4.6.2021

What is a Merchant Account?

Written by Austin Chegini

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With American shoppers using electronic payments instead of cash, businesses need to adapt to this new consumer trend. Unfortunately, accepting credit and debit cards is not as easy as flipping a switch. Businesses must work with a payment processor and obtain a merchant account. 

That said, what is a merchant account, and how do you qualify for one? 

What do merchant accounts do? 

When businesses accept cash payments, they typically deposit the funds in a business bank account. This standard account can be used when writing checks, paying employees, or issuing invoices.

When it comes to digital payments, businesses need a similar bank account called a merchant account. This is where all credit and debit card funds will be deposited after a transaction. A business cannot accept digital payments without this account. 

However, a merchant account is not like a typical bank account. You have no control over the account. Rather, it is a holding place for electronic payments during the settlement period. Once settled, the funds are then sent to your business bank account. In all, this process typically takes 1-3 days.

Why do businesses need merchant accounts?

With this in mind, why can’t merchants instantly deposit digital payments to their bank accounts? 

In short, it is a merchant’s best interest to keep these funds in their account for a few days. Let’s see a few key reasons why this may be. 

First, banks and credit card companies can charge back the payment. A chargeback is when the card company or bank requests the funds back from the merchant. This typically happens if a customer issues a formal chargeback request or claims fraud. 

Second, a customer can return their purchase or ask for a refund. Having some funds in your merchant account to cover returns helps simplify banking and bookkeeping. 

Lastly, your payment processing company often collects funds from a variety of sources. If you have a large transaction volume, this could be hundreds of deposits in a single day. Instead of sending all these transactions directly to your bank account, the funds are combined in your merchant account. Then you can have a single deposit to your bank, simplifying reconciliation and accounting.

On top of this, processing digital payments is not a simple task. Unlike a simple bank transfer, swiping a credit card requires a few entities to send the funds. The payment processor will need to communicate with the cardholder’s bank, credit card association, and the business’s bank to transfer the funds. 

Having a merchant account is necessary to receive the funds during this step.

What fees come with having a merchant account?

Once you set up your payment processing, you can expect to pay monthly fees and individual transaction fees. Keep in mind that companies charge various rates. Some will charge a flat percentage per transaction, and others can have fluctuating percentages. 

Some common expenses to expect include:

  • Application Fees
  • Setup Fees
  • Monthly Charges
  • Transaction Fees
  • Equipment rental fees 

On top of this, you may have contractual obligations with your merchant service provider. For example, some companies will require you to commit to 12 months of service. Should you cancel your service before then, you will be charged additional fees. 

How do you obtain a merchant account?

Anyone cannot qualify for a merchant account. Follow these steps if you want to accept debit and credit cards. 

1. Work with a merchant services company

As we mentioned earlier, you will need a payment processor or payment gateway to collect digital payments. These services carry out the behind-the-scenes tasks needed to charge banks and credit card companies. 

Merchant services companies provide businesses with the hardware and software needed to charge cards in-store and online. 

In return for facilitating these transactions, the payment processing company collects a percentage of the transaction total. For example, a company may charge 3% + $.50 on every transaction. 

2. Meet the basic requirements

Since credit card payments expose payment processors to a high degree of risk, merchant services companies take precautions when onboarding new clients. After all, your merchant account acts as a type of credit line until the funds officially settle. If the merchant services provider refunds customers but you do not have the funds in your bank, the company will lose money. 

When applying for a merchant account, a payment processing company will want to be sure that you are a stable business that is not involved in risky transactions.

The basic requirements to qualify for a merchant account include:

  • A business bank account
  • History of financial statements
  • Proper business licenses
  • Employer identification number
  • PCI-compliance

3. Have a modern point of sale system or e-commerce website

While not always necessary to receive digital, using a point of sale system is one of the simplest ways to process card transactions. With a POS, you will plug in a card terminal to accept credit, debit, and contactless payments. The terminal will not only process the payments, but it will communicate with your POS so you have accurate financial records. 

If you want to sell online, you will need to link your payment gateway with your store. When a customer completes a purchase, the payment gateway will collect their card information and facilitate the transaction. 

Need a POS for payment processing? Contact Epos Now to learn about our solutions.