Increasing sales while improving customer shopping experience is the goal of every business owner. Consumers today want the flexibility of paying for products or services using a convenient payment method, regardless if it’s an online or retail store.
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
Get to know what a merchant account is, and its role in e-Commerce. Learn what it takes to find the right payment service provider by knowing the benefits merchant accounts, and which type of merchant account you fall under.
- What is a Merchant Account?
- Uses of Merchant Accounts
- The Advantages of Credit and Debit Card Usage to Merchants
- Benefits of Having a Merchant Account
- Types of Merchant Accounts
- Wireless Merchant Accounts
- e-Commerce Merchant Accounts
- High-Risk Merchant Accounts
- Types of High-Risk Merchant Accounts
- Merchant Account Fees
- Merchant Account Options
- Brief history of Card-Not-Present (CNP) Transactions
- History of Credit Card Processing and Merchant Accounts
- How a Credit Card-Present Transaction Works
- How Online Credit Card Processing (Car-Not-Present Transaction) Works
- Who Uses a Merchant Account?
- How Does Pricing Work for a Merchant Account?
- Why Businesses Need Merchant Accounts
- What are the Document Requirements for a Merchant Account?
- How to Choose a Merchant Account Provider
1. What is a Merchant Account?
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 direct 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.
2. Uses of Merchant Accounts
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.
3. The Advantages of Credit and Debit Card Usage to Merchants
The growth of banks, the development of integrated mobile payment systems, and added incentivessuch as travel or cash back rewards for using payment cards, has fueled the demand of customers to go cashless.
Many customers use the debit network since it performs the same as cash, allowing customers to make payments directly out of their savings or checking accounts without the need of an ATM, or the old school way of writing checks. No need to carry a wad of cash when going out, or to set reminders about going to the bank for monthly recurring payments. Online banking is the norm these days, such that paying for monthly bills can be set up and done through mobile banking apps.
But it’s not just consumers who enjoy the benefits of debit and credit card usage. Merchants also find cashless transactions beneficial to their business. Multiple studies have shown that credit card acceptance increases sales volumes, as it tends to encourage impulse sales because paying with a plastic card brings less ‘pain’ in paying than you would with cash.
Another advantage of cashless payments is that it brings security to businesses. It is made even better
with the emergence of the 3D Secure feature, which brings the chargeback liability shift from merchant
Today, most customers can be found carrying little to no cash in their wallets. Instead, they use their
credit or debit cards and have a more significant buying power. This has allowed businesses to increase
their sales with the ability to accept online e-commerce transactions or more retail storefront
transactions, that would otherwise have never occurred if cash was the only available option.
When a merchant decides to avoid accepting electronic payments and only accept cash, the business is limiting and running the risk of completely eliminating the buying power of a large portion of customers.
The buying power that comes from the use of debit and credit cards allows customers to make larger purchases more frequently because customers are not limited by the amount of cash in their wallets.
Many restaurants, retailers and other businesses relying on impulse purchases have significantly
benefited from accepting credit cards with higher sales volumes and larger average sales amounts. It’s
been proven that customers spend more when cash is not a limiting factor.
4. Benefits of Having a Merchant Account
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
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.
5. Types of Merchant Accounts
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.
With the rise of electronic payments, the ways in which merchant accounts are used has taken its own
course, creating hybrid accounts to tackle some of the problems that merchants face when getting
Aggregated merchant accounts have emerged as simple solution for merchants having trouble obtaining
a regular merchant account, whether it be due to financial troubles or the type of business, aggregated
solutions can provide a much lower barrier to entry for payment processing.
While the process of accepting payment from a credit or debit card is nearly identical for merchant
accounts, there can be differences on how the accounts are set up. Whether it is the acceptance
method of the merchant or the type of bank providing the payment processing services, the types of
merchant accounts will vary between businesses. Some of the most common businesses include:
a. General Commerce Merchant Accounts
The most common type of payment processing used by businesses that operate through a store
front with generally the lowest fees of all types of merchant accounts. 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 or a point of sale (POS)
machine but can also be manually entered if required.
b. MOTO Merchant Accounts (Mail Order/Telephone Order)
Businesses that are accepting mail order or telephone order sales will need the ability to process
credit cards manually. These transactions can usually be entered through a credit card terminal
or online using a virtual terminal located in many of the payment gateways today. While fees
can be slightly higher for these transactions versus a swiped card, merchants can prevent fraud
by requiring the billing address for AVS verification and the CVV code from the back of the cards
to verify the customer.
