What is a Merchant Account – Everything You Need to Know

September 3, 2019 / Posted in Merchant 101

Cashless payments are increasingly becoming the most popular payment method, although cash is still present. Paying with credit or debit cards is much more convenient and fast. If you run an enterprise, you surely already have or are in the process of getting a merchant account (MA). But what is a merchant account? Besides the fact that you need to have one, how much do you know about your options and the expenses associated with them?

If you opened your company recently, you might be wondering what an MA is and what does it entail. MA transfers funds from your customers’ private accounts to your business bank account after the transaction has been processed. The transaction follows a simple path. The customer pays for your services or products. The funds then go through a gateway to a credit card processor (CCP) and credit card associations and finally to the issuing bank. All of those steps include commissions, and some of them are variable while some are not.

MA usually includes many features you will pay extra. Those additional features are check processing services, PCI complaint, online reporting features, and many others. Additional features also mean additional expenses. But to process and even make credit or debit card transactions possible, you need a merchant service provider (MSP). Here we offer a detailed breakdown of what an MA is and how you can avoid paying unacceptably large sums of money to your provider.

Credit Card Payments Processors

This is a step you cannot avoid. You will always need a processing service for your customers’ card payments. What CCPs do is confirm sufficient funds, and check if all the necessary conditions are met by your customer so that you can accept the transaction. They basically authorize the sale, and if all the requirements are met, the payment will be deposited from your customer’s bill to your business bank accounts. 

What happens during the process is that interchange and processing expenses will be deducted and the rest will be deposited to your bank record. Interchange fee goes to your credit card association, and the processing fee goes to your service provider. You can expect to pay around 3 to 5% of every transaction for such fees. On a smaller scale, this doesn’t seem like much. But if you process a lot of transactions each month, this can build up to a serious amount. Nowadays, a lot of MSPs have online access that can help you track your monthly transactions. You can even save some money on printed copies of your monthly statements by requesting a digital copy. 

What is Important to Know Before You Set Up a Merchant Account?

Although setting up an MA is pretty straightforward, you should inform yourself about different pricing schedules, contract terms, and features that different MSPs will offer you. The market is very competitive and not all providers are the same. So not only you should do your research on the MSP you’re interested in but you should also try to make a better deal for your company. 

You can drain your resources if you choose an MSP with high fees and rates. You may not have much choice regarding the contract period since most of them offer only 3-year contracts with an automatic renewal clause. If you choose, for any reason, to terminate your MA earlier than agreed in the contract, you will have to pay an early termination fee. In some cases, an early termination fee can amount to over $600. 

There are also liquidated damages. That is the penalty you have to pay for approximated charges that remain till the end of your contract, and it can cost you thousands of dollars.

The Fees 

Your MA has many commissions attached to it. To name just a few: application fee, setup fee, discount rate, monthly fee, per-transaction and rental fee for the technology you take for transactions, etc. Those commissions can add up to 3% of every transaction to your already existing charges. 

An Internet Merchant Account

If you are making online sales, you will need an internet merchant account that can act as a deposit for your internet transactions. An Internet MA usually has higher expenses compared to the regular one. There is another problem you will encounter for internet transactions. You will need a different internet MA for every type of card you accept.

How to Avoid Termination Fee 

Some MSPs are willing to exclude the early termination fee due to fierce market competition. You even have the possibility of month-to-month billing without long-term obligations and contracts. That means you will face no penalties if you choose to end the contract. 

One of the potentially most dangerous encounters for your firm is with the providers’ sales team. Since many companies outsource services, you may encounter unprofessional and uninformed employees. Many of them won’t even know to explain all the details of your contract, or they may even give you false information. 

While this can be hard to avoid, you can protect yourself. Read the entire contract carefully and ask professionals if you have any questions before signing anything. It is a long-term obligation, and you don’t want to be stuck in a 3-year contract that does you more harm than good.

What Are Payment Service Providers?

There is a new player on the market, and it’s called the payment service provider or PSP. Because MSPs proved to be expensive and long-term obligating, a few companies introduced this new service that emerged with the rise of online payments. These companies merge all their services into something that resembles one large MA, except that you wouldn’t have a unique merchant ID number. It has a lot of advantages that an MSP doesn’t provide, such as avoiding monthly and annual fees. Flat rate pricing simplifies processing rates significantly. They bill you for their services month to month, so when you decide to cancel the contract you won’t pay penalties. This method is also referred to as pay as you go pricing.

