November 24, 2021
Cash is becoming a thing of the past, as more and more people move to shopping online and paying via credit card. Even in brick and mortar stores, cash was only used in 13% of transactions in 2020, down from 27% in 2019. Whether you run an in-person or online business, in order to accept credit card payments you must have a merchant account and work with a merchant services provider.
In this article, we will explain exactly what is a merchant account, as well as how to get one. Here’s what you’ll learn:
You can think of a merchant account as a sort of holding account that sits in between your customers’ payments and your actual bank account. It is the place where the money sits after the customer clicks “pay now” and before the credit card issuing bank approves the payment. There is generally a payment gateway or payment services provider (such as Pay.com) that acts as the go-between between you (the retailer/merchant), the merchant account and the credit card company.
In most cases, you cannot accept credit card payments online without a merchant account, so this is a key part of setting up your business. There are different types and providers of merchant accounts, so it’s worth doing the research to understand exactly what you need and what makes the most sense for your business.
While a merchant account is a type of bank account, it is separate from your regular business account that you use for the transactions involved in operating your business. You are the owner of your own merchant account, but you cannot directly access the funds in it, as while they are in that account they do not yet “belong” to you. Once the payments are approved by the credit card issuer, then the funds can be transferred from the merchant account to your business account. These transfers can happen instantly or (as is more commonly done) on a weekly basis or other defined timeframe.
The best way to understand how a merchant account works is to think about what happens behind the scenes when a customer purchases a good or service from your website.
First, you must have a way to physically accept the credit card information from the customer. If you have a brick and mortar store, you can do this via a credit card machine that you can rent from a merchant service provider. To take orders over the phone, you will need a “virtual terminal” which is a secure website that you use to enter the credit card details that the customer tells you on the phone. Finally, as an online store, you need to use a payment gateway or payment service provider who will provide you with a checkout page and handle transmitting the credit card info to the merchant bank.
Once you have a payment method set up, the merchant account works as follows:
There are 6 main things that you will need in order to open a merchant account (although the details may differ slightly depending on your merchant service provider):
It is not a given that anyone will automatically be approved for a merchant account. If you have past bankruptcies or other black marks on your credit report, it may be difficult for you to get approved. Difficult, but not impossible - you will need to speak to credit reporting agencies to try to resolve any outstanding issues. You may also need to pay higher fees at first until you can prove yourself trustworthy to the merchant account provider, at which point you can renegotiate your fees.
You’ll want to shop around to find the merchant services provider that works best for you and you will probably end up applying to more than one. The process may vary slightly by provider, but in general it involves reaching out to providers, asking for a quote and then completing the (often rigorous) application process.
Most providers will want to know details about your business and the types of products and/or services you sell, as well as your average monthly payment amounts by credit card and average transaction size. Many merchant service providers will also conduct a credit check.
While the merchant service provider has to accept your application and be willing to open a merchant account for you, you also want to make sure they are a good fit for you and your business needs. Not all providers are equal so you should compare things like pricing and fees, PCI compliance, and additional payment solutions beyond just credit cards.
Once you submit an application, it can take days or even weeks to get a response as they study your application and run a credit check.
There are a number of one-time and ongoing fees involved in opening a merchant account. First, you can expect to pay an upfront setup fee to open the account. Next, you will be required to pay a monthly maintenance fee to cover the cost of services provided. These fees usually range from $10-$30 per month.
You will also be charged fees per credit card transaction which can be anywhere from 1.3% to 3.5%, depending on factors like the type of card and the payment network. Usually, the higher the volume of transactions processed (and the more money involved), the lower the fee rates.
It is very important to insist on getting a full list of all charges from the merchant service providers as part of their initial quote so that you do not face any surprises later on. The key charges to make sure you get rates for include:
PayPal itself is not a merchant account, but it is a good workaround solution should you not want to open your own merchant account. Once you have a high volume of transactions, you will probably find it worthwhile to get your own merchant account, but when you’re just starting out PayPal might be a viable alternative.
Technically, PayPal is a third party payment processor and it essentially combines all of its customers payments into its own large merchant account. The downside to PayPal is the large fees that it charges, but it’s up to you if it’s worth it for the convenience of having an easy way for customers to make payments quickly.
There are three types of merchant accounts that you should understand in order to determine which is the right one for your business:
All of the different elements involved in collecting payments from customers can be very confusing, but using a payment service provider like Pay.com can make it much simpler for you. You need to open a merchant account, but once you have that, Pay.com can do everything else for you, including:
While it is not difficult to get a merchant account, it is not necessarily a given that you will be approved by the first place you try. Your likelihood of approval is dependent on your risk profile. Being a high-risk prospect does not mean that you’ll be unable to open a merchant account, but rather you may need to work with a provider who specializes in high-risk merchant accounts and you may need to pay higher fees.
A merchant account works as follows:
Generally speaking, any vendor who accepts electronic payments (any payments other than cash) needs to have a merchant account. As an online seller, it’s in your best interest to have a merchant account so that your customers can pay you via credit card.
Any person or business who sells a product or service either retail or wholesale is considered a merchant. If you open a business in which you are accepting payment from customers, you are a merchant.