How Do Merchant Accounts Work?

How Do Merchant Accounts Work?

Business ownership is overwhelming, especially in the beginning stages. The mere task of understanding the terminology alone can be extremely daunting, yet it is crucial to have a good sense of the numerous components that combine to form the well-oiled machine of a successful retail enterprise. One of the most basic and important is the concept of the merchant account.

What Is a Merchant Account?

In the simplest terms, your merchant account is not all that different from your bank account. However, it is set up through a payment processor and is separate from your business account. It is where all of the funds from credit and debit card payments are stored for a period of time before being transferred to your business bank account.

The Purpose of Merchant Accounts

The role of your merchant account is to process the transactions from your customers. You are generally charged a flat rate or a percentage fee for each transaction, and the funds that remain after these deductions are taken out are transferred to your bank account. Because this process is automatic, you don’t need to be directly involved in these tasks although you are usually able to view a log of your transactions as they are being processed.

Merchant account providers allow you to accept customer payments by various means:

• Using countertop, portable or mobile card machines for credit and debit card payments as well as by NFC contactless cards or digital wallets like Apple Pay, Samsung Pay and Android Pay.
• Through a payment page for online transactions.
• Through a virtual terminal for payments by phone.

Choosing a Merchant Account Provider

Even the most cursory of online searches will show you that there are many options out there when it comes to merchant accounts. Because the benefits and fees can vary so widely, take time to carefully assess your needs and review your options before signing any contracts or agreements. Know the following aspects of your business, which you may need to discuss when applying for a merchant account:

• The type of business you run
• The products and services you offer
• Your average sales volume and size of an average transaction
• Percentage of sales using credit and debit cards
• The solvency of your business accounts

Tips on Getting Approved for a Merchant Account

The companies that sponsor these accounts can often have a complex application process. Maximize your chances of being approved by following these suggestions:

• Provide financial statements that show an excellent history (or be ready to pay a security fee).
• Be prepared to show at least six months’ worth of bank statements showing a good credit history; otherwise, be willing to pay a security deposit.
• If your history is poor or you are a new company, write a clear cover letter and be prepared to explain what your business is all about and why you are a good risk.

If you plan to accept credit card payments either in your physical store or online, you must have a merchant account. By its very nature, it will require you to pay fees, but not all providers are the same with regard to fees charged or services provided. Sometimes flat rates seem attractive, but you are often better ahead by working through variable rates depending on how your customers most often choose to pay. Thoroughly review all of your options before signing on the dotted line to ensure that you and your merchant account provider can have a long and fruitful relationship that works well for both of you.