What Is a Merchant Account? Everything You Need to Know

If you want to accept credit cards from your customers online, in person, or on the phone, your first step is getting a merchant account from a merchant account provider. Even though it’s a fundamental part of modern businesses, it can be more difficult than you think to choose the right provider and make sure your application gets approved.

We’ll cover what a merchant account is and exactly how to make the right decision for your business, regardless of size or industry.

What is a merchant account?

A merchant account is a type of bank account that allows you to accept credit or debit card transactions, and it officially establishes a relationship between you and your chosen merchant services provider.

When a business has a merchant account, it essentially acts as a temporary holder for settled credit or debit card transacted funds. The issuing bank (a.k.a. the cardholder’s bank) sends the funds directly following the transaction to the merchant account, which then deposits the funds into your business account of choice.

That’s right. Your merchant account is not your primary business account nor can you merge these. Before you even try to apply for a merchant account, you’ll need to have a normal business account set up. We’ll cover what else you need a little later on.

Merchant accounts act as sort of mutually agreed upon bay where transactions are held and proper fees are taken by each respective party (issuing bank, MSP, etc.). This reduces risk for all parties involved and allows for more sophisticated integrations between parties.

These funds’ transfers typically occur on a schedule of your choice (weekly, every other week, etc.), and their durations vary provider to provider.

How do I get a merchant account?

While the process for getting a merchant account is somewhat rigorous, it’s fairly easy to accomplish with proper preparation and due diligence.

There are two typical avenues to acquire a merchant account:

1. Banks
2. Merchant Services Providers (MSPs). These are also known as ISOs (e.g. us!)

You’ll need to have a variety of assets to open a merchant account, but if you have an existing relationship with a bank they may give you more leeway. Keep in mind that banks usually work with third-party providers, though, and you may end up paying more than you should due to kickback rates existing between parties. Ask specifically who they work with and why, and then do your research on those companies separately.

Similar to banks, some ISOs will charge extra fees on the backend so they can pitch enticing processing rate offers on the front end. Be careful of this! Low rates aren’t worth it if the savings are drowned out by silly fees and long contracts.

While banks can be good options for large, 7-8 figure businesses, small to medium-sized businesses rarely have the leverage or expertise to negotiate proper deals, and it’s almost always more advantageous to work with an MSP/ISO instead.

Good MSPs are more flexible, save you time, help with PCI compliance, help fight chargebacks, have better or proprietary hardware, and make it their mission to partner with you. MSPs also rarely require you to have multiple merchant accounts across card networks, whereas banks and some ISOs will (depending on their partners).

Documentation and information you’ll need to apply for a merchant account:

• How many years you’ve been in business
• Your credit history
• A valid business license
• Whether or not you’ve had merchant accounts in the past
• If you’ve had bankruptcies / general financial standing.
• Whether or not your type of business is high-risk for business.

Once you have this information in hand, it’s just a matter of choosing your MSP! They will guide you through every step of the way and have their own system and application — there’s no generalized system across the industry.

Choosing the best merchant services provider

It’s helpful to view these requirements from the merchant services provider’s perspective. They invest time and money into helping you open a merchant account, equip you with hardware, recommend or install POS systems, etc. — all while betting on your future success.

Merchant service providers make their money from transaction fees incurred when you accept credit card charges, and they want to make sure you’re a good fit for them.

For example, some merchant service providers won’t work with businesses making under certain amounts per month, while others specialize in startups. It’s important to analyze the space your MSP works in and make sure you’re setting yourself up for long-term success.

Also, watch out for nasty contracts that lock you in for 3-5 years: this is almost a sure sign of an MSP trying to take advantage of you.

In our opinion, we should earn your business month after month by offering consistent uptime, the latest innovation in merchant services software, and fantastic customer support. If not, then why do we deserve your business?

And keep in mind, the weaker you are from a documentation and information angle, the more leverage the merchant account issuer will have to negotiate higher fees and rates, but if you prove to be a valuable asset, you can bring that to the table in the future and renegotiate.

How your chosen merchant services provider guides you through this process will be their first test of customer service, so keep a close eye on them during what is essentially their sales process. If you don’t like the experience, leave. It will be quite a hassle if you change your mind later on.

Merchant account FAQs

Do merchant account providers charge fees?

Usually. Make sure you double-check your chosen merchant service provider’s policy for recurring merchant account fees.

There are a few different fees to look out for:

1. Initial setup fee. This could be for applications, gateways, etc.
2. Software or hardware startup fees. If you’re just switching providers this may not be an issue.
3. Monthly fees. Some MSPs charge a strict monthly fee for general support services and maintenance.

And keep in mind, these fees are separate from your typical processing fees (interchange rates, etc.).

What is the difference between a payment gateway and a merchant account?

It’s easy to conflate merchant accounts and payment gateways. Just remember that the merchant account is like a special banking account for your business, while the gateway provides a platform for conducting transactions to and from your merchant account and authenticates the submitted credit card data.

So they work closely together, but they aren’t the same thing.

Is PayPal a merchant account provider?

No. Having a PayPal account does not mean you have a merchant account. Paypal acts as a gateway and processor but ultimately holds the funds in their own account.

Having your own merchant account offers a few advantages:

• Slower deposit rates (it has to first go to PayPal, you have to request the funds, and then they are sent to your business account).
• PayPal has significantly higher transaction fees than an official merchant account through an MSP.
• Customers are always sent to PayPal to transact instead of remaining on your site. This causes all sorts of marketing tracking issues and prevents you for installing better upsell opportunities. You also have better control over your conversion rates with a merchant account.
• You’ll be stuck with PayPal’s customer service for when something goes wrong, and that can be a total nightmare.
• If you breach PayPal’s terms and conditions, they can withhold your money from you. Imagine if your margins were tight one month, and you had to deal with back and forth communications with PayPal over a supposed breach of contract? And they didn’t send your money to you? It could be disastrous. While PayPal can be useful for extremely small volumes of transactions, if you’re planning on growing a sustainable business you should absolutely work with an MSP instead.

Who are merchant accounts for?

For you, the business owner! Merchant accounts act as the central hub for fund transfers between your storefront, online store, business account, gateway, payment processor, and merchant services provider.

Without one, you’ll be subject to higher fees and more risk.

Conclusion

Ultimately, where you get your merchant account is dependent on the size, transaction volume, and type of business you operate, but it will almost always be in your interest to utilize an MSP to cut back on sales and kickback rates that banks thrive off of.

When researching your options, remember to:

• See what they offer for PCI. Coming out of the gate with your compliance system taken care of save a lot of time.
• Make sure your storefront merchant account is compatible with your online software.
• Don’t forget to study the Terms and Conditions meticulously! Take notes and have multiple team members review it in a Google doc.
• Have all of your business credentials on hand (license, EIN, etc.).
• Have sales forecasts etc. ready.
• See if they help with chargebacks and/or underwriting.

We hope this helps.

If you’d like to talk about your merchant account options as related to your specific business, throw us a call or email — we’d love to hear what you’re up to.