What is a merchant account?

What is a merchant account?

Although some consumers carry cash or checks from time to time, the vast majority want to swipe their credit cards. A merchant account facilitates the acceptance of credit and debit cards for purchases. But what exactly is a merchant account, and why is it so important for today's business owners?

Credit card processing 101
The purpose of a merchant account is to allow a business owner to accept credit cards as payment by transferring money from a credit card account to a business owner's bank account.

Credit card processing transfers a variety of information -- including the credit card number, merchant identification number and the amount of the sale -- over computer networks to authorize the transaction with the cardholder's credit card issuer. None of this is possible without a merchant account.

How merchant accounts work
A merchant account is similar to any bank account except that it is reserved solely for processing credit card transactions for a merchant. The bank or processing company from which the merchant account is obtained will charge the business fees (such as per-item, percentage, batch and authorization fees) in exchange for processing transactions.

There might be other static fees associated with a merchant account, such as monthly charges for statements and customer service, or annual fees. The bank might also charge for chargebacks and other situations not under your complete control.

What many business owners do not realize is that credit card processing is not completed when a payment is authorized. At the end of the business day, the merchant must submit all of the day's transactions over the computer network in a batch, after which the customers' credit cards will be debited and the merchant will receive confirmation that the processing is complete.

The benefits of obtaining a merchant account are many. Since accepting credit cards is an enormous convenience for customers, they are far more likely to buy from a business that has that capability.

Types of merchant accounts
This is not a one-size-fits-all industry. There are many different types of merchant accounts to choose from, each intended for a different type of business model. For example, you can open an Internet merchant account that processes only the transactions that are conducted over the Internet. This type of account works well for business owners who operate exclusively online.

There are also retail and MOTO merchant accounts. A retail merchant account is best for bricks-and-mortar businesses where the cardholder is present for most transactions. In most cases, credit cards must be swiped rather than keyed into the terminal. MOTO accounts are for mail- and telephone-order transactions, similar to the Internet account model.

Choosing a merchant account
It is never a good idea to simply pick the first merchant account you investigate. Volume limits and minimums, for example, are included in many accounts, and the fees charged by the credit card processing company will vary.

Make sure to collect as much information as possible before applying for a merchant account, and ensure that the product you choose will make credit card processing easier for your business.

Published: March 22,2023