What is a merchant account? Do you really need one?

by | Feb 7, 2023 | Uncategorized

Home » Blog » Uncategorized » What is a merchant account? Do you really need one?

In this article, we will share with you complete details about what is a merchant account. The business bank account is a merchant account. With the use of a merchant account, a company can collect payments in a number of different methods, including online ones made with credit or debit cards. Since it is a commercial bank account, opening one requires a business license.

You can start accepting credit cards and debit cards from your consumers once a payment processor has set up a merchant account for your company. You will often need some hardware for this, which you can get from your credit card processing partner. Some payment processors may even provide you with a free credit card reader to get you going.

Also read: What is a merchant account? Do you really need one?

How to obtain a merchant account? Procedure

Obtaining a merchant account is a very simple few-stepped process, here is how you can get one:

Exercise due diligence:

• To open a merchant account, you must first do some research. There are differences in costs and capabilities, so you’ll want to find out which businesses provide the finest answer for your company. For example, some processors concentrate on your business, while others are experienced in a certain kind of transaction, like retail sales or internet purchases.

• Ask your acquaintances who work in related fields for referrals. Additionally, you can compare processors online. You might want to think about your bank’s potential availability of merchant accounts. Particularly if your business is young, your bank might be more inclined to approve your request for a merchant account.

• Compare the hardware expenses, customer support, and contract term in addition to any posted fees. The typical merchant account contract is three years long and includes early termination fees.

• Your potential processor should give you specific information about the kind of evidence it needs and how long the approval process might take when you apply. It’s wise to investigate the processor’s business practices if it makes generalized, unreasonable promises or remarks.

Prepare your documents:

You must submit information about your company, such as your company’s name and DBA, contact details, the number of years you’ve been in operation, your tax ID number, financial documents, business bank account, and routing information, and occasionally a credit card to pay the application fee.

Open a merchant account by applying:

• The processor will probably examine your personal and corporate credit histories once you’ve provided all the necessary information. You could need to pay an application fee depending on the supplier.

• Include an antiquated cover letter with your application to detail your company’s operations and justifications for a merchant account.

As your application is being reviewed, wait:

Your application will be assessed by the merchant account provider, who will determine whether you pose a good risk. The following criteria will be taken into account by the vendor when approving an application:

  • Amount of time in business
  • Personal and business credit histories – including bankruptcies or defaults
  • Whether you have previously had a merchant account
  • Type of business and future transactions – in person or card not present

If you intend to handle transactions in-person while customers use their cards on hand, your firm is regarded as less dangerous. If you process cards over the phone or online, your business is ranked as riskier because these transactions are more susceptible to fraud. Some merchant account providers demand address verification when cards are not present in order to reduce this danger.

If your business background and transactional history make you a low-risk option, the merchant account provider is likely to approve your application. Riskier businesses pay more money but they are still accepted.

Also read: Best Small businesses credit card processing

How does the processing of payment work?

A payment gateway is used for transactions:

• Checking whether the cardholder has enough money for the transaction is done using a payment gateway, which is an independent system from a merchant account. A payment gateway is necessary if your company accepts credit card payments over the phone or through an online portal: Online transactions involving keyed-in or card-not-present payments are completed via a payment gateway that connects to the credit card company.

• A payment gateway is an additional handy resource if your clients routinely place pickup orders in advance. The finest point-of-sale (POS) systems have a payment gateway that reads the cardholder’s information and verifies the validity of the transaction with the credit card company.

• When you open a merchant account, the credit card processor you work with can also set up a payment gateway for you. Card-not-present transactions typically have greater expenses than card-present transactions, and payment gateways typically have an additional monthly fee.

Amounts are taken out of the customer’s account:

If the transaction is accepted, the merchant account will first deduct its transaction charge, which ranges from 3% to 5% of the total, before removing the purchase price from the customer’s bank or credit card account. Depending on the method of payment, the fees change. For instance, American Express often charges greater transaction fees than Visa or Mastercard.

Funds are deposited into the business account you specify:

The money is then transferred from the merchant account into your business’s checking account. Instead of immediately following a transaction, these deposits typically happen in batches at the end of the day, or even less frequently.

Customers contest the acquisition:

The merchant account must get the transaction data in order to verify it in the event of a customer dispute. For this, there is frequently a cost. In the event that a refund is appropriate, the merchant account provider will handle it, taking the money out of your account and depositing it into the customer’s account. For this phase, there is frequently another cost.

Also read: Credit card processing and payment gateway

What are the different types of merchant accounts?

There are many sorts of merchant accounts because your company has particular needs in terms of payments:

• Retail:
This merchant account is for shops that sell things in a set place. Low startup and transaction costs are often provided to these businesses.

• Mobile merchants:
If your company goes to events, like food trucks, you’ll need a mobile merchant account. You can purchase mobile credit card processing equipment that is simple to set up and use if you want to accept payments made using mobile credit cards.

• E-commerce:
There are merchant accounts that can meet your needs whether you sell things over the phone or online, such as e-commerce merchant accounts.

Also read: Best 5 payment gateways for small businesses 2023

What is a special merchant account (for e-commerce and phone businesses)?

