October 3, 2019 12:00 PM PT

What is a Merchant Account

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Accepting credit cards requires more than a business account. Find out why you need a merchant account.

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As a business owner, it's essential that you're able to accept credit cards and debit cards. To do so, you'll need to sign up for a card processing service. You have two options:

  • A merchant account, or
  • A third-party payment service provider

Read more about the differences here.

A full merchant account provider is usually the better option for more established businesses with a steady cash flow. It usually offers more account stability, more features, and better customer support.

Read on to learn what exactly is a merchant account and how you can get one.

What Is a Merchant Account?

A merchant account is a type of bank account that allows you to accept credit and debit card payments.

When you take a card payment from customers, the funds are first deposited into the merchant account. From there, the money is then transferred to your business bank account (usually in 1-2 business days).

You don't actually have access to this merchant account - thus, it's just a "holding account" for your funds.

When you sign up with a merchant account provider, you'll also get other services, such as:

  • Credit card processing
  • Payment gateway
  • Equipment (some will provide for free)
  • PCI compliance assistance
  • Tax reporting assitance
  • Customer service

Typically, merchant accounts require underwriting to approve you as a client. So it's best for established businesses with high processing volume.

Is a Merchant Account the Same as a Business Account?
A merchant account is strictly an account to hold your credit card earnings until the merchant account provider transfers the funds to your business bank account.

A business account can be any type of account held with a bank, including checking accounts or loans.

How Merchant Accounts Work

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The merchant account is the bank account that holds your credit card funds. You'll also need a payment processor, which acts as the "middleman" to connect you and the financial institutions.

Usually, you'll get both from your merchant account provider, but they are two separate services.

Here's how it works:

  1. Customer pays with a credit card in-person or online.

  2. You send the information to the payment processor.

  3. The payment processor sends the information to the card association (Visa, Mastercard, etc.) and on to the issuing bank.

  4. The issuing bank approves or denies the transaction and sends the information to the card processor, which then sends it to the merchant service provider.

  5. The funds go into your merchant account, if approved. In 1-2 days, it'll be transferred to your bank account.

How to Get a Merchant Account

Getting a merchant account requires multiple steps and has strict underwriting guidelines. The merchant account provider needs to assess what kind of risk you present by accepting you as a client. It needs to verify that your business is legit. This is to protect themselves from potential fraud.

The application for a merchant account is usually pretty simple. You'll need to provide your SSN, business license (if required for your type of business), business bank account, and other general business information.

You may also need to submit supporting documentation, such as your business plan, return policy, guarantees and warranties, inventory reports, previous processing statements, etc.

During the approval process, some of the things the provider may look at include:

  • Your personal credit history
  • Type of business (some are considered high risk)
  • How long you've been in business
  • Billing policy
  • Previous processing history
  • Chargeback history

Businesses deemed to be high-risk may undergo further scrutiny. Not all providers will work with high-risk merchants. And for those that do, you may be charged higher processing fees to offset the risk.

How Long Does It Take to Get a Merchant Account

Each merchant account provider has different turnaround times. Since there is an underwriting process, you won't get an instant decision.

If you have good credit and your business is easily verified, you could be approved in as little as one day. You'll be set up with a merchant account and can start accept online payments almost immediately. You can start taking in-person payments as soon as you get your equipment.

If you have bad credit, your business is more complex, or is considered high-risk, it could take a few weeks.

What Does a Merchant Account Cost?

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Different merchant account providers have different fee structures. The provider needs to earn a commission from each transaction you process. This can either be a percentage or a fixed fee each sale.

The two most common pricing structures for merchant accounts are:

Interchange-Plus Pricing
You'll pay the wholesale fee (called interchange) plus the provider's markup. The interchange fee is a non-negotiable rate different for each type of debit or credit card transaction.

This pricing plan often comes out to be the best value. It works for most types of businesses. However, the provider may tack on other fees for services like payment gateway, virtual terminal, etc. One example is Payline Data.

Subscription Pricing
You pay a small per-transaction fee for each transaction, and then a flat monthly subscription fee for using the service.

This pricing model could be good for large-volume businesses, as your savings would justify the subscription price. One example is Payment Depot.

Besides the processing fee, you might also pay a variety of other fees, including:

  • Setup fees
  • Monthly maintenance fees
  • Payment gateway fee
  • Virtual terminal fee
  • PCI compliance fees
  • Chargeback fees
  • Statement fees

It's important to ask about the fees and understand the terms. Oftentimes, you can negotiate the commission rates with the salesperson, especially if you're a high-volume business.

