What you need to know to open a merchant account

August 05, 2019

If you currently have a business or are considering starting one, chances are you’ll want to be able to accept credit and debit cards, since they are a preferred payment type for many consumers. In order to do so, you’ll need to establish a merchant account. No doubt you’ve heard about this, and quite possibly you’re not entirely sure what it means and how it fits in the much larger world of payments. That’s understandable. We're here to help you sort through the complex and often contradictory information.

In this article, we'll take a look at what a merchant account is and why you need one to process payments.

What exactly is a merchant account?

A merchant account is a type of bank account that allows a business to accept credit card and debit card payments, along with other types of electronic payments. This type of account is set up with a payment processor the manages the processing of payment when customers pay for goods and services. A merchant account usually requires an agreement between the merchant and the acquiring bank (the financial institution that processes the credit and debit card payments for the merchant) and any other parties involved in processing payments such as a payment processor, an independent sales organization (ISO), and/or a member service provider (MSP).

Whether the agreement is between the merchant and the acquiring bank, or through a payment aggregator, like an ISO, (which allows a merchant to accept credit and debit cards without having to setup a merchant account themselves), it acts as a contractual agreement that also requires the merchant to adhere to operating regulations established by the card associations, including payment security mandates.

Not every merchant services account is designed the same way. The terms depend on the payment processing needs of your business, the type of business you run, and the size of your business, among other considerations. Small business merchant accounts have different needs than enterprise business solutions.

Gateway or integrated payment solution

Whether you process payments instore, online or both, you will have the choice of using a payment gateway or an integrated payment integration.

A gateway is a third party hosted payment solution that connects a merchant to the acquirer's payment processing platform. Merchants typically use payment gateways when a direct connection to the processor is not possible, or is inconvenient because of cost or time. The advantage of a gateway is that it eliminates the need for a merchant to implement all of the necessary software, hardware, servers and security protocols for payment processing themselves. Gateways often come as all-in-one packages.

With an integrated payment solution, a merchant can connect directly to the payment processor. An integrated solution virtually eliminates the need for a credit card payment gateway because transactions are sent directly from the POS to the payment processor. Integrated solutions often have built-in advantages like reporting features and customer service-features that may be available as add-ons with a gateway solution but not as part of an initial package. Many integrated solutions offer customizable features.

An integrated solution may cost more upfront, but may be worth it in the end for some merchants, considering their business model and goals. A gateway solution may be the best option for those merchants that are willing to sacrifice lower costs and customization for a turnkey solution.

So, before you open your merchant account, first consider your cost structure and time frame for implementing a payment solution. Also consider the complexity you need to accommodate in your payments and whether a one-size-fits-all approach will be sufficient or if you will need additional capability in the future.

Where do you get a merchant account?

If you already have a business banking account, you could inquire whether your financial institution also offers merchant accounts (many do).

Another option is to establish a merchant services through an ISO or through your POS hardware provider––most have established partnerships with trusted payment processors. If you are processing online, eCommerce solutions often have merchant accounts built-in to their options and allow you to get up and running with ease.

Before you get merchant services, also consider fees and costs.

Fees are an important consideration of course, but should not be the deciding factor when selecting a merchant provider. Like with most things, you get what you pay for.

The fees for a merchant solutions mostly depend on the number of transactions you’ll be putting through the system. However, the fees could also depend on how risky your business is (i.e. businesses operating in an industry or a manner that has high number of fraud incidents) as well as the amount of risk you’ll extend to your customers. These considerations play into what is called “tiered” merchant accounts. Fees may be higher, for example, for merchants that don’t require a CVV number from the back of a credit card for verification.

Most commonly, merchants will pay a fee per transaction and/or a percentage of each transaction. You may end up with merchant credit card processing that operates on a flat fee with a cap on how many transactions you can actually accept.

In addition, you can choose between an aggregate merchant account or an individual merchant account. If you intend to have a smaller eCommerce business, for instance, you may choose an aggregator. They offer a set of standard services to small merchants that often cannot be negotiated, but getting set up with an aggregate merchant account is simpler, may not require any underwriting, and can be set up in a few hours versus a few days.

If your business is already established and accepting numerous payments daily or is just starting up with an aggressive plan for growth, you will want an individual account in which rates can be negotiated and/or a fee plan can be tailored to your needs.

Be sure to find out about termination fees if you are unhappy with the merchant services or decide to close your business.

Opening a merchant account may require underwriting and approvals.

Many merchant accounts have to undergo an underwriting process for approval. How complex this process is depends on the terms. For example, if your account requires a high line of credit, the underwriting process will be more in depth and take into account a number of things such as your business history, your credit score, the type of account and the risks inherent in your business.

Also, as part of the application process, you will also be asked to provide your Employer Identification Number (EIN), business checking account information, a business license, your social security number, and other business operational information.

Underwriting is ordinarily required if you want an individual merchant account, however that type of account will give you many more customization and negotiation options.

Try to get a combination of services from one provider.

To keep it simple, look for a provider that can offer as many services as possible, so you don't have to use multiple providers. In the end, if you can get other services bundled into your merchant account, it will simplify your payment operations and let you focus on the fun parts of your business.

Still have questions? Reach out to learn more.