6. Wireless Merchant Accounts
Merchants that operate mobile businesses, whether they travel to their customer's locations or operate
at events, such as fairs or conventions, will generally want the flexibility and functionality of a wireless
merchant account. Using either a wireless credit card machine or an adapter on their smartphone,
merchants will be able to accept customer payments remotely. Fees for a mobile merchant account are
about the same as retail merchant account with the possibility of an additional transaction and monthly
7. e-Commerce Merchant Accounts
Online businesses operating web stores will need a merchant account that is set up to accept online
payments from their customers. Merchants will need a fully functional online store with shopping cart
and integrate the payment gateway provided by the payment processor into their website. Most
merchant accounts that are set up for e commerce have similar rates and fees as a general commerce
merchant account but with additional payment gateway fees.
8. High-Risk Merchant Accounts
Businesses that are unable to obtain a merchant account through regular payment processing channels
will usually require the services of a high-risk merchant account. Depending on the type of business, the
history of the business or the background of the merchant, a high-risk merchant account might be the
only solution for some businesses. Fees for high-risk merchant accounts are usually more expensive than
other types of merchant accounts and are dependent on the level of risk determined by the payment
Merchant accounts will operate in the same manner whether the transaction is from an online purchase
or through a restaurant POS system. Some accounts will require additional fees because of how
transactions are accepted or the type of business that is being operated. Most merchants will be able to
figure out which category their business would be classified as and understand how that will affect the
rates of their merchant account.
9. Types of High Risk Merchant Accounts
Other types of businesses that do not fall into the category of general commerce or general e-
Commerce might be considered medium or high-risk merchant accounts. The most common types of
businesses classified as high-risk include but are not limited to:
Adult Merchant Accounts
Alcohol Merchant Accounts
Firearm Merchant Accounts
Tobacco Merchant Accounts
CBD Merchant Accounts
Debt Repayment Merchant Accounts
10. 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.
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.
11. Merchant Account Options
Merchant accounts can exist through a number of different avenues, whether they are issued directly
through an acquiring bank, payment processor or as an aggregated account. There are many different
options available today for business with a variety of different billing methods.
It is important for merchants to fully understand their options and all the costs involved with their
merchant account before finalizing their decision.
12. Brief history of Card-Not-Present (CNP) Transactions
Traditionally, merchant accounts were set up using strictly phone authorizations through live operators,
but that was replaced with manual imprinters and carbon paper, and required merchants to “copy” the
embossed customer's card account information.
This tedious task of collecting and mailing copies of payment authorizations was soon replaced in the
1980's with the invention of the credit card machine.
In the 1990's, the rise of the internet created a significant need for online payment gateways to handle
the exponential demand for e-commerce payments.
Similar in function to a credit card terminal, the payment gateway allowed merchants to securely accept
sensitive customer card account information received online from their customers and send it to their
payment processor for card authorization and payment settlement.
13. History of Credit Card Processing and Merchant Accounts
Dating back to the 1920's and unbeknownst by most, the use of credit by consumers began shaping and
molding our society as we know it today.
During the Roaring Twenties, exorbitant spending by all types of consumers was fueled by the readily
available consumer credit from businesses looking to cash in on the economic boom. From department
stores to auto dealerships, lines of consumer credit were issued to the individuals that could
demonstrate their capability of making payments into the future for products today. With millions of
Americans willingly accepting the use of debt to make the purchases they could otherwise not afford,
society slowly became accustomed to making purchases without cash.
The use of credit cards took hold during the 1920's, while department stores were generally issuing
cards for identity purposes as a way to combat potential fraud in their store.
The first real “payment network” was derived by various oil companies that set up partnerships with
other corporation to accept payments from both their customers or the customers of other companies.