If negotiating and understanding the fees overwhelm you, consider a payment services provider, which offers simple flat-rate pricing.

What Is the Difference Between a Merchant Account and a Payment Services Provider?

Many small businesses don't need a full-fledged merchant account, which are hard to qualify for and costly to set up. Instead, they use a payment services provider (PSP), also called a third-party processor.

Instead of getting your own dedicated merchant account, PSPs group multiple merchants together into one merchant account. Your transactions are processed in a batch along with those of many other businesses.

For smaller businesses, it's easier to get set up with a payment service provider. There's no underwriting required. You can get approved instantly and start taking credit cards right away.

Payment service providers usually charge a flat-rate pricing, with month-to-month billing and no setup fees. Some may charge a monthly fee for certain services and features.

But PSPs do have some drawbacks.

  1. You'll run the risk of frozen funds and canceled accounts. Large transactions or selling high-risk products are two of the most common ways to get your account canceled.

  2. PSPs lack in quality customer support. Many companies, like Square, only offer online customer service with no phone support.

What Is the Difference Between a Merchant Account and a Payment Gateway?

A payment gateway is necessary for taking credit cards online. It transfers the customer's credit card information from your website to the payment processor.

Many merchant account providers have their own payment gateway, or they'll set you up with a third-party gateway (such as Authorize.net). The payment gateway may be included for free as part of the service, or it may cost an extra monthly fee.

To accept credit card payments online, you need both a merchant account and a payment gateway.

To operate in-person, you don't need a payment gateway, but you still need a merchant account or payment service provider.

Choosing the Right Merchant Account

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When choosing the right merchant account for your business, consider what services you want:

  • Which pricing structure do you want?

  • Do you need a POS or do you have an existing system? What other hardware do you need?

  • Do you need a payment gateway or virtual terminal?

  • What credit cards do you want to process (Visa, Mastercard, AMEX, etc.)?

  • How will you accept credit cards (online, in-person, over the phone, invoice)?

  • How much do you estimate you will have in sales?

  • Do you want to handle PCI compliance yourself or have the merchant account provider manage it?

Knowing the answers to these questions will help narrow your search. For example, not all merchant accounts process AMEX cards.

Some merchant account providers strictly provide the account, but no hardware—you have to get your own from a compatible third party. Other merchant account providers supply the whole gamut, including the POS, payment gateway, and virtual terminal, while others just provide the account.

Decide what you need before applying
If you are a new business, you may want to consider an all-in-one system so that your POS system and credit card processing integrate.

If you are an established business and have back-office processes in place, look for a merchant account that can integrate with what you already have in place.

Merchant Account Providers to Consider

Lastly, here are some of our top picks for merchant account providers.

Payline Data
Payline Data has an Interchange-Plus pricing model that works well for most businesses. It offers month to month billing with no cancellation fees.

  • Online: Interchange + 0.3% + $0.20
  • In-store: Interchange + 0.2% + $0.10
  • $20 monthly fee for online
  • $10 monthly fee for in-person

It also has a reputation for dealing with high-risk businesses. Payline Data is willing to take on the risk and work with you to find the best options for your unique needs.

Payment Depot
Payment Depot is great for high-volume businesses. It has a unique membership plus fixed-rate pricing that can come out cheaper than other pricing models. The basic plan costs:

  • $49 per month
  • Interchange + $0.15 per transaction

If you process higher volumes, you get a discount on the per-transaction fee. The membership fees includes payment gateway and virtual terminal.

Dharma offers low pricing best for mid-large companies processing more than $10,000 per month.

  • In-store: Interchange + 0.15% + $0.07
  • Online: Interchange + 0.20% + $0.10
  • $20/month for retail, online, restaurant

Note that markup for AMEX transactions are higher.

Dharma doesn't require a contract or have monthly minimum requirements. Each account includes free access to a payment gateway from MX Merchant, which also includes a virtual terminal.

Bottom Line

A merchant account is the best option for established businesses with steady cash flow. They offer full service and better account stability. Their pricing structure will usually come out to be the most affordable option if you process a large number of credit card transactions.

If you decide to use a merchant account, do your research and get quotes from at least three providers. Be sure to pay close attention to the per-transaction fee, monthly fees, and any miscellaneous charges.

If your business is new or you only process credit cards occasionally, you may be better off with a payment services provider that offers pay-as-you-go pricing.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

More from CreditDonkey:

Credit Card Transaction Fees

How to Accept Credit Card Payments

Online Credit Card Processing

How to Accept Credit Card on Phone

Do you want to take credit card payments on your phone? Find out how to use your Android or iPhone as a mobile credit card reader.
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