A merchant service account, or merchant account, is a special account that allows a business to accept debit and credit cards and electronic payments in exchange for goods and services.
Unlike a traditional bank account, however, a merchant account acts as a temporary holding account, eventually rerouting received funds directly into your business bank account. This means that you are unable to access the funds in your merchant account until they are deposited into your business bank account, which typically occurs 24 to 48 hours after you collect payment and complete the transaction with your customers.
When you apply for and set up a merchant account with a merchant processor or acquiring bank, you will be able to accept card and electronic payments. You may likely also receive a spectrum of additional financial services to aid in your business’s success. This spread of services are referred to comprehensively as merchant services.
Merchant services generally include software and hardware such as point-of-sale systems, credit card machines, online payment gateways, PCI compliance, account statements, online reporting, and technical support. Some, but a not all, of these services are included in the cost of your merchant account. Others are optional and come with additional costs.
A merchant account plays an essential role in your ability to accept card payments at your business. Without one, you won’t be able to accept debit and credit cards or other forms of electronic payments.
Essentially, when a customer swipes a credit card at your business, you collect their card information using a credit card machine and request authorization for the transaction through your merchant account. Your merchant processor verifies the card information with the credit card company, ensures there is sufficient funds in the customer’s account, and authorizes or declines the transaction. Read more about the complexities of credit card processing here.
If the transaction is authorized, the merchant processor collects the payment from the customer’s bank and deposits the funds (minus fees) into your account. You can expect to pay anywhere between 2% and 3% of the total transaction amount in fees charged by your merchant processor, the credit card company, and the customer’s bank.
Setting up a merchant account, though time consuming, is fairly straightforward. Choosing the wrong merchant service provider can be expensive, which is why it's essential to devote time to research. A quick Google search for “merchant service provider” yields a daunting 45 million results. Resist the urge to pick a provider at random despite that feeling of being overwhelmed.
Instead, create a list of providers that you believe could be a good fit for your company. You should consider banks where you have established relationships, providers found during your Google search, or work with the payments experts at SwipeSum to help you find the best merchant services provider for your business. You are looking for a processor with transparent, reasonable pricing and fair contract terms that provides your business with excellent service.
After identifying a handful of quality options, start asking for quotes. You will want to seek quotes from all of your top choices. Don’t settle for the first quote you get -- having multiple options gives you an upper hand during negotiation and can help prevent being pressured into signing a contract prematurely by a pushy salesperson.
Remember to negotiate. Think back to your Google search and how many merchant service providers there are. They want and will fight for your business, so negotiate lower rate and fees, contract terms, additional technical support, etc. You’ll be surprised what they are willing to offer to win your business.
Before signing a contract, be sure to read every word of it. Take a your time and be sure the contract includes everything you negotiated and no hidden fees. Once you have signed your contract, it’s time to set your account and any hardware and software. Your merchant service provider will help in this process, and get you started accepting payments.
Terminating a contract with a provider can be more difficult than ending a bad relationship. And, no, you can’t just ghost them. That’s why it is important to do you research and find a best provider for your business. Trust us, and you’ll be on your way to reducing the costs of your payments processing and increasing your profits.
If you think a merchant account isn’t for you, you can choose to process card transactions through a payments aggregator or merchant aggregator. These are companies that enable businesses to accept card payments without setting up an individual merchant account. Under this umbrella are well-known companies like Square, Stripe, and PayPal.
Instead of requiring businesses to set up individual merchant accounts, a payments aggregator groups your business’s transactions together with those of other merchants and processes them all through its merchant account. This has its advantages and disadvantages and isn’t inherently better or worse than setting up your own merchant account. It’s just an alternative processing structure. But, let’s take a closer look at a few of the differences.
The ease of the application process with a payment aggregator is relatively simple, which is one reason so many small businesses find aggregators so appealing. The process often requires only a few minutes to complete the application and connect it to your bank account. Generally, you can expect to accept card payments the same day using the aggregator’s mobile apps on your tablet or mobile phone.
Comparatively, the process of applying for a full-service merchant account can be time consuming. It involves setting up a business profile; completing complicated applications, for which you may need a business license, credit histories, banks statements and more; negotiating terms and fees; and setting up hardware and software, like point-of-sales systems and credit card machines. It can take days or longer before your account is active and you can accept cards.
But, while creating an account with an aggregator is quick and easy, it comes with a few trade offs. Allowing a high volume of merchants to process payments so easily translates into higher risk for the aggregator. They counterbalance this risk by charging higher fees to its member merchants. Aggregator fees are fixed so when your business increases its processing volume it may become cost prohibitive for your business.
You may also find your account with your aggregator of choice frozen without notice, unable to accept card payments. Again, to counteract the risk of fraud by merchants in the aggregate, aggregators exercise severe caution when fraudulent activity is suspected by a merchant or a cardholder. Often, accounts holds can last 24 to 48 hours; but can also exceed 30 days and lead to account closure.
Account holds occur infrequently for individual merchant accounts due to the comprehensive application process. So while a merchant account requires more time and effort during the set up stage, it offers greater reliability. Merchant accounts also have fee schedules that are tailored to your individual business and your transaction volume, which make them more cost-effective the more payments you process.