds and cash flow, a financial advisor or accountant who understands merchant services can be helpful.

Proactively managing your merchant account by understanding common issues and how to resolve them can save your business time and money. 

Establishing a good relationship with your provider and knowing when and where to seek help is also important in navigating account problems effectively.