What Is a Merchant Account? Small Business Guide for 2022

A merchant account is a financial service that allows businesses to accept credit card and debit card payments, as well as ACH. Businesses frequently need to open merchant accounts with banks or third party processors in order to start accepting payments online. This article will give you the basics on how your business can get started using credit cards today

A merchant account is a service that a business uses to accept credit card payments. A merchant account can be used by small businesses, or even consumers, but they are typically only available to businesses with certain amounts of annual sales. Read more in detail here: merchant account for small business.

You may take credit and debit card payments with a merchant account. It’s a bank account that acts as a link between your bank account and the bank account of the client. When a consumer uses a credit or debit card to make a purchase, the money are initially sent to a merchant account before being transferred to the merchant’s preferred bank account for withdrawal. If a consumer disputes a transaction or is a victim of credit card fraud, this makes it easy to reimburse them.

Merchant services include a merchant account as well as other tools such as payment processing, ACH transfers, gift cards, customer loyalty programs, payment gateway, the ability to take credit cards online, mobile payment processing, and merchant cash advances, among others.

Is a Merchant Account Required?

The simple answer is yes if you want to make sales in today’s society, whether online or in person. Just over a quarter of all purchases are made using cash. While the advent of ecommerce may be blamed for part of the shift away from cash, consumers are still opting for in-person transactions, which account for about three-quarters of all transactions.

Merchant Services Types

The issue then becomes “What sort of merchant account should I get?” rather than “Do I need a merchant account?” Merchant services come in a variety of forms.

Payment service providers, like Square or Payanywhere, charge a set rate no matter what kind of transaction you handle. They often include free tools like POS systems. They’re best for people doing occasional sales or have low monthly sales volume (<$10,000 month).

Typically, merchant account providers deal with clients that have a greater number of transactions and want more specialized service. Merchant accounts often charge an interchange-plus rate, which is calculated by adding a minor percentage or a few cents to the rate charged by the credit-issuing bank. As a result, rates vary depending on the kind of credit card or debit card used and by transaction. These might help you save a lot of cash. Although some merchant account providers charge a monthly fee, merchant accounts are often a better bargain for well-established and expanding companies.

A merchant services division exists in several banks, such as Chase. You’ll normally need a business checking or savings account with them, but you’ll receive extra perks like rapid money transfer into your bank account.

Payment gateway providers (such as Authorize.net) may merely provide a tool to connect to your merchant account or may also provide merchant services.

All of these accounts are grouped together under the name “merchant services.” Although legally distinct, the terms merchant account and payment processor are often interchanged since they both fulfill the same purpose of processing payments for companies.

What to Look for in a Merchant Account

It’s crucial to conduct some research before deciding on a merchant account since you may be signing up for a long-term commitment in certain circumstances. To make the best selection, follow these steps.

To begin, understand what to search for:

• Be familiar with your processing history: In a month, how much do you process? How frequently do you need to handle payments? What kind of transactions do you often handle (online, keyed-in, card swipe or chip, non-contact payments)? Do you sell high-priced tickets or low-priced tickets?
• Understand your industry: Do you work in a high-risk field? Do you have any experience with chargebacks? Will you accept payments online, in-store, or through mobile?
• Determine your requirements: Do you also need a point-of-sale system? How simple is it to connect the merchant service if you already have one? Do you intend to expand your web presence? Do you need payment integration with other company software, such as Salesforce?

After that, conduct some research. Fit Small Business evaluates hundreds of processors to identify the finest small business merchant services so you can make an educated selection. Also, inquire about what other people in related fields utilize. Here are some things to keep an eye out for:

• Fees: Some charge a fixed fee each transaction, while others charge interchange plus. Some organizations charge a monthly membership fee. Others will charge you a modest fee on top of that. Be wary of getting nickeled and dimed to death with hidden costs, since this is one of the most prevalent consumer complaints. Request a contract and inquire about any costs you don’t understand.
• Is the transaction charge calculated in percentages, cents, or a mix of both? If you primarily sell little tickets, a percentage charge may be less expensive than a simple cents-added cost.
• Your merchant service should ideally provide month-to-month contracts. They may, however, demand a contract if you are acquiring or renting equipment, are high-risk, or are receiving a very low rate. These are famously difficult to escape and costly to forfeit.
• Free POS, virtual terminals, and other merchant services are available. Others demand a fee for certain tools. Some even want a separate payment gateway, which adds a price to your processing rates.
• User reviews are important to consider if you want to utilize their POS system or app. Look for things like simplicity of use, downtime complaints, and allegations of payments being withheld. Pay attention to whether a mobile app supports your Android or iOS version.
• Ease of use: Merchant services should be simple to set up and use, with straightforward software and an online system that allows you to track your costs. Customer service should be there when you need it, particularly if you purchased your POS system from them.
• Complaints: It’s a good idea to look into other people’s experiences. When it comes to customer review research, we suggest the Better Business Bureau and Capterra. Keep in mind that the larger the company, the more complaints there are; for example, thousands of people have complained about Square and PayPal withholding cash, despite the fact that they serve millions of clients and are highly rated.

