Posted by:Brian Szymanski
As technology is constantly upgrading itself, the ability to accept payments smoothly and securely has become fundamental to the success of any business. Behind the scenes of every electronic transaction lies a critical component known as a “merchant account”. While it may not be a term that rolls off the tip of the tongue in everyday conversation, understanding what a merchant account is and how to successfully acquire is essential for entrepreneurs and business owners alike.
What is a Merchant Account?
A merchant account is a business bank account that allows a business to accept and process electronic payment card transactions. These accounts need a partnership between a business and a merchant-acquiring bank that facilitates all transactions related to electronic payments.
Merchant account relationships are essential for online businesses. Their relationships involve added costs which some traditional businesses may choose not to pay by accepting only cash for deposits in a standard business account. Merchant accounts are a type of commercial bank account.
Role of a merchant account in payment processing:
The role of a merchant account in payment processing is critical, serving as the backbone that enables businesses to accept and process electronic payments, particularly credit and debit card transactions. Let’s look at the key aspects of the role of a merchant account in payment processing:
Payment Acceptance:
Merchant accounts are the gateway through which business transactions happen using credit and debit cards. When a customer makes a card payment, the funds are transferred from the customer’s bank (issuing bank) to the merchant’s bank account (acquiring bank) through the merchant account.
Transaction Authorization:
At the time of card payment, the transaction details are sent to the merchant’s payment processor. The merchant account plays a critical role in facilitating the authorization of these transactions. After the process, it verifies whether the customer’s card is valid, has sufficient funds, and whether the transaction can proceed.
Fund Settlement:
After the transaction gets authorized, the merchant account ensures that the funds are settled into the merchant’s bank account. Mostly, this process involves batching transactions, reconciling them, and transferring the appropriate funds to the merchant regularly, often within a few business days.
Security and Fraud Prevention:
Merchant accounts play an important role in maintaining security and preventing fraud. They implement security protocols, such as Payment Card Industry, and Data Security Standard (PCI DSS) compliance, to safeguard sensitive information during transactions.
Transaction Recordkeeping:
Merchant accounts maintain records of all transactions processed, including details like transaction amounts, dates, and customer information. These records are essential for accounting, reconciliations, and customer support purposes.
Handling Chargebacks:
When a customer disputes a transaction (chargeback), the merchant account is involved in the resolution process. It allows merchants to respond to chargeback claims and provide evidence to prove the validity of the transaction.
Fee Management:
Merchant accounts handle various fees associated with payment processing, including transaction fees, interchange fees, and processing fees. They ensure that these fees are deducted from the transaction amounts before funds are settled to the merchant.
Customization and Integration:
Merchant accounts often offer customization options and integrations with point-of-sale systems, e-commerce platforms, and other business tools. This enables businesses to tailor their payment processing to their specific needs.
High-Risk Industry Support:
Some merchant accounts specialize in serving high-risk industries, such as online gaming or adult entertainment, and are equipped to handle the unique challenges and risks associated with these businesses.
How to Successfully Acquire a Merchant Account?
Before you open a merchant account, you need to set up a few foundational elements of your business. Let’s delve into the points on how to prepare your business, find the right merchant account for your needs, and open your merchant account:
1. Register Your Business:
Before getting a merchant account in the US, ensure your business is legally registered and has the necessary licenses and tax IDs.
2. Get an EIN:
Obtain an Employer Identification Number (EIN) from the IRS; it’s like a social security number for your business.
3. Open a Business Bank Account:
Separate your merchant account from your regular business bank account to handle customer payments.
4. Research Merchant Account Providers:
Compare providers based on fees, processing time, customer support, security, integration, and reputation.
5. Complete an application:
Fill out the merchant account application with accurate business and personal information.
6. Provide Supporting Documentation:
Submit necessary documents such as business registration, bank statements, and tax returns.
7. Underwriting Process:
Expect the provider to evaluate your business’s risk, potentially involving a credit check and additional information.
8. Wait for Approval:
Approval can take days to weeks, depending on factors like the provider and your business’s risk profile.
9. Set up Payment Processing:
Integrate payment processing software with your website or point-of-sale system.
10. Test and Start Accepting Payments:
Ensure the system works smoothly by testing it, then start accepting payments from customers.
Online Merchant Account v/s Traditional Merchant Account:
Online merchant accounts and traditional merchant accounts function similarly. Online merchant accounts collect payments from issuing banks and transfer funds to the merchant’s business bank account. While, online merchant accounts are compatible with various digital tools, like payment gateways, online shopping carts, and other digital payment tools to facilitate online transactions.
However, some traditional merchant accounts don’t offer online payment services.
Meanwhile, some traditional merchant accounts aren’t equipped to offer online payment services. In the future, if you ever plan to open an online store or are in the process of opening it, working with a merchant service provider with online merchant account capabilities is critical.
High-Risk Industries and Merchant Account, What You Should Know?
High-risk industries involve businesses that face a higher degree of risk and have challenges when it comes to seeking merchant accounts. These challenges arise from factors like the likelihood of chargebacks, legal complexities, and stringent regulatory oversight.
Prominent high-risk sectors include the gaming industry, the pharmaceutical industry, and many other industries. These businesses often struggle with evolving regulations and greater susceptibility to customer disputes.
High-Risk Merchant Account providers evaluate risk in high-risk industries by inspecting a range of factors, these include a company’s history of chargebacks, its overall reputation within the industry, financial stability, and adherence to compliance measures.
Merchant account providers evaluate risk in high-risk industries by scrutinizing a range of factors. These include a company’s history of chargebacks, its overall reputation within the industry, financial stability, and adherence to compliance measures.
Security and Compliance:
Merchant account security is very critical. It protects both your business and customers from any fraudulent activity. Ensure you’re complying with the Payment Card Industry Data Security Standard (PCI DSS), a set of requirements designed to safeguard sensitive cardholder data. Non-compliance can result in hefty fines and damage your reputation.
To maintain compliance, securely store customer data, use encryption for online transactions, and regularly update your security measures. Educate your staff on best practices to prevent data breaches and fraudulent activities.
Choosing the Right Merchant Account Provider:
Selecting the right merchant account provider is a critical decision. Research thoroughly, and don’t rush into partnerships. Consider factors like reputation, customer support, and contract terms.
Merchant account providers come in various forms, including traditional banks and payment processors. Banks often provide stability and comprehensive services, while payment processors offer flexibility and tailored solutions. The choice depends on your business’s unique needs.
Parting Note:
As we conclude this journey into the world of merchant accounts, it’s important to note that while online and traditional merchant accounts share core functionalities, they differ in their compatibility with digital tools. Choosing the right merchant account provider, whether it’s a traditional bank or a payment processor, hinges on your business’s unique needs and aspirations.
