Most customers expect you to accept debit and credit card payments. To do so, you need a merchant account. Here’s what to expect when opening a merchant account for your business.
- For both in-person and online credit and debit card processing, your company requires a merchant account.
- Your merchant account can be created by a payment processor. Find out how to obtain one for your small business.
- Fees, hardware support, customer support, and contract term should all be taken into account when evaluating credit card processing services.
- This article is for company owners who want to learn about the costs associated with accepting credit and debit cards as well as how payment processing works.
Credit card processing is not automatic. In this situation, merchant accounts are useful. The intermediary that enables your company to accept credit and debit cards in person and online is a merchant account. But why are they required in order to accept debit and credit cards, and does your business actually require one to handle electronic payments?
Here is a brief explanation of how small company credit card processing works, what to look for in a merchant account, and how a merchant account functions.
What is a merchant account?
A business bank account is a merchant account. With the use of a merchant account, a company may collect payments in a number of different methods, including online ones made with credit or debit cards. Since it is a commercial bank account, opening one requires a business license.
You may start accepting credit cards and debit cards from your consumers once a payment processor has set up a merchant account for your company. You will often need some hardware for this, which you can get from your credit card processing partner. Some payment processors may even provide you with a free credit card reader to get you going.
How to obtain a merchant account
Getting a merchant account is not too difficult. The steps to create an account are as follows:
1. Do your due diligence.
To open a merchant account, you must first conduct some research. There are differences in costs and capabilities, so you’ll want to find out which businesses provide the finest answer for your company. For instance, some processors are focused on your business, while others are experts in a certain kind of transaction, like retail sales or internet transactions.
Ask your acquaintances who work in related fields for referrals. Additionally, you may compare processors online. You might want to think about your bank’s potential availability of merchant accounts. Particularly if your firm is young, your bank could be more inclined to approve your request for a merchant account.
Compare the hardware expenses, customer support, and contract term in addition to any advertised fees. The typical merchant account contract is three years long and includes early termination fees.
Your potential processor should provide you specific information about the kind of evidence it needs and how long the approval process could take when you apply. It’s wise to investigate into the processor’s business practices if it makes generalized, unreasonable claims or remarks.
2. Get your paperwork in order.
You must provide information about your company, such as your company’s name and DBA, contact details, the number of years you’ve been in operation, your tax ID number, financial documents, business bank account and routing information, and occasionally a credit card to pay the application cost.
3. Apply for a merchant account.
The processor will probably examine your personal and corporate credit histories once you’ve provided all the necessary information. You could be required to pay an application fee depending on the supplier.
Include an antiquated cover letter with your application to detail your company’s operations and justifications for a merchant account.
4. Wait while your application is reviewed.
Your application will be assessed by the merchant account provider, who will determine if you pose a good risk. The following criteria will be taken into account by the vendor when accepting an application:
- Amount of time in business
- Personal and business credit histories – including bankruptcies or defaults
- Whether you have previously had a merchant account
- Type of business and future transactions – in person or card not present
If you intend to handle transactions in-person while clients use their cards on-hand, your firm is regarded as less dangerous. If you handle cards over the phone or online, your business is ranked as riskier since these transactions are more susceptible to fraud. Some merchant account providers demand address verification when cards are not present in order to reduce this danger.
If your business background and transactional history make you a low-risk choice, the merchant account provider is likely to approve your application. Riskier businesses may still be accepted, but they will pay more money.
How payment processing works
The actions that are done when a credit card transaction is processed are as follows:
1. The transaction goes through a payment gateway.
When determining if the cardholder has enough money for the transaction, a payment gateway acts independently of a merchant account. Your company needs a payment gateway if you take credit card payments over the phone or through an internet portal: Through a payment gateway that connects to the credit card issuer, a keyed-in or card-not-present transaction is completed online.
A payment gateway is an additional handy resource if your clients routinely place pickup orders in advance. The finest point-of-sale (POS) systems have a payment gateway that reads the cardholder’s information and verifies the validity of the transaction with the credit card provider.
When you open a merchant account, the credit card processor you work with can also set up a payment gateway for you. Card-not-present transactions typically have greater expenses than card-present transactions, and payment gateways typically have an extra monthly fee.
2. Money is deducted from the customer’s account.
If the transaction is accepted, the merchant account will first take its transaction charge, which ranges from 3% to 5% of the total, before deducting the purchase price from the customer’s bank or credit card account. Depending on the method of payment, the costs change. For instance, American Express often charges greater transaction fees than Visa or Mastercard.
3. Money is deposited into your business account.
The money is then transferred from the merchant account into the checking account of your business. Instead of immediately following a transaction, these deposits typically happen in batches at the end of the day, or even less frequently.
4. Customers dispute the purchase.
The merchant account must get the transaction data in order to validate it in the event of a customer dispute. For this, there is frequently a cost. In the event that a refund is appropriate, the merchant
account provider will handle it, taking the money out of your account and putting it into the customer’s account. For this phase, there is frequently extra cost.
Types of merchant accounts
Because your business has unique needs when it comes to payments, these are different types of merchant accounts:
Retail:
This merchant account is for shops that sell things in a set place. Low startup and transaction costs are often provided to these businesses.
Mobile merchants:
If your company goes to events, like food trucks, you’ll need a mobile merchant account. You may purchase mobile credit card processing equipment that is simple to set up and operate if you want to accept payments made using mobile credit cards.
E-commerce:
There are merchant accounts that can meet your demands whether you sell things over the phone or online, such as e-commerce merchant accounts (explained in more detail below).
