Different payment methods on the market today is the reason why businesses need a merchant account. Such payment options include but are not limited to:
- Credit cards
- Debit cards
What is a Merchant Account?
How many business owners asked “what is a merchant account?” when starting their business. Merchants that want the ability to accept credit cards in their business will need to establish a bank account that allows access to the payment card networks for proper customer card authorizations and settlements of funds. This type of account is referred to as a merchant account whose services are provided by a payment processor in conjunction with a banking institution, known as the acquiring bank.
The banking institution is needed to access the payment card network with all the proper security protocols in place.
Most payment processors offer their services directly to merchants or through an outside sales organization while providing account information, back-end accounting and customer services for their merchants and the sales organizations themselves.
In some cases, the acquiring bank will also act as their own payment processor, marketing, and setting up merchant accounts direct with their merchants and any other businesses in need of merchant services.
Benefits of Having a Merchant Services
Another benefit of having a merchant account is the option to accept credit card payments online, allowing merchants to expand their businesses by opening their doors to the internet. With an e-commerce store, a business can virtually be open 24 hours a day and reach a much broader customer base than previously possible, when selling strictly through a retail storefront location. More customers purchasing with fewer costs than operating a retail storefront can help businesses drastically increase their sales without changing much by means of their business model.
We have reached a point in our economic evolution where many customers have become comfortable, and many times prefer, making purchases using credit or debit cards. Whether these transactions occur at a merchant’s location or from the comforts of a customer’s home, the importance of businesses to accommodate the lifestyle and demands of their customer base is becoming more and more essential today. One easy step for businesses to improve their customer experience is by allowing multiple types of electronic payments through the use of a merchant account.
Uses of Payment Processing Services
Merchant accounts can be used in a variety of ways, whether the merchant operates a storefront or the business accepts cards through a card-not-present (CNP) environment. It depends on the type of business the merchant operates. The same merchant account can be used for online payments or another transaction occurring in the merchant’s store, the authorization process is identical once the card account information is captured.
More alternative payment methods are introduced every year, as the modern world continues to shift towards a completely cashless society.
Now it’s so much easier for businesses to apply for a merchant account anywhere in the world. This is where Payment Service Providers (PSPs) like Allied Payments come in. PSPs connect merchants and financial institutions worldwide. This makes it possible for merchants to easily open an account with banks in a foreign country, and integrate with whatever payment methods they prefer.
Types of Merchant Account Services
Merchant accounts can vary from one another depending on the business and the types of merchants the payment processor is able to partner with. While some payment processors and acquiring banks are only able to work with general retail and e-commerce like restaurants and local stores, other payment processors have focused on more niche industries that can be considered higher risk, including tobacco, and adult businesses.
- General Commerce – The most common type of payment processing used by businesses that operate through a storefront with generally the lowest credit card processing fees. These businesses can vary from restaurants to retail shops or wholesale distributors that accept payments by customers in person. Transactions are normally run through a credit card terminal.
- E Commerce – Online businesses operating web stores will need a merchant account that is set up to accept online payments from their customers through a shopping cart.
- High Risk – Businesses that are unable to obtain a merchant account through regular payment processing channels will usually require the services of a high-risk merchant processor. Fees for high-risk merchant accounts are usually more expensive than other types of accounts and are dependent on the level of risk determined by the payment
How a Credit Card Transaction Works
When a payment card is swiped, the authorization process begins by sending the card account holder’s information to the network, to complete the transaction. A single payment card transaction requires a number of different organizations to properly authorize a payment request. A payment network
- Payment Processor – The payment processor facilitates the transaction between the merchant location and the payment card network. The processor receives and sends the cardholder account information to the card association network.
- Card Association – The associations handle the transmission of payment card
information between the card-issuing banks and the card acquiring banks.
- Merchant Acquiring Bank – The acquiring bank is the organization that works with the payment processor to underwrite and provide the financial services to the businesses using their merchant account services.
- Customer Issuing Bank – The card issuer is the bank that provides the customer’s credit or debit card, and provides the merchants with the responses for their customer payment authorization requests.
A payment gateway, which can also serve as a ‘Payment Service Provider’, is an online application that allows merchants to securely link their e-Commerce website to their payment processing company. A payment gateway accepts cardholder account information from the customer’s web browser and encrypts the data before transferring account information to the payment processor.
