eCommerce 101: What is a Merchant Account?
Opening a merchant account from a trusted bank is the start of setting up an easy and seamless online payment experience. Find out how you can bring in more customers and grow your business, just by setting up a merchant account.
What is a Merchant Account?
The first step to accepting credit card payments is to know what a merchant account is, and how it’s set up.
A merchant account is a type of bank account that enables you to accept online payments. Your revenues are deposited in this account after one to two business days, depending on your agreement with the acquiring bank.
An acquiring bank is the one that grants the merchant account to businesses. This will allow businesses or merchants to accept debit and credit card payments from the acquirer’s partner card networks. There are some acquiring banks that only let you accept card payments under the most common card networks Visa and MasterCard. Then there are other acquirers that have a wider range of card network options, adding American Express, JCB, Discover, Diners Club International, and China UnionPay among the accepted credit cards for your business.
Setting up a merchant account and accepting card payments is a tripartite agreement or contract. This is between you as the merchant, the acquiring bank of your choice, and your payment processing company.
The payment processing company will process the merchant account application on your behalf — you will only need to submit the required documents. One other thing that payment processors do is that they process due diligence and merchant background checks on behalf of the acquiring bank.
The payment processor must assess the risks involved in your business, and make sure you pass the acquiring bank’s standards as a business owner. This is why it’s important to be honest and have your business documents ready when you’re starting with eCommerce.
How does a Merchant Account work?
It's not rocket science, but there are a lot of components you need to know when you get this service. Here's the step-by-step process about what happens after your customer makes a purchase:
After swiping a credit card, the payment information goes through a terminal and it sends the information to your preferred payment processor to request for payment authorization.
Your processor reviews this and sends the transactions accordingly — through Visa or Mastercard for instance, and passes it to the issuing bank or card company.
The company or bank issuing the card will do its security check and decide if it goes through or will be declined, depending on the customer's account status.
After it's approved or declined, it will then be reflected to your terminal and the transaction is complete.
How to open a Merchant Account
To set up a merchant account for your business is simple, and it’s mostly done by the payment processor. Before you settle on a merchant service provider, you should do your own research and compare payment processors based on the businesses they serve and level of experience.
Each company have their own unique offers: different pricing schedules, unique features, and different contracts that may or may not work for you.
Most companies will offer a small business with a three-year contract, and that comes with an automatic renewal clause after the end of the initial term.
Cutting it off early will make you liable for ETF or Early Termination Fee, which can easily rack up to $200 to $600. Some companies will charge you with liquidation damages based on the anticipated fees in the remainder of your contract.
This is why it’s important to find the right payment processor, as they will walk you through the entire decision-making process — from finding the right acquiring bank for the type of businesses you have, down to explaining all the details of the business and the tripartite agreement before you sign it and get started with accepting online payments.
To get a merchant account, you need to identify what kind of business you have – the risks it entails, and whether it's likely to deal with chargebacks and credit card fraud. You should also provide your credit record and revenue reports.
Your business background should also include related tax and business documents. It's important to be honest in this process, as your bank will be able to see unscrupulous dealings in the past and your credit history as well. Usually, new businesses are likely to be approved. On the other hand, it doesn't mean that high risk businesses will always get declined.
How does a Merchant Account work for online stores?
For online merchant accounts, you would need the same information, but usually with higher fees compared to the physical shops, since online businesses are more prone to fraud due to card-not-present (CNP) transactions.
You would also need a secure and advanced payment gateway that provides a seamless connection to relay and authenticate the payments. Your payment processor should be able to help you find the right payment methods that you want for your online shop.
There are merchants that need more than just a card payment platform. Depending on the type of business, some customers would prefer electronic invoicing, electronic checks, and even as simple as an e-Wallet, like PayPal.
You as the business owner, along with a competent payment processor can integrate and combine all these payment methods to make the customers’ payment experience even better. Everything has to be seamless from browsing to checkout.
The back end online payment process is almost the same as the brick and mortar stores. However, the risk for CNP transactions is riskier since there is no physical way to verify customer identification.
How does a payment gateway work?
A payment gateway is equivalent to the physical Point-of-Sale (POS) terminal in brick and mortar stores. It provides a secure way to take the card information for authentication, payment processing, and confirmation.
A payment gateway offers different kinds of payment methods such as e-Wallets, e-Invoicing, e-Checks, and even other payment softwares that makes it easier for customers to pay. It should also come with risk management tools to keep your business more secure and up to date with the many different ways of credit card fraud.
You can get a payment gateway through the help of your payment processor or after a consultation with the acquiring bank of your choice.
What are the Merchant Account Fees?
There are different fees charged when setting up a merchant account, and all these depend on the acquiring bank you chose. It's important to do your own research, ask questions, and compare it according to what fits your business more.
There are fees you need to pay when you sign up for a merchant account, and sometimes it's not clearly indicated by contracts as to how and why it's there. Below are the various fees you might need to pay for a merchant account:
- Application Fees
- Setup Fees
- Monthly Fees
- Discount Rate
- Per-Transaction Fees
- Cross-border Fees
- Rental fees for a credit card terminal
However, there are additional credit card processing fees that might increase the total fee per credit card swipe, and it usually goes around 3%. You should also keep in mind that there's a possibility of additional fees and contractual requirements that requires you to pay as well.
This will all depend on the service provider you choose to work with. There are a lot of ideal alternatives out there for startup businesses without the need for a merchant account, such as Paypal, WePay, and Amazon Payments.
For those serious about growing their businesses however, they will do well with partnering with an experienced payment processor such as Allied Payments, and start providing more secure and convenient payment options for their customers.