Special merchant accounts for e-commerce and phone businesses
The payment processing sector has grown to include e-commerce enterprises as businesses have become more digital. Payment processing services are even more crucial if you’re starting an internet business.
However, compared to brick-and-mortar establishments, e-commerce enterprises have access to several sorts of merchant accounts. Following are some categories for e-commerce merchant accounts:
Direct:
A merchant bank is where you go to apply for a direct merchant account.
Local:
An account in your native nation is referred to as a local merchant account.
Offshore:
An offshore merchant account, sometimes referred to as an international merchant account, is situated abroad.
High-risk:
Online firms with a high rate of chargebacks and refunds should use a high-risk merchant account.
Third-party:
merchant accounts assist the processor by splitting its costs and are linked through an extra secure payment channel. If your e-commerce business is just getting started, this kind of account is great.
What fees are charged?
The costs related to a merchant account differ depending on the supplier. Transactions with a card present are typically thought to be the least prone to fraud. As a result, these transactions frequently have the lowest rates that credit card processors have to offer.
Some merchant accounts follow a set per-transaction pricing with no extra charges. Others employ the interchange-plus pricing model, which combines the markup from the merchant account provider with the processing fee charged by the credit card issuer. The tiered pricing model also offers a variety of charges based on the nature of the transaction.
Let’s examine each model in more detail:
Flat-rate pricing:
The flat-rate pricing model is simple and is most frequently used by mobile credit card processors. You pay a certain percentage for each transaction that is handled. For instance, the processor could take 3% of the transaction’s value each time you swipe a debit or credit card. If your company sells small-ticket products or has modest sales volume, this business model will work best for you.
Interchange-plus pricing:
pricing schemes for small businesses is interchange-plus pricing. The processing fee determined by the credit card company is known as the interchange rate. A payment processor will bill this rate plus a markup as its profit under interchange-plus pricing. An interchange-plus price structure would look like this: 2.75% + $0.10 per transaction, for instance. In this illustration, the exchange rate is 2.75%, while the processor’s markup is 10 cents.
Tiered pricing:
disqualified transactions are the three categories into which transactions are divided by tiered pricing. The most favourable rate is offered to qualifying transactions, while the most expensive rate is charged to unqualified transactions. Each category has different transaction types, but in general, a card-present transaction using a standard credit or debit card at a POS system is considered to be a qualifying transaction. A credit card number entered over the phone, however, would often be unqualified. Keyed-in card numbers may be used in disqualified transactions if an address verification service (AVS) is used to confirm the cardholder’s address.
Beyond the price models, there are some extra costs listed here:
Monthly fee:
Sometimes referred to as a statement fee, the monthly fee is charged for preparing your monthly statement and providing customer support.
Gateway fee:
If you require a payment gateway for card-not-present or online transactions, you might incur a monthly gateway fee.
Monthly minimum fee:
Some payment processors have a minimum number or value of transactions you must complete each month. If you fail to meet this minimum, you could be subject to a monthly minimum fee.
PCI compliance fee:
The payment card industry (PCI) has data security regulations to reduce the threat of identity theft and fraud. Many payment processors will help you stay compliant as part of setting up and maintaining your merchant account. Some processors charge PCI compliance fees for these services, but they aren’t always disclosed when you inquire about pricing.
PCI noncompliance fee:
Some processors charge fees for businesses that do not comply with PCI standards. Usually, you have a few months after signing up to come into compliance, but if you fail to do so within that time frame, you could begin incurring PCI noncompliance fees.
Batch fee:
You might be charged a batch fee when you post a batch of new transactions – usually once or twice a day. These fees are often the same as your per-transaction fee, about 10-25 cents.
Address Verification Service fee:
If you use AVS to confirm a cardholder’s address, the processor might charge this fee. AVS is a fraud-prevention measure most commonly employed by e-commerce businesses and companies that frequently perform keyed-in transactions.
Retrieval fee:
You might be charged a retrieval fee when a customer disputes a charge and their bank requests the records related to the sale in question. This isn’t the same as a chargeback fee; the retrieval could ultimately prevent a chargeback if the customer’s dispute is invalidated.
Chargeback fee:
Chargeback fees occur when customers successfully dispute a charge and demand a refund. Chargebacks involve canceling an already processed transaction and returning the funds to the customer. You then have to pay a fee to the processor to cover the processing costs associated with the refund.
Cross-border fees:
International transactions generally come with additional fees to cover the costs of exchanging currencies electronically.
Some fees are unavoidable, but not all are common across credit card processors in the industry. Do your due diligence to ensure you aren’t caught up in bogus fees from an unethical payment processor.
Alternatives to merchant accounts
One of the following options enables credit card acceptance without a merchant account:
PayPal:
PayPal charges a fee per transaction to accept payments from credit cards, debit cards, and bank transfers for online companies. After creating a PayPal business account, you would get the necessary coding to add a PayPal button to your website.
Low-volume processing:
Several companies, including Intuit’s QuickBooks payment system, PayPal Here, and Square, provide low-volume credit card processing for small and mobile enterprises. Read our Square review for additional details.
The simple line is that you must open a merchant or alternative account if you wish to take debit and credit cards from your consumers. Most clients in today’s society expect to pay with a credit or debit card; many do not carry cash on a regular basis. Customers can become irate if you refuse to open an account so you can accept these payment methods. In the end, declining credit cards might affect your revenue.
Check out Business News Daily’s reviews of the top credit card processors if you’re seeking for a payment processing business that can swiftly and simply set you up with a merchant account. These payment processors provide exceptional service to meet your company’s demands.