Unlike a swiped transaction occurring in a retail location, online credit card transactions have significantly higher risks without the added security that comes from EMV chips in today’s cards. To combat fraud, e-Commerce merchants rely heavily on their own fraud prevention practices including address verification (AVS), 3D Secure verification, and other security protocols available through their payment process or payment gateway.
Merchants that choose to ignore this problem can face significant losses that will not be covered by payment processors, banks, or the card association.
Merchant Account Fees
Businesses that use a merchant account will be charged fees for processing payment as either a per transaction fee or a fixed monthly cost. All credit card and debit card transactions carry fees including discount fees and transaction fees.
Most merchants are charged based on every transactions, normally comprised of a discount fee (a percent of the sale) along with a per transaction fee. Over the years, new billing models have emerged allowing for merchants to pay flat fees, flat monthly fees or even bill their customers for their fees. With many options available, merchants can decide what system works best for the business and customers.
There are a few types of pricing systems that are commonly in use today:
- Tiered pricing
- Interchange plus pricing
- Flat fee pricing
- Membership programs with a set monthly fee
Traditionally, tiered pricing was the most commonly used fee schedule but in recent years, there have been more options available to businesses and the trend has been moving away from the tiered pricing format, towards the other programs offered.
In the beginning, the use of tiered pricing was the most commonly used billing structure, establishing between 3 to 6 different rates that payments could be charged, otherwise known as qualifying. The tier, or rate, that a payment card qualifies for can vary due to many different reasons including the type of card, how the payment was accepted, or even when the transaction was finalized. This type of pricing structure can be very confusing and at times extremely costly to merchants eventually leading to its decrease in popularity among businesses and payment processors alike.
One of the most commonly used pricing models by merchants today is interchange plus pricing. Sometimes referred to as cost plus pricing, the interchange plus fee schedule uses the true cost of the credit or debit card and tacks on a set fee per transaction. Merchants like the simplicity and ease of knowing what they will be charged for each transaction and removing the mystery of costly downgraded to lower tiers that was so very common with the tiered pricing models.
In recent years, other types of billing methods have emerged that offer easy to understand pricing for merchants. One of the most popular has been a flat fee, normally around 3% for every transaction that is processed, regardless if it is a credit card or debit card. Other programs offer flat monthly fees for all payment card transactions up to a predetermined dollar amount every month. While both types of billing structures can be interesting for businesses, many times, the costs involved are substantially higher than other types of pricing models making it important for merchants to weigh all options.
Most merchant accounts will have other costs including additional transaction fees, chargeback and retrieval fees, that are billed on a per occurrence basis. Other fees that are billed monthly include maintenance fees, compliance fees, or other fees to cover the service costs. In some cases, high-risk merchants will also have to pay annual registration fees to the payment card associations to use their services, making payment processing an expensive product at times.
Determining junk fees or other costs that can be lower or removed can help merchants keep the overall costs of their payment processing services to a minimum. While there will always be costs and fees to some extent when accepting credit or debit cards, a full understanding of the costs involved with processing payments can significantly help a business lower their fees when comparing costs between merchant services providers.
Required Documents for a Merchant Account
For a business to establish merchant account services, most payment processors will require some information about the owner and their business before starting. Depending on the business — especially the size of the business and the industry, many of these documents will be required for the merchant account to be approved.
- Completed Application
- Social Security Number
- Copy of Driver’s License or Passport
- Voided Check from Business Bank Account
- Last 3-6 Months Bank Statements (if currently processing)
- Last 3-6 Months Payment Processing Statements (if currently processing)
The underwriters at the payment processors and acquiring banks will want to have a full understanding of the merchant, and conduct due diligence of the business, before making any decisions about credit card processing services. Certain businesses will require less documents, especially startup and general commerce businesses, while high-risk businesses will usually require the above items and possibly other supporting documents to complete the bank’s application package.
Documents supplied to the underwriters will be used to perform their proper Know-Your-Customer (KYC) due-diligence including checks of the merchant’s financial history, along with a check of their history with payment card associations.
Merchants with a negative history including account closures, outstanding balances, or being listed on the MATCH list might be required to accept lower processing volumes, accept reserves being held from funding, or even the account being declined.
Businesses that are currently processing payments through a merchant account will usually be required to submit the previous 3-6 months of payment processing and banking history for the same period.
Open your Merchant Account Today!
Allied Payments is available to help your company easily apply and setup with a low-cost retail merchant account. Most merchants coming inquiring about rates will see a decrease in their credit card processing fees once using our competitive rates. Contact our office today and see how easy it is for retail merchants to partner with an affordable merchant services company.