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. Learn how to open a merchant account (including must-have requirements for small businesses).

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What Is a Merchant Account?

A merchant account is a "holding account" that allows you to accept credit card payments. The full amount of each sale minus any processing fees is added to this account after the close of business for the day.

The merchant service account then transfers that money to your business bank account after a required waiting period—usually 1-2 business days.

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 account.

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

How Merchant Accounts Work

A merchant account isn't the same as a payment processor. You may be able to get both from one company, but they are two separate services.

The merchant account is the bank account for your credit card funds. The payment processor is the "middleman."

Here's how it works:

  1. Customer pays for the product or service with a credit card at your business 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.

  5. The card processor sends the approval or denial information to the merchant services provider.

  6. The funds go into your merchant services account, if approved.

How Long Does It Take to Get a Merchant Account?
Each merchant account provider has different turnaround times. It will also vary between merchants, depending on the completeness of your application and the complexity of your business. The average turnaround time varies from a few minutes to a few weeks.

How to Get a Merchant Account

A merchant account requires multiple steps and has strict underwriting guidelines. Before you can apply, you need a business license (if required for your type of business) and a business bank account.

Once that's handled, ask yourself the following questions:

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

  • How will you accept credit cards (online, in-person, on-the-go)?

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

  • What hardware do you require and does the merchant account provider supply it?

  • Which pricing structure do you want: flat-rate or percentage pricing?

  • Do you need invoicing services?

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

  • Do you need a POS or other back-office services?

Knowing the answers to these questions will help narrow your search. For example, not all merchant accounts process AMEX cards and some only offer in-person or online transactions, not mobile card readers.

Some merchant account providers strictly provide the account, but no hardware—you have to supply the hardware from a compatible third party. Other merchant account providers supply the whole gamut, including the POS system, 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, you may want a merchant account that can integrate with what you already have in place.

What Does a Merchant Account Cost?

Merchant accounts aren't one-price-fits-all. You might pay a variety of fees, including:

  • Setup fees
  • Maintenance fees (monthly fee)
  • Transaction fees
  • PCI compliance fees
  • Chargeback fees

Some merchant accounts have complicated and lengthy agreements that make it hard to determine how much an account costs. Others have straightforward per-transaction pricing that's easy to understand.

It's important to ask about the fees, understand the terms, and negotiate the rates with the salesperson.

If negotiating and understanding the fees overwhelm you, consider a merchant account offered by a payment services provider.

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 or a third-party processor (you may also see it called Payment Facilitator—they all mean the same thing).

Payment service providers group multiple merchants together into one merchant account. Essentially, you become a sub-merchant on the account.

Many payment service providers (PSPs) operate on a month-to-month contract with flat-rate pricing and no setup fees. Some payment service providers charge a monthly fee in addition to the flat-rate pricing, so it's important to read the fine print carefully.

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 and Stripe, offer online customer service with minimal phone support.

Many payment service providers, like Square, offer instant approval for an account, allowing you to get set up and accepting credit cards within a matter of minutes.

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

A payment gateway is a secure method of transferring a customer's credit card information from your website to the payment processor.

A payment processor sends that information through the credit card network to the issuer of the credit card for approval. It works just like an in-person transaction, but you need the payment gateway to securely transmit the information.

In other words, a payment service provider provides end-to-end credit card processing services, which often include the payment gateway.

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.

Choosing the Right Merchant Account

Beyond the merchant account itself, you should consider what services you want:

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

  • Do you need a payment gateway, online credit card processing, or a virtual terminal for manual credit card processing?

Answering these questions can help you choose the right merchant account. If you will only process credit cards occasionally, you may be better off with a payment services provider that offers pay-as-you-go pricing.

If you are an established business with numerous or large credit card transactions, opting for a merchant account provider that offers competitive pricing and the services you need will be better.

Bottom Line

A payment services provider is a great option for a new business owner. Many PSPs grow with you, allowing as much scalability as necessary.

If you decide to use a merchant account, do your research and get quotes from at least three providers. You want a combination of low costs and value.

Be sure to pay close attention to the per-transaction fee, monthly fees, and miscellaneous fees charged by merchant account providers.

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 Processing Fees

How to Accept Credit Card Payments

Online Credit Card Processing

Payment Processing

Accepting credit cards involves a lot more than swiping a card and receiving payment. What goes on behind the scenes is called payment processing. Learn how it works and how to choose the right vendor in our guide.

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