New business owners may initially encounter the term "merchant account" without fully understanding its importance, only to later discover that it functions as an essential part of their payment operations. With the right merchant account, businesses can accept payments seamlessly. If you're unsure about where to begin your search for the perfect one—we've got you covered. This guide delves into the fundamentals of what a merchant account entails, explains the various types available, and provides step-by-step insights on how to initiate the account-opening process. Let’s dive in!
A merchant account is a specialized type of bank account designed to allow businesses to accept payments from customers. If you want to accept payment via credit cards, debit cards, or other electronic payment methods, you’ll need access to a merchant account.
It’s unique because a merchant account allows you to move money. In other words, it’s not an account that sits there with a balance like a traditional checking or savings account. It’s instead an intermediary account, set up and controlled by your payment processor, that money flows through.
When choosing to accept payments through a merchant account, there’s more to it than just accepting payments. Below are the advantages of a merchant account.
The first and biggest advantage of a merchant account is that it enables your business to accept a wide range of payment methods, including credit and debit cards. This expands your customer base and improves their experience through added convenience.
Next, Accepting card payments can enhance your business's credibility and trustworthiness in the eyes of customers. Many consumers prefer card payments for security and ease of use.
When you have your own merchant account, you’re essentially setting up a partnership with a payment processor. Some alternatives to merchant accounts (which we’ll get to below) leave you unsupported when problems arise.
Card payments tend to lead to higher sales, as customers tend to spend more per transaction when they can pay with cards instead of the limited amount of cash they have on their person.
When you set up a merchant account of your own, you can more or less choose a lot of its parameters to fit your business. This allows for often better pricing and functionality than competing solutions (again, more on those later).
Truly, it’s almost impossible to have a website that converts sales without a merchant account. It facilitates online and mobile payment processing, arguably essential for eCommerce and businesses with an online presence.
Most merchant account providers also offer tools and analytics that can help you gain insights into your customer behavior and sales trends. An invaluable tool as you look to grow and scale over time.
Now you have a vague idea of what merchant accounts are, but the picture becomes much clearer when you can see it in practice. Here’s a step-by-step overview of where merchant accounts fit:
Step 1: Customer Makes a Purchase. The process begins when a customer decides to make a purchase from your business.
Step 2: Payment Information Comes In. To complete the purchase, the customer provides their payment information. They’ll either hand you a physical card or type in the necessary card information such as card number, expiration date, and CVV.
Step 3: It Moves Through the Payment System. The payment information is securely transmitted from a point-of-sale system (this could be a payment gateway for online transactions or a physical card reader for in-person transactions).
Step 4: Authorization Request. The payment system reviews and sends an authorization request.
Step 5: Bank Verification. Your bank (acquiring bank) communicates with the cardholder's bank (issuing bank) to determine whether the transaction is valid and if the customer's account has sufficient funds to cover the purchase. This step verifies the legitimacy of the transaction.
Step 6: Authorization or Decline. The banks send a response back to the payment system. If the transaction is approved, it includes an authorization code. If declined, it provides a reason.
Step 7: Settlement. At this point, all you have is authorization—no money has moved yet. Instead, these authorization codes gather until settlement. Settlement typically occurs in a single batch submission at the end of the business day.
Step 8: Batching and Clearing. At the end of the day, you’ll submit your batch, and the involved banks will verify and reconcile the transactions.
Step 9: Funds Transfer. After clearing, the funds go into your merchant account.
Step 10: Payout. Then, your payment processor transfers the funds to your regular business bank account.
Let’s list a few of the types of accounts you may be interested in opening depending on your business model/type:
Opening a merchant account is a relatively simple process, but may take a few days (up to a few weeks) from start to finish. Thanks to the Patriot Act, there’s a lot of personal verification that needs to happen before your account can accept payments. But once your account is up and running, you’ll be grateful for the customized account, tailored support, and costs available to you.
To open an account, you’ll want to:
Beyond what we already have discussed, here are a few additional things you should know before agreeing to get a merchant account from a provider:
One of the biggest concerns with opening a merchant account is the costs associated with them. Sourcing a reliable quote is important when vetting providers. Oftentimes, business owners will take the quote to another provider to see if it can be matched or beat.
Additionally, verify that the agreed-upon fees show up on your contract. Doube-check fees are not added without your knowledge and if some are, ask questions to the representative.
Lastly, monitor your monthly statements for increasing/changing fee statements, additional fees you don’t recognize, and the correct average percentage cost. For example, if you process $10,000 in credit card transactions each month, your fees should remain relatively consistent.
Alternatives to Merchant Accounts
There are some alternatives to merchant accounts that you may have seen or considered before. Payment service providers (PSPs) are one of the most popular. If you have seen Square, PayPal, or Stripe you’ve seen (and potentially used) a payment service provider. There are also peer-to-peer payment methods rising on the scene today including Venmo, CashApp, and Zelle.
So let’s talk about how they differ from a full merchant account.
To describe the difference between a merchant account and a payment service provider, we'll use an analogy. Compare a merchant account to setting up a brand new phone plan with a company like T-Mobile or Verizon. You get to choose the number of minutes, data, and equipment to make sure it’s exactly what you want. When something on your plan needs to change, you can call your provider and get direct support. That’s what it’s like to have a merchant account.
Now imagine you’ve added a line to an existing phone plan. You can make requests for the number of minutes, data, and equipment you get, but you can only work within the confines set by the main account holder. They control the price of the line, and your access to the account, can shut you down or remove you at any point, and handle all the support for you. They can also impose their own “controls” on your account. That’s what it’s like to have a PSP (like PayPal, Square, or Stripe). It’s quick and easy to set up, but your options, control, equipment, and costs are all already set for you, making it harder to grow your business.
Peer-to-peer payments, on the other hand, are newer to the scene and are closer to cash or ACH payments. They’re the brands like Venmo, CashApp, or Zelle you’ve probably seen and used before in your personal life.
These transactions are cheap to process, but unless the other person already has an account and knows how to use it, they’re also ripe with opportunities for fraud or human error that harms your business. So while it’s a great additional/secondary tool to add to your payments toolkit, it’s not a great primary payment option.
Merchant accounts provide safety, flexibility, support, and the ability to grow/change over time, which makes them one of the best options out there for accepting payments. While there are some things to look out for, with a little research you can find a merchant service provider that acts more like a partner than a vendor.