Merchant accounts come with many different options. Depending on the business, the types of transactions and the preferences of the customers can vary. These differences can make the approval process quick and easy or more challenging and drawn out. Working with the right solutions provider will help businesses find the best setup for their needs.
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
- e-Wallets
What is a Merchant Account?
How many business owners have asked, “what is a merchant account?” when starting their business? Businesses that want the ability to accept credit cards must establish a bank account that allows access to the payment card networks for proper customer authorizations and funds settlements. This is a merchant account whose services are provided by payment processors in conjunction with a banking institution, the acquiring bank.
The banking institution must access the payment card network with all the proper security protocols in place.
Most payment providers offer their services directly to businesses or through an outside sales organization while providing account information, back-end accounting, and customer services for their businesses and the sales organizations.
In some cases, the acquiring bank will also act as their own payment processor, marketing, and setting up merchant accounts directly with their businesses and any other businesses needing merchant services.
Benefits of a Merchant Account
Another benefit of having a merchant account is accepting online credit card payments, allowing businesses to expand 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 using their business model.
We have reached a point in our economic evolution where many customers have become comfortable and often prefer purchasing with debit or credit cards. Whether these transactions occur at a merchant’s location or from the comforts of a customer’s home, the importance of businesses accommodating the lifestyle and demands of their customer base is becoming increasingly essential today. One easy step for businesses to improve their customer experience is allowing multiple electronic payments through a merchant account provider.
Merchant Uses of Payment Processing Services
Merchant accounts can be used in various ways, whether the merchant operates a storefront or the business accepts credit 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 in the merchant’s store; the authorization process is identical once the credit card account information is captured.
More alternative payment methods are introduced yearly as the modern world shifts towards a completely cashless society.
Now it’s so much easier for businesses to apply for merchant accounts from anywhere. Payment Service Providers (PSPs) like Allied Payments help solve this problem. PSPs connect businesses and financial institutions worldwide. This allows businesses to easily open accounts with banks in a foreign country and integrate with whatever payment provider and payment method they prefer.
Types of Merchant Accounts
Merchant accounts can vary from one another depending on the business and the types of businesses the payment processor can partner with. While some payment processors and acquiring banks can only work with general retail and e-commerce like restaurants and local stores, other payment solutions have focused on more niche industries that can be considered a 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 customer payments in person. Transactions are normally run through a credit card terminal.
- E-Commerce – Online businesses operating web stores will need a merchant account to accept online customer payments through a shopping cart.
- High Risk – Businesses that cannot obtain merchant accounts through a regular payment processing provider will usually require the services of a high-risk merchant processor. Fees for high-risk merchant accounts are usually more expensive than others and depend on the level of risk determined by the payment service provider.
How a Merchant Account Credit Card Transaction Works
When credit cards are swiped, the authorization process begins by sending the cardholder’s information to the network to complete the transaction. A single payment card transaction requires several organizations to authorize a payment request properly. A payment network
transaction includes:
- Payment Processor – The payment processor facilitates transactions between the merchant location and the payment card network. The processor receives and sends the cardholder account information to the credit 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 financial services to businesses using their merchant account services.
- Customer Issuing Bank – The credit card issuer is the bank that provides the customer’s debit or credit card and provides the businesses with the responses for their customer payment authorization requests.
Dedicated Merchant Payment Gateway for Merchant Accounts:
A payment gateway, which can also serve as a Payment Service Provider, is an online application that allows businesses to securely link their e-Commerce website to their payment solutions company. A payment gateway accepts cardholder information from the customer’s web browser and encrypts the data before transferring cardholder information to the payment service provider.
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 credit cards. To combat fraud, e-Commerce businesses 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 who ignore this problem can face significant losses that payment account providers, banks, or credit card associations will not cover.
Account Providers Fees for a Merchant Account
Businesses that use a merchant account will be charged fees for processing payments as either a per-transaction fee or a fixed monthly fee. All credit and debit payment transactions carry discounts and transaction fees.
Most businesses are charged based on every transaction, normally comprised of a discount fee (a percent of the sale) and a per transaction fee. Over the years, new billing models have emerged, allowing for businesses to pay flat fees, flat monthly fees or even bill their customers for their fees. With many options and solutions, businesses can decide what provider and system works best for the business and customers.
There are a few types of pricing systems that are commonly in use at services providers today:
- Tiered pricing
- Interchange plus pricing
- Flat fee pricing
- Membership programs with a set monthly fee
Traditionally, tiered pricing was the most common pricing schedule used to set discount fees, but in recent years, more options have been available to businesses. The trend has moved from the tiered pricing format to the other pricing methods.
In the beginning, 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 for many reasons, including the type of credit card, how the payment was accepted, or even when the transaction was finalized. This type of pricing structure can be very confusing and many times the fees are extremely costly to businesses, leading to its decrease in popularity among businesses and payment service providers alike.
Today, interchange plus pricing is a business’s most commonly used pricing model. Sometimes referred to as cost-plus pricing, the interchange plus fees 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 tier fees that were so common with the tiered pricing models.
In recent years, other billing methods have offered easy-to-understand pricing for businesses. One of the most popular has been a flat fee, normally around 3% for every transaction processed, regardless of whether it is a business credit or personal debit card. Other programs offer flat monthly fees for all credit card transactions up to a predetermined dollar amount every month. While both types of billing structures can be interesting for businesses, the costs involved are often substantially higher than other pricing models, making checking all options for accepting cards is important.
Most merchant accounts will have other costs, including additional transaction fees, chargeback and retrieval fees, that are billed per occurrence basis. Other monthly fees include maintenance, compliance, or other fees to cover the service costs. In some cases, high-risk businesses will also have to pay an annual registration fee to the payment card associations to use their services, sometimes making payment processing expensive.
Determining junk fees or other merchant fees that can be lowered or removed can help businesses keep the overall costs of their payment services to a minimum. While there will always be costs and fees to some extent when accepting debit or credit cards, a full understanding of the costs of processing payments can significantly help a business lower their fees when comparing costs between merchant services providers.
Required Documents for a Merchant Services Account
For a business to be approved by an acquiring bank, most payment processors will require information about the owner and their business before starting. Depending on the business — especially the size 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 service providers and acquiring banks will want to fully understand 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 and their history with payment card associations.
Businesses with a negative history, including account closures, outstanding balances, or being listed on the MATCH list might be required to accept lower sales volumes, accept reserves being held from funding, or even the application being declined.
Businesses currently processing payments through a merchant account must usually submit the previous 3-6 months of sales transaction history and banking history for the same period.
Open your Merchant Account Payment Service Today!
Allied Payments is available to help your company receive quick approval. Our online application makes it easy to apply and setup with a low-cost retail merchant account. Most merchants inquiring about rates will see a decrease in their fees for credit cards once using our competitive rates. Contact our office today and see how easy it is for retail businesses to receive their approval for affordable merchant services solutions.