It used to be that if you had an online store and wanted to accept credit card payments online, you needed to open a merchant account. Today, however, it’s possible to use a payment service provider to accept credit cards and other online payments without setting up a designated merchant account. This post will explain everything you need to know about payment service providers, what a merchant account is, and how you can start accepting online & credit card payments without one.
The main topics we’ll cover include:
What do you need to accept credit cards and online payments?
Difference between payment service providers vs. merchant account providers
What does a Merchant Account do?
Who are Merchant Accounts and Services for?
Benefits of accepting Payments via Merchant Account?
Downsides of accepting online payments without a Merchant Account
How to accept credit card payments without a merchant account?
Benefits of using third-party payment service providers over merchant account providers
How do I accept payments online as a small business without a merchant?
What do you need to accept credit card and online payments?
Almost every business today needs to know how to take payments & credit cards online. Ultimately, two critical services are needed, which include a payment gateway and payment processor aka a payment service provider.
A payment gateway is an online version of a point of sale (POS) terminal that enables merchants to accept online payments. It’s a front-end software application on a website that captures and sends credit card data to a payment or credit card processor and communicates approvals or rejections to merchants and their customers.
Payment processor (aka payment service provider)
The terms payment processor and payment service provider (PSP), are commonly used in online payments. However, they refer to the same thing. A payment processor (PSP) is a company that helps merchants accept and process online payments. They work to securely execute transactions behind the scenes by transmitting the card data received from a gateway between the merchant, issuing bank, and the acquiring bank. They also often offer other services in addition to payment processing, such as fraud, compliance, and the capability to accept multiple currencies and payment methods.
Difference between payment service providers vs. merchant account providers
A payment service provider is a company that provides merchants with the software and tools they need to accept, manage and facilitate online payments. They usually offer several value-added services, including opening a merchant account for merchants at acquiring banks. Instead of giving each merchant their own account, PSPs work on behalf of merchants, pooling hundreds or thousands of merchants under one merchant account with one identification number (MID).
On the other hand, merchant account service providers are a financial institution that provides a special type of bank account for merchants to accept online payments. Unlike a payment service provider, merchants get a separate merchant account and identification number (MID) when setting up a merchant account through a merchant account provider. Because banks take on the financial risk that comes with allowing a merchant to process online payments, qualifying for a merchant account usually involves an extensive vetting and risk assessment process. There are also monthly fees and also sometimes hidden fees that merchants need to be aware of.
What is a merchant account and how it works?
A merchant account for ecommerce is a particular type of business bank account (customer's issuing bank) that enables merchants to accept card payments such as: online debit, credit cards, and other online payments in order to conduct online transactions. When customers make a purchase, a merchant account holds the payments before depositing them into your actual bank account, which is the actual payment process. Once payments are approved, funds are transferred from your merchant account into your regular business account, where they can be accessed as needed.
Who are merchant accounts and services for?
A merchant account is for any business that needs to accept debit or credit card transactions for goods or services. However, contrary to popular belief, getting approved for a merchant account is not guaranteed and may be difficult for merchants with past bankruptcies or black marks on their credit reports.
Can I accept credit card payments without a merchant account?
Merchant accounts used to be a requirement for every online merchant in the past. However, this is no longer the case. Merchants that prefer to accept credit card payments without a dedicated merchant account can do so by signing up with a payment service provider (PSP).
How to accept credit card payments without a merchant account
Payment services providers are a good option for merchants that don’t want to set up a designated merchant account through a merchant service provider. Payment service providers (PSPs) work like merchant service providers. They enable merchants to accept online payments and hold onto the money from credit card transactions. They handle the entire journey of what payment processing is too. Generally, the process of using a payment service provider is pretty straightforward. Everything can be done online, from the sign up to managing your account.
Summarized table of PROs and CONs
Benefits of accepting payments via merchant account?
Opening a merchant account can involve a somewhat detailed process, but putting in the effort can pay off in the long run. Here are three critical benefits of having your own merchant account.
Merchant accounts offer more reliable account stability, which means there is less risk of termination, holds, or freezes. This is important because having your account terminated or frozen can severely impact your cash flow and even lead your business to shut down.
Merchant accounts acquired through a financial institution usually offer more flexible pricing and can be better customized to your business needs and size.
Negotiable volume limits
When it comes to processing restrictions, merchant accounts tend to provide a decent level of flexibility. They usually offer negotiable limits on transaction size and processing volume, which can be especially handy if you’re a new or fast-growing business.
Downsides of accepting online payments without a merchant account
Payment service providers allow merchants to avoid setting up their own individual merchant account. But this convenience comes with a few significant downsides
Merchants face a higher risk of sudden holds, freezes, or terminations without a dedicated merchant account. The impacts of these events should not be underestimated. For example, during a freeze, merchants cannot process new debit or credit card transactions or access any of the funds from recent transactions until the freeze is lifted.
Payment service providers are typically a little different from financial institutions regarding pricing. Although some custom plans are available for larger businesses, prices are usually fixed from the start.
Limited processing volume
Unlike a separate merchant account from a financial institution, businesses that use a payment service provider to accept payment online without a designated merchant account face much stricter limits on transaction sizes and volumes, which may not suit every type of business.
Benefits of using third-party payment service providers over a merchant account
Third-party payment service providers are set up to help business owners accept payments online more easily. The benefits of using third-party payment service providers include:
Payment service providers usually offer a simple setup process and instant approval that is quicker than most merchant account options.
Payment service providers are usually cheaper than merchant accounts to start up and maintain. They often don’t have a monthly fee and don’t require a merchant to process a minimum number of transactions in a month.
Unlike merchant account providers, payment service providers usually offer several value-added services like fraud management, PCI compliance, and merchant tools such as customer insights, reporting, and analytics.
Better customer experience
Payment service providers offer merchants the ability to provide multiple payment options and easily add new ones to stay up to date with customer payment preferences and provide the most convenient experience.
How to find a good third party payment processor?
Choosing the right third-party payment service provider is an important decision, but it can be difficult because there are a lot of options out there. Once you understand your business needs and what markets you operate in, you can know what payment methods and solutions your chosen provider must support. Fees, security and compliance, and the level of support are vital issues to know about. It's also essential to understand each provider's capabilities for customizing the checkout process and which merchant tools they offer to help you optimize and run your operations more smoothly.
What is the best way to accept payments & credit cards for small businesses without a merchant account?
Using a payment service provider is the best way to accept credit cards for small businesses. By using a payment service provider, merchants don’t have to worry about setting up a merchant account and also get access to additional services that can help them manage and grow their business. This can also help small business owners to accept credit card transactions and debit cards with the help of the online payment processing companies.
Online payment alternatives
While debit and credit cards are popular in many countries around the world. They certainly aren't alone. Over the last decade, hundreds of other alternative payment options have become available. For merchants, it's critical to choose a provider that offers the popular payment methods in each market of operations to enable customers the most convenient and frictionless payment experience possible. Alternative payment methods that are popular with many consumers and merchants include:
- Google Pay
- Apple Pay