Merchant Accounts

What Your Business Needs to Know

Setting up a merchant account with an acquiring bank is the traditional way for merchants to accept credit card payments.

Whether or not starting a traditional merchant account is right for your business, however, will depend on numerous factors, including the types of goods or services you sell, your sales volume, and the fees you can afford.

It’s also possible that your business won’t qualify for a merchant account (based on the acquiring bank’s vetting criteria). In such cases, you will need to explore other credit card processing options.

We’ll cover each of these details and more in the following guide on merchant accounts.

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What is a Merchant Account?

A merchant account is a type of bank account that exits solely to process payments from credit cards and other types of payment cards. It isn’t a bank account you have access to. You can’t withdraw money from a merchant account or put money in it as you can with your business’s checking account.

Instead, a merchant account is a “pass-through” bank account where the funds from credit and debit card payments sit while the transactions are authorized and settled.

Once the credit card payment process is complete, the funds (minus processing fees) are deposited in your business’s bank account.

Why are merchant accounts important?

As we discussed in our guide on how credit cards work, when you accept a credit card payment you’re receiving a temporary loan until the person making the payment (the cardholder) can no longer reverse or dispute the charge. This means someone (and not you) has to take financial responsibility for the transaction while the payment process does its work.

This is the main role played by the “acquiring bank” or “merchant acquirer” in the card payment industry. The acquiring bank essentially backs the payments that pass through the merchant account and ensures that funds from any successful payment disputes (called chargebacks) are returned to your customer’s card issuing bank.

And, even apart from the possibility of chargebacks, there is always a delay between when a card payment is authorized by your customer’s bank and when it’s finally settled by the financial institutions involved in the process. A merchant account is essentially the mechanism that keeps this complicated engine running.

Do I need a merchant account to process credit cards?

No. Technically, a merchant account is always involved in the credit card payment process, but that doesn’t mean your business needs a merchant account of its own.

You can also sign up for merchant services through a “payment aggregator,” which is simply a payment processor or credit card processing company that processes payments for multiple businesses through the same merchant accounts.

In such cases, the funds from the payments you receive are still passing through a merchant account, but it’s a merchant account owned by the payment processor instead of you. This is the business model used by well-known credit card processing companies like Square, Stripe, and PayPal.

Setting Up Your Merchant Account

To set up a merchant account for your business, you’ll need to sign a merchant service agreement. This can be done directly by applying for a merchant account with an acquiring bank (if the bank offers merchant services), or through a separate payment processor that can set you up with a merchant account through an acquiring bank.

However, there’s more to applying for merchant account than simply submitting an application. You’ll also have to prepare by identifying the services you need, researching potential payment processors or acquiring banks, and gathering the documents and other information you’ll need to apply.

Here are the steps you’ll need to take:

Evaluate Your Payment Processing Needs

Your first step is determining your payment processing needs and preferred payment methods. This is important because the services your merchant account provider offers need to actually match the way you do business and how your customers prefer to pay.

This will typically include accepting the major card brands (Visa, Mastercard, and possibly American Express and Discover), but there are also larger questions to consider. Do you need to process mobile payments or online payments? Will a traditional credit card terminal work for your business, or will you need a more sophisticated point-of-sale (POS) system or a virtual terminal?

Fortunately, one of the key benefits of choosing a traditional merchant account provider is their flexibility. Pretty much every payment processor that can offer a dedicated merchant account can also provide a wide range of payment processing options and supporting technologies.

Research Acquirers & Payment Processors

You’ll also need to research and compare the available merchant account providers, including their fees, pricing models, and contract terms.

However, this isn’t always as easy as doing a simple online search. The card payment industry is a mess of complicated fees, obscure pricing models, and confusing contract terms. So, you’ll need to dig, dig, and dig some more. Any merchant account provider worth its salt should have an accessible and knowledgeable in-house customer support staff that you can reach by phone.

For guidance on the main issues to consider and the questions to ask, check out our guide on Payment Processors: What to Look For.