Customers were issued cards that could be used at all company-owned gas stations including other in-
network gas stations clear across the United States, laying the groundwork for future payment card
With the growth of the airline industry in the 1930s, the use of charge cards issued by the different
airlines became increasingly popular, allowing for customers to purchase tickets now and pay later.
Ticket discounts and the ability for consumers to make payments on an installment basis led to nearly
half of all airline revenues in the 1940s originating from the use of travel cards. By the end of the 1940s,
these airlines cards became the first internationally accepted charge card.
It was not until the 1950s when Frank McNamara and Ralph Schneider devised the Diners' Club card, a
charge card that could be universally accepted by restaurants in lieu of paying with cash. By creating a
network that was independent of any particular business chains, Diners could focus on building their
network of member businesses accepting their charge card. The public response for the Diners card was
enormous, leading to their rapid global expansion within a few years and eventually paving the way for
many of the card networks dominating the industry today.
Soon after in 1958, American Express launched their first card along with Bank of America and their
BankAmericard, the predecessor to Visa. Mastercard followed suit in the 1960s with their Master Charge
and finally Discover entered the arena with their card in 1985. Other payment networks that have also
been established and entered the United States include JCB (Japan Credit Bureau) and China UnionPay
or UnionPay, is the largest payment card network in the world.
14. How a Credit Card-Present 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
1 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.
The payment processor handles a number of different transactions from the payment card
network, including payment authorization requests, refunds, voids, and daily batches. They will
also provide customer service to merchants along with monthly statements and other general
account services to help keep the merchant accounts operating smoothly.
3 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. The acquiring bank accepts payments upon settlement from the
customer bank and manages the disbursement of funds to the merchants.
Card 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. The card issuing bank maintains the consumer's account information on file and uses
that information to determine if a merchant's request for payment can be approved or declined.
Some of the largest card issuing banks today include Capital One, Chase, and Citi. American
Express and Discover each act as a card issuing bank and a card association through their closed
2 Card Association: The payment networks owned and operated by Visa, MasterCard, American
Express, Discover, and others. The association handles transactions for the payment cards that
are part of their network, whether the cards are co-branded with another company as is the
case with Visa and MasterCard or offered as an independent card, such as many American
Express and Discover cards. The associations handle the transmission of payment card
information between the card issuing banks and the card acquiring banks.
When a customer is prepared to check out and their payment card is swiped, dipped, or tapped at a
merchant credit card terminal, account information that is stored on the payment card is securely
captured and sent along with the transaction value for payment authorization. Payment cards retain the
cardholder’s account information in a secure format on both the EMV (embedded chip) on the front and
the magnetic strip (mag stripe) located on the back of payment cards. To combat the rise of fraud,
payment cards have been slowly moving away from the use of the mag stripes and adopting a more
secure technology called EMV. Cards that are equipped with an EMV microchip are capable of creating
and sending dynamic authentication codes as a way to prevent fraud.
Once the payment card is accepted at the merchant credit card terminal, account information is
encrypted and the payment authorization request is sent through the payment processor and entered
into the card network. From the card network, the card association is able to receive and decrypt the
payment card files from the authorization request to determine the card issuing bank. Once the bank is
identified, the authorization request is forwarded over for a decision by the card issuer.
Transactions at the card issuing bank require either an approval or denial response to inform both the
merchant and customer as to the sale of the item or service.
A card issuer will use a number of different checks before providing an answer including:
Amount of available credit
Fraud alerts, etc.
Once a decision can be made, the card issuing bank's response is sent back through the card
association's network onto the merchant location, informing both the merchant and customer of the
payment authorization's status.
15. How Online Credit Card Processing (Car-Not-Present Transaction) Works
An e-Commerce payment occurs using the same process as a swiped transaction through a credit card
terminal once the payment card information is received. The difference between a swiped card
transaction originating in a credit card terminal and an online transaction lies in the fact that the
customer's is not present during the sale, requiring an different method to capture the card information.
To securely accept and transfer the card account information from the merchant's e commerce website
to the payment processor requires the use of a payment gateway.
4 Payment Gateway: 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.
Payment gateways are generally built and operated by a third-party company that has the experience
and knowledge of financial technology to design an online payment application capable of providing the
maximum level of security. Once integrated into an e-Commerce shopping cart, the payment gateway
provides a seamless link between the merchant's website and the payment processor for fast and
secure payment authorizations.
