A merchant account is a type of bank account that allows businesses to accept payments by debit or credit cards. So a merchant account is an agreement between a retailer, a merchant bank and payment processor for the settlement of credit card and/or debit card transactions.
When a customer pays for a product or service with a credit card, the funds are first deposited into the merchant account and from there eventually transferred to the business bank account. Transfers to the business account are normally done on a daily or weekly basis.
If you are going to operate an e-commerce business and want to accept credit card payments online, you need at least one internet merchant account (even if you already have a merchant account, in many cases).
Obtaining a Merchant Account
Applying for and getting a merchant account is not a slam-dunk process even though the business of issuing merchant accounts is highly competitive. To minimize risk, vendors use a variety of criteria to determine whether to approve a merchant account application:
- Type of business - does it have a higher or lower risk of credit card fraud or returns?
- Length of time in business
- Business history - bankruptcies, defaults, etc.
- Whether the applicant has had merchant accounts previously
- Personal credit history of the business owner
Most new business owners are more likely to get a favorable review of their merchant account application from the same bank that holds their business and/or personal account(s).
Having a higher risk does not mean that an application will be rejected. However, the vendor may initially demand higher transaction or other fees to compensate for risk. If the business becomes well established, the fees can be renegotiated at a later date.
An internet merchant account is a merchant account specifically designed to hold the proceeds from the online payment processing of credit cards. If you already have a merchant account, you'll probably notice that another difference between the two is the fees; typically, the internet merchant account fees are higher because of the assumed higher risks of online payment (as opposed to a face-to-face credit card or debit card transaction).
Note that for taking credit card payments over the internet you also need a payment gateway, which authenticates the submitted credit card information (the same as a handheld point of sale machine does in a traditional bricks and mortar establishment). The payment gateway submits the transaction request to the credit card company issuer for authorization for payment. Some merchant account vendors (such as Shopify) offer one-stop solutions that don't require a separate payment gateway.
You may be able to get internet merchant accounts from your bank (the same place you got your merchant accounts for your bricks-and-mortar retail business). Because you need separate internet merchant accounts for each type of card you wish to accept as online payment, it may be easier to purchase your account through a third party merchant account provider, such as Merchant Accounts, Beanstream, Moneris, PSiGate or InternetSecure.
Merchant accounts can have a variety of fees attached to them, not all of which are always clearly outlined in contracts, including:
- Application Fees
- Setup Fees
- Monthly Fees
- Discount Rate
- Per-Transaction Fees
- Cross-border Fees
- Rental fees for a credit card terminal
Additional fees can increase the total fee per credit card transaction to over 3%, so you'll want to shop and compare when looking for a merchant account - be aware that in addition to extra fees, some also come with contracts that are minimum term and cannot be canceled without penalty.
PayPal offers one-stop solutions for online payments that don't require a merchant account and are ideal for businesses looking to get started with online transactions quickly, easily, and inexpensively:
- PayPal Payments Standard handles credit card payments, bank transfers, and regular PayPal payments on a fee per transaction basis (there are no setup, monthly, or cancellation fees). To use PayPal Payments Standard, a PayPal button is placed on your e-commerce website checkout page, and when clicked by the customer, they are redirected to the PayPal hosted checkout site.
- PayPal Payments Pro charges a monthly fee but gives a more professional look to the e-commerce website as the payment process takes place directly on the site rather than being redirected to PayPal. PayPal Payments Pro also allows payments via phone, fax, or mail.
Credit Card Readers
Credit Card Reader devices that plug into smart phones and iPads are available from a variety of vendors:
- Intuit's QuickBooks Payment system offers a free mobile card reader and full integration with QuickBooks for a low per transaction fee of 2.4% + $.25 per swipe, dip, or tap.
- Square's Point of Sale application requires Square's free custom reader. Swipe, dip, and tap fees are 2.65% per transaction.
- PayPal's Mobile payment solution integrates with the overall PayPal system and offers a flat fee of 2.7% per swipe/dip/tap transaction.
Note that vendors charge higher per transaction fees for keyed or scanned transactions.