The payment processing sector has grown to include e-commerce companies as businesses have become more digital. Payment processing services are even more crucial if you’re starting an internet business.

However, compared to brick-and-mortar establishments, e-commerce enterprises have access to several sorts of merchant accounts. Following are some categories for e-commerce merchant accounts:

• Direct:
A merchant bank is where you go to apply for a direct merchant account.

• Local:
An account in your native nation is referred to as a local merchant account.

• Offshore:
An offshore merchant account also referred to as an international merchant account, is situated abroad.

• High-risk:
Online firms with a high percentage of chargebacks and returns should use a high-risk merchant account.

• Third-party:
These merchant accounts assist the processor by splitting its costs and are linked through an additional secure payment channel. If your e-commerce business is just getting started, this kind of account is great.

Also read: Merchant service provider: Explained simply

What type of fees are charged?

The costs related to a merchant account differ depending on the provider. Transactions with a card-present are typically thought to be the least prone to fraud. As a result, these transactions frequently have the lowest rates that credit card processors have to offer.

Some merchant accounts follow a set per-transaction pricing with no additional charges. Others employ the interchange-plus pricing model, which combines the markup from the merchant account provider with the processing fee charged by the credit card company. The tiered pricing model also offers a variety of charges based on the nature of the transaction.

Let’s examine each model in more detail:

Flat-rate pricing:

The flat-rate pricing model is simple and is most frequently used by mobile credit card processors. You pay a certain percentage for each transaction that is handled. For instance, the processor might take 3% of the transaction’s value each time you swipe a debit or credit card. If your company sells small-ticket items or has a modest sales volume, this business model will work best for you.

Interchange-plus price:

One of the most popular pricing structures for small businesses is this one. Interchange Rate means processing fee determined by the credit card company. A payment processor will bill this rate plus a markup as its profit in interchange-plus pricing. An interchange-plus price structure would look like this: 2.75% + $0.10 per transaction, for instance. In this illustration, the interchange rate is 2.75%, while the processor’s markup is 10 cents.

Tiered pricing:

Transactions are divided into three categories by tiered pricing: qualified, nonqualified, and mid-qualified transactions. The most favorable rate is offered to qualifying transactions, while the most expensive rate is charged to unqualified transactions. Each category has different transaction types, but in general, a card-present transaction using a standard credit or debit card at a POS system is considered to be a qualified transaction. A credit card number entered over the phone, however, would often be unqualified. Keyed-in card numbers may be used in mid-qualified transactions if an address verification service (AVS) is used to confirm the cardholder’s address.

Also read: Best offshore high risk merchant account providers

Some other fees are as follows:

The monthly fee:

Often known as a statement fee, is assessed for creating your monthly statement and offering customer service.

Gateway charge:

You might pay a monthly gateway fee if you need a payment gateway for card-not-present or online transactions.

Monthly minimum fee:

Some payment processors have a minimum volume of transactions you must do each month in order to avoid paying a monthly minimum fee. If you don’t fulfill this requirement, you might have to pay a monthly minimum cost.

PCI compliance fees:

Data security laws have been established by the payment credit card industry (PCI) to lessen the risk of fraud and identity theft. As part of setting up and keeping up your merchant account, many payment processors will assist you in remaining compliant. When you ask about price, some processors may not always disclose any fees associated with PCI compliance.

PCI non-compliance fees:

Certain processors impose surcharges on companies who do not adhere to PCI requirements. You typically have a few months from the moment you sign up to get into compliance, but if you don’t do it in that time, you can start paying PCI noncompliance fines.

Batch fees:

When you upload a batch of new transactions, which is often once or twice per day, you can be assessed a batch fee. Frequently, these fees equal your per-transaction fee by around 10 to 25 cents.

Address verification service fees:

The processor may impose this fee if you utilize AVS to verify a cardholder’s address. Most companies used an AVS strategy but this strategy is a fraud strategy that does a lot of keyed-in transactions and those that operate online.

Retrieval fees:

When a customer disputes a charge & their bank seeks the documents pertaining to the in question sale, you might be charged a retrieval fee. This is not the same as a chargeback fee; if the customer’s challenge is upheld, the retrieval may eventually stop a chargeback.

Chargeback fees:

When clients successfully contest a charge and request a refund, chargeback fees apply. Chargebacks entail stopping a transaction that has already been completed and giving the customer their money back. The processor will then charge you a fee to cover the expense of processing the refund.

Cross-border fees:

To compensate for the costs of electronically transferring currencies, international transactions typically incur additional fees.

Although not all fees are standard among credit card processors in the business, some are inescapable. Make sure you do your research to avoid being hit with phony fees from an unethical payment processor.

Also read: Top 10 credit card processing companies (2023)

The bottom line:

The simple line is that you must open a merchant or alternative account if you wish to take debit and credit cards from your consumers. Most clients in today’s society expect to pay with a credit or debit card; many do not carry cash on a regular basis. Customers can become irate if you refuse to open an account so you can accept these payment methods. In the end, declining credit cards can affect your revenue.

Check out Business News Daily’s reviews of the top credit card processors if you’re seeking for a payment processing business that can swiftly and easily set you up with a merchant account. These payment processors provide exceptional service to meet your company’s demands.

For more information contact us at YMSR!

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