What is a Merchant Account?

It is important to be able to offer your customers and clients multiple payment options. Accepting debit and credit cards is a must these days, and while there are a number of ways to go about doing that, the more conventional and popular way is by opening a merchant account with a merchant services provider.

What is a Merchant Account?

A merchant account is a type of bank account used for storing funds from card transactions until those transactions are settled completely. Thereafter, the funds are transferred to a business account.

Merchant accounts are opened at a merchant services provider such as an acquiring bank. The merchant services provider acts as a middleman between the merchant, the customer's credit card company, and the customer's bank, and offers a range of services such as payment processing.

Unlike a business account, the owner of a merchant account has no control over the account. It is a holding account only. Merchant banks or acquiring banks leave money from transactions in the account for a number of days, to ensure that if any chargebacks or refunds occur, the funds are readily available.

Merchant account plans.

There are three pricing models merchant services providers use to determine how much a merchant will pay per transaction. They are the interchange plus model, tiered pricing model, and flat rate or fixed pricing. Knowing how each of them works will help you decide which you're more comfortable with.

Interchange plus.

Recommended plan.

The interchange plus model is made up of the interchange fee card networks charge and the payment processor or merchant services provider's mark-up fee. It is considered the fairest pricing model and the most transparent.

• The interchange fee charged is different depending on the card. Premium cards carry a higher interchange fee. Some card companies charge assessment fees as well.

• Interchange fees also vary depending on whether the card is swiped or keyed-in, the latter being more expensive.

• The mark-up fee is negotiable. This is unique among the pricing models.

Tiered.

A good option if most of your customers pay with debit cards.

The tiered pricing model groups transactions into three categories: qualified, mid-qualified, and non-qualified. Different pre-determined variables decide each category, and the categories have different rates. This pricing model is known for carrying hidden fees and often works out to be the most expensive model of the three.

• Qualified: Transactions involving standard debit and credit cards being swiped or inserted.

• Mid-qualified: Transactions involving rewards cards and loyalty cards, keyed-in transactions, and card-not-there transactions.

• Non-qualified: Transactions involving corporate cards and international cards.

Flat rate.

Best for businesses with low transaction volumes.

The flat-rate model, also called fixed pricing, charges one rate for all transactions regardless of whether the card is a standard credit card, reward card, or international business card. The way payment is accepted, however, can alter the pricing.

• Mobile credit card processing companies use this model. New merchants are signed up as sub-merchants of a larger, master merchant account.

• Has very few fees. The only other fee charged by service providers under this model is a chargeback fee, but only when needed.

Merchant account fees.

Merchant account fees include transaction fees but also a wide range of other fees. It is important to know exactly what you will be paying for because these fees add up. If you have a merchant account, these are some of the more common fees involved:

How to Open a Merchant Account:

1. Figure out your needs.

• How are you going to accept payments?
• What form of payment is most popular among your customers and clients?
• How many terminals do you have?
• Do you need a mobile reader solution or an entire POS system?
• What is your monthly transaction volume bound to be?
• Do you need a brick-and-mortar business and eCommerce business to integrate?
• What types of add-ons and integrations will you need?

2. Find the right merchant account provider.

• You could start by approaching your business bank to find out if they offer merchant services.

• While shopping around, you'll want low fees, transparency, and the services you need. Pay special attention to the pricing model.

• Read customer reviews of service providers. Find out as much as you can about the provider's reputation.

• Run projections at the highest fees, to get an idea of the most you're likely to pay.

• Do they offer great customer support? If you work with them, how much control will you have over payment options, etc? How good is the software and hardware they provide? Do they provide comprehensive payment solutions? Do they take PCI compliance seriously?

• Make sure the merchant services provider includes a payment gateway in their offering. This makes life a little simpler, seeing as you won't be needing to go with a third-party payment gateway.

3. Compare fees.

Merchant account fees can vary considerably from one service provider to another, so it is important to compare these fees especially:

• Cancellation fees.
• Batch fees.
• Annual fees.
• Monthly minimum fees.
• Statement fees.
• Setup fees.
• Chargeback fees.

4. Begin the sign-up process.

1. Fill in the application form.

2. Supply supporting documents and information: financial statements, processing history, corporate structure, contacts, annual sales, etc.

3. Check your credit report for errors. The underwriter will be pulling a credit report to check the risk. It's a good idea to have both your personal and business credit scores.

4. Submit a cover letter. Write in a standard business tone. This letter should be used to address any weaknesses that might be of concern to a service provider.

5. Read the contract's terms and conditions thoroughly. What a salesperson says and what the contract says is sometimes different.

6. Install the software and hardware. Test it to see whether it works and does what you need it to do. Begin training staff members if needed.