When is PSP a Bad Solution?

While all of this sounds ideal, there are security issues you have to be aware of. PSP accounts can be shut down for any reason without notice. Even a single large transaction can freeze or shut down your accounts. They also provide poor customer service. 

If you are handling a larger number of credit card transactions, it is more important to have lower processing rates then lower MA fees. If your monthly transactions exceed 5000$, you will benefit more from a full-service MA. PSPs are a better solution for small and seasonal businesses. 

What is the Best Gateway Solution for Your Business

If you don’t have any kind of terminal to accept card payments, you are going to have to set up one. Most of the MSPs will offer their own terminals. That is why you should set up your MA with the local MSP which can install the required technology faster and can address possible problems without engaging a third party.

If you are the owner of an online shop, you are going to have to integrate your MA solution with your shopping cart through a payment gateway. Many shopping carts have integration capabilities or plugins that will make this a lot easier to setup. Since every shopping cart and payment gateway integration is different, you will have to research this on both ends. 

Payment Gateway Features

Besides the essentials that all gateways include, there are a few features that can distinguish them from one another. Those features are various payment methods, billing tools, security systems, and analytics.

  • There are a few cashless payment methods apart from cards. E-wallets emerged recently as a more convenient method. Also, debit cards can be contactless, and there are special terminals to handle payments made with them.
  • Security tools play a big role in transactions, especially for online businesses. You will benefit the most from the gateways with strongest fraud detection and prevention.
  • Recurring billing tools are very convenient for businesses who use subscription methods to sell goods. You can set up customized plans and update subscription information.
  • If you have payment analytics, you can make a better decision on how to improve your company and your goals. Some of the gateways offer this kind of reports so that you can see where you need to improve your services.

How to Setup and Edit Your Merchant Accounts

Although you cannot go through thousands of MSPs, it is advisable to look into at least the ones you find the most appealing.

Learn From Someones’ Previous Experience  

A good rule of thumb is to always check out the reviews from other customers. After finding the MSP that suits your company the most, you can start applying for an MA.

Setup a Business Profile

Setting up a business profile will determine the processing risk for MSPs when dealing with your company’s’ transactions. That includes answers to questions such as:  How are you going to accept payments? What are your predicted monthly transaction amounts? What is your average ticket price and is your company seasonal or all year round?

How Will You Accept Payments 

There are different methods. You should inquire about not just terminals but also check processing, e-commerce shopping carts, wireless and mobile online transactions. It all depends on the structure of your company and the type of transactions you will be dealing with the most.

What Volume Do You Plan to Process

If you already have an established enterprise that has processed transactions in the past, you won’t have a problem with getting this number. But if you are new in the business, try to predict how many transactions on a monthly basis you’ll have for at least the first six months.

What is the Average Ticket Price

You get to this number by dividing total sales revenue with a total number of sales per month.

For example, total revenue (100 000 USD) / total sales (10 sales) = 100 USD 

What Kind of Enterprise Do You Own

A lot of enterprises have higher revenue during a specific time of the year. Many MSPs can offer you seasonal downtime, which can save you money during lower revenue months. 

How to Apply for a Merchant Account

To apply, you need to provide information like business name, contact information, tax information, routing, and business bank accounts number. Some providers will expect you to submit a credit check. Here is a tip on how to apply for your MA – contact several providers. Why? Because you will have an opportunity to bargain with them based on the offers from their competitors.

Negotiate a Better Deal 

What may surprise you is that you don’t have to accept the first offer you get. You can negotiate better terms for your company with sales representatives. They will usually try to push you to sign up to a broadly available offer, but you can try to negotiate a better deal that applies specifically to your needs. 

Choose the Provider That Suits Your Needs 

Setting up an MA is not very much an open-and-shut case. You shouldn’t chain yourself to the first offer from the first provider you stumble upon. This can very much affect how you will grow your venture over time. If you stick to some generic, expensive long-term contract, you may be faced with thousands of dollars of unnecessary expenses each year. This is the reason for that thorough research you should undertake from the beginning. Not all merchants have the same conditions and the same fees, and there is a possibility to negotiate better terms for your company than the ones you were offered.


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