If you are a new business owner that wants to offer customers the ability to pay over the phone and online, you will need to open a merchant account. What exactly is a merchant account and why do you need one? This article explores what a merchant account is, why you might need one and easy steps for obtaining one.
A merchant account enables businesses to accept debit and credit card payments. Acceptors and merchants enter into agreements to create merchant accounts for the settlement of payment card transactions.
For a more precise understanding, let's look at the process of receiving electronic payments from credit cards and debit cards.
A merchant account is a bank account that receives electronic transactions such as credit card payments, debit card payments and ACH payments. It’s required for any business that offers online payments because it is the only way these funds can be received. At the same time, this bank account is only necessary for these types of payments. For instance, if you only work with cash, you won't need a merchant account. Just a basic business bank account will do.
Banks aren't the only merchant account providers. You can opt for third-party merchant account vendors that offer money transfer services. Some third-party payment processors offer a merchant account in their business structure. Funds arrive in a shared account with all users, and you have the authorization to withdraw your specific funds from this account.
How do merchant accounts work?
The process begins with you and a merchant services provider, also called a merchant acquiring bank, agreeing to terms of service. Often a third-party payment processing company is involved, though the bank may handle all merchant account services. The bank you sign-up with receives electronic bank transfers from a given card processing network and deposits them into your business bank account.
A payment processor is a company that stands between a merchant acquiring bank and a card issuer. The entire payment process works like this:
When a customer places an order, credit card information is captured by your store terminal, online payment system, or mobile payment device and sent to your merchant acquiring bank, which sends the payment request to a card processor. In some cases, the card processor and merchant acquiring bank are the same institution, but not always. This processor then uses the credit card network (VISA, Mastercard, American Express) to communicate to a coordinating bank listed on the card for the funds. The coordinating bank does fund availability checks, verifying the customer has sufficient funds and that the account is in good standing. The funds are then transmitted through the credit card network and processor to your merchant acquiring bank to start the settlement process. Then final funds are placed in your business bank account.
The merchant acquiring bank informs you of all approval and denial communications along the way. The whole communication process happens in minutes, though the actual receiving of funds can take a few days. These final batches are sent at the end of the day or sometimes multiple times a day.
Your merchant acquiring bank, payment processor, and credit card network charge fees for services. The merchant account cost varies depending on the institution and whether you are considered a low or high-risk merchant account.
The costs are outlined in your cost of service. It is a good idea to shop around to find the best blend of competitive merchant account fees and services to meet your needs.
The following key terms define various electronic payment options.
In addition to the pricing models above, you can incur additional fees like:
When factoring in all your costs, keep in mind that you may have fees from your merchant provider such as:
There is a wide range of software and hardware options on the market, including some customizable options and many inexpensive options well suited for small businesses.
Your merchant account will be categorized in different ways, each with fees corresponding to individual risk:
These are credit card purchases at a brick-and-mortar location made through card reader hardware or mobile purchase using a credit card reader in-person with the customer. Running orders through credit card processing equipment has the lowest transaction cost due to the lowest risk of fraud.
Known as a virtual terminal, this model has a higher risk than in-person orders, though pricing for online businesses can be reduced with the addition of a payment gateway for more secure payments. This option can significantly increase your potential customers and sales, making them well worth the fee.
Taking card details over the phone comes at the highest cost because it has the highest potential for fraud. However, it still is advantageous for additional sales and business for specific industries like restaurants.
Your merchant acquiring bank will request information such as:
A third-party processor can provide an aggregated merchant account.
How do you choose between a merchant bank account or an aggregate account through a payment service provider? The choice will depend on your needs. Here is a brief explanation of the differences between the two.
When shopping for a third-party processor to connect to your merchant account, be sure to choose one with experience and a strong reputation in the business. BNG Payments has been serving business owners for years with a comprehensive list of merchant services, including:
In addition to these services, we pride ourselves on high quality support that’s entirely based in the United States. Contact us to learn more. BNG Payments may be able to help save you time and money, specifically for your type of business.