Similar to a credit card terminal, the payment gateway captures the encrypted card account information
from the customer's web browser and packages it along with the transaction details from the shopping
cart for transmission to the payment processor. Once the customer bank renders a decision as to the
status of the transaction request, that information is sent back to the payment gateway and presented
to the customer through their web browser.
The merchant account is linked directly into the payment gateway, providing immediate functionality
once the gateway has been integrated into the merchant's shopping cart. The gateway is able to pass
the XML account files containing cardholder details from the customer's web browser through an SSL
(Secure Socket Layer) to the payment processor. The files sent through the SSL are normally done using
a standard financial interchange message, usually ISO 8583, for maximum security during the
After the card association receives the secure customer and transaction files from the payment
processor, the customer's card issuing bank can be determined. The transaction details along with
account information will be sent to the bank for account verification and payment authorization after
various credit, security, and fraud checks are performed. Once a decision has been made, the response
will be sent back through to the payment gateway to inform both the merchant and customer of the
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.
16. Who Uses a Merchant Account?
As technology has advanced and consumers have adapted the shift towards a cashless society, more and
more businesses have needed to accept credit cards as a way to maintain their customer base. Some of
the most commonly seen types of merchant accounts today include:
Online Merchant Accounts
Retail Merchant Accounts
Restaurant Merchant Accounts
17. How Does Pricing Work for a Merchant Account?
The costs that are assessed to businesses for a merchant account will vary between payment
processors, depending on the pricing structure that the business and processor agreed upon. All credit
card and debit card transactions carry fees including discount fees and transaction fees. How these fees
are billed to the merchant can vary dramatically, making it very important for businesses to fully
understand how they are being charged for credit card and debit card transactions and the other fees.
There are a few types of pricing systems that are commonly in use today:
Interchange plus pricing
Flat fee pricing, and
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.
18. Why Businesses Need Merchant Accounts
As consumers have drifted away from primarily using cash for purchases while increasingly opting for
the convenience of using credit and debit cards for payments, the need for merchants to cater to this
change is becoming essential to keep up with consumer trends. Operating a business that does not
accept credit card payments can substantially limit the buying power of their current customers to only
the cash available on hand and can also hinder any potential expansion into new customer markets.
Traditionally, businesses have operated by selling their products and services to their local clients from
the areas surrounding their business, focusing on more niche industries to meet the needs of customers.
Short of opening new locations in different areas, merchants would find it difficult to expand their
customer base outside their current markets due to barriers caused by time and distance constraints
that traveling to outside markets caused.
With the advances in technology and the creation of the internet, commerce has been able to expand
and allow merchants to remove those sales barriers from before and reach a broader audience.
Today, merchants accepting payments online with a merchant account are able to sell products and
services to customers from across the globe 24 hours a day without having to open an additional
19. What are the Document Requirements 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.
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.
Underwriters use this information to determine the financial strength of the business since processing
fees and other merchant account costs are usually collected on a monthly basis and the acquiring bank
needs to know that costs will be paid.
Some types of medium risk to high-risk merchant accounts might be assessed registration fees due to the requirements of the payment card association. A few industries might also be required to provide a legal letter drawn up by an attorney or another industry professional, stating the business is abiding by all federal and state guidelines for the sale of their products.
Merchants needing such documentation or registration fees will be advised from their merchant services provider as to requirements for businesses from their industry to be approved for a merchant account.
20. How to Choose a Merchant Account Provider
Partnering with the best payment processing company is important for the success in a business of any
size, in any industry. Working with a merchant services company that offers low fees, advanced
software, along with outstanding technical support, can help a merchant grow their business and
Before signing a contract with a merchant services provider, ask about their company and the features
they can offer when partnering with your business.
Big savings comes with working with an online payment processor that can offer a payment gateway
that is fully compatible and easy to customize into a merchant’s website.
The Allied Payment Gateway is compatible with over 99% of the major shopping carts available and
provides features and reliability that the other payment gateways can’t. This gives merchants all the
features needed to run a successful business.
Start accepting credit cards 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.