Gather Your Financial Information

Any traditional merchant account provider, whether it’s a bank or a third-party payment processor, will expect to learn about you and your company before they’ll approve your merchant account. This includes basic information about your business, your credit history, and numerous other details. As such, you should gather this information prior to attempting to fill our your merchant account application.

You’ll find a comprehensive list of the most common information required in the section below titled “What Processors Want to Know.”

Complete & Submit Your Application

Once you’ve settled on a payment processor and gathered the required information, it’s time to complete and submit your application. Fair warning: applications for a merchant service agreement can be fairly complex, with numerous details buried in the end-notes and fine-print. Before you submit your application, familiarize yourself with every aspect of the payment processor’s merchant account application.

What Processors Want to Know

Basic Information About Your Business

Every payment processor will want to know who they’re dealing with, so you’ll need the necessary basic information, including:

Your business’s legal name (what appears on your state filings and federal tax forms)
Your “Doing-Business-As” name or DBA (if applicable)
Your business’s address and contact information
The name, address, and contact information for an authorized representative (the person signing the application)
Detailed ownership information (names, addresses, etc.)
Your business’s bank account information (designated to receive deposits)
Your business’s website address (if applicable)
Your business’s Federal Tax ID# (typically an EIN)
How long you have been in business

Your process will also want to know if your business has accepted credit card payments before (and, if so, they’ll likely want copies of recent monthly processing statements). This matters to most processors because a major focus of the application process is determining the level of risk you pose. If you have a history of high rates of payment disputes or chargebacks, for instance, they’ll use that information to decide on the terms of the contract they’re willing to offer.

Your Type of Business

What you’re selling, when you sell it, and how you sell it have a big influence on the contract and rates you’ll get. This is because card networks like Visa and Mastercard set different interchange rates for different types of transactions, so contracting with some types of businesses will cost the payment processor more than others. Here’s the type of information they’ll likely want to know:

Your business structure (sole proprietor, LLC, sole proprietor, private corporation, etc.)
Your market type (retail, supermarket, restaurant, E-Commerce, etc.)
A description of the services or goods you sell
Whether or not your business is seasonal (and, if so, when you operate)
Your type of location (store, office building, etc.)
If you have more than one location (and, if so, how many)

Your General Sales Information

How much money your business makes, and how your customers pay, can also make a significant difference to your contract. The sales-related information most payment processors request includes:

The amount of your average ticket
Your annual sales
Your annual sales from Visa, Mastercard, etc.
Your card swiped percentage
Your manually-keyed transaction percentage
The percentage of your sales that are made online
The percentage of your sales made over the phone or by mail
Your number of chargebacks in the last year (if applicable)
How you handle returns (exchanges, refunds, etc.)

Other possible details include your percentage of business-to-business sales and whether or not you offer subscriptions or warranties—all details, in other words, that help the payment processor measure the risk they’re potentially taking on. Card-not-present credit card transactions made online, for instance, present higher risks for fraud and chargebacks than face-to-face transactions when you swipe your customer’s card.

The Equipment You’ll Need

The type of business you operate also makes a big difference to determining the credit card payment equipment you’ll need. Are you a full-service restaurant that can get by with a single payment terminal at the cash register? Or are an online business that needs a payment gateway or some other form of integration with the payment processor?

And the list of possibilities goes on and on. There are virtual terminals, mobile payment equipment, advanced point-of-sale (POS) systems, and a variety of other processing options that might be available from the payment processor you go with in the end. Many payment processors will want to know the type of equipment you’ll need up front and whether or not you’ll get that equipment through them.

The Key Takeaway

A traditional merchant account isn’t for everybody. If you’re a well-established company with fairly high monthly sales ($5,000 or more), you’re likely to benefit most from setting up a merchant account of your own. But if you’re running a much smaller outfit, your business is new, or you have a poor credit history, signing up with a payment aggregator is probably your best bet.

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