Finally, compare and contrast your best picks: Some businesses make it simple by listing their rates and features directly on their website. If they don’t, you’ll need to give them a call and provide some basic information about your company. In such circumstances, always get a sample contract and inspect it for any costs you don’t understand as well as the duration of the deal.

Popular Small Business Merchant Services

Square, by far the most popular and highly-rated merchant service on our site, offers a wide range of sales and business services in addition to flat-rate payment processing and a free POS. It’s an excellent choice for retail, restaurants, and other service businesses. It may be used by crafters to sell at local farmers markets, or by retailers to sell online and in-store. See why people appreciate Square in our Square review.

Helcim is a well-known merchant service that appears on a number of our lists, including the top retail credit card providers. Helcom offers a free POS system, as well as a virtual terminal, mobile payments applications, and an online shop builder. There is no monthly cost and no commitment with interchange-plus pricing. Helcim’s complete review may be found here.

Stripe often appears on our top payment gateways rankings due to its versatility. It is simple to program into websites and interfaces with over 650 software packages. It can handle 135 different currencies. It provides free billing, invoicing, and subscription services. It also offers financial services and a startup assistance program. It’s ideal for individuals that need to collect payments via the internet. It is, nevertheless, excellent for individuals with technical knowledge. For additional information, see our Stripe review.

PayPal deserves particular attention since it not only processes credit cards and other types of payments, but it also has its own payment mechanism. It integrates well with other merchant services, and studies have shown that having PayPal on your site boosts your chances of making a transaction. PayPal provides point-of-sale, virtual terminals, credit cards, and financing services. It also has powerful chargeback services and pays immediately into your PayPal account. It comes in second place among the top free merchant accounts for small companies, just behind Square. Read the rest of our PayPal review.

Obtaining a Merchant Account

The good news is that many merchant services do not need a lengthy application. You may usually join up for them immediately away if they offer a flat cost.

You must apply if you charge interchange-plus pricing. Gather the following information to help the process go more quickly:

• Contact information for businesses, including names, addresses, and DBAs
• How long have you been in company and what has been your sales history? (to help you get the best rates and plans)
• If you’ve ever used a credit card processor and the data associated with it,
• Tax identification numbers, financial documents, bank accounts, and routing numbers are all examples of financial information.
• The application cost must be paid using a credit card.

Then, get in touch with the credit card processor. Some allow you to apply online, while others need you to speak with a sales representative who will collect your information, review your requirements, and provide you with a price. The merchant service will do a credit check on your personal and company credit history once you submit the information.

You’ll then have to wait for approval. Unless you have a high-risk account, it may take up to two weeks, although it normally takes less.

What Are Merchant Accounts and How Do They Work?

It’s useful to know who’s engaged in credit card processing before trying to figure out how it works:

• Merchant: A small business that sells goods and/or services to the public; they are the ones who get money.
• Customer: The person or company who makes the purchase; they are the ones who give the merchant money in return for goods and/or services.
• The financial institution where the merchant stores their money is known as the merchant bank.
• Payment gateway: Software that enables merchants to receive credit card payments from consumers in a secure manner.
• The Independent Sales Organization (also known as Member Service Provider) serves as a conduit between the card-issuing bank and the merchant.
• The financial institution that issues the customer’s credit or debit card is known as the issuing bank.
• Visa, MasterCard, American Express, and Discover are examples of card organizations.

The whole credit card processing process may be broken down into three essential parts, from when a consumer presents a payment card to when the money are transferred into your company bank account:

1. Authorization
2. Authentication
3. Settlement

At the point of sale, credit card authorization is the process of approving or rejecting a transaction. When your customer swipes their card, the payment amount is transferred to your payment processor, who subsequently passes the information on to the client’s card association.

The card association will forward the request to the customer’s bank, commonly known as the issuing bank, which will authorize or refuse the transaction. The card association then sends the approval or rejection message to the payment processor, who then sends it to the merchant, who displays the approval or refusal at the point of sale.

The merchant will be given an authorisation number if the transaction is accepted.

After the point of sale, payment authorisation is the process of confirming the client account. The card association and merchant bank are contacted once the customer’s bank confirms the transaction, and a hold is put on the customer’s account. The first two phases of payment authorization and authentication happen automatically and behind the scenes, so company owners don’t have to do anything.

The POS or payment terminal of the business may now begin the process of batching and sending out accepted transactions for payment.

When the merchant is paid, the settlement procedure begins. Although many merchant services batch and process transactions automatically, depending on your processor, you may need to batch and settle transactions manually at each terminal at the end of the day. In any case, keep an eye on all of your statements to ensure there are no pending permitted payments.

The POS or payment terminal of the business may now begin the process of batching and sending out accepted transactions for payment.

Fees for Merchant Accounts Explained

Because there are so many parties involved and the costs are not standardized amongst merchant service providers, credit card processing fees may be somewhat confusing. As a result, the costs you pay with one organization may be quite different from those charged by another merchant service provider.

Processing fees are made up of the following items:

• Account/service charge: This is a hidden cost that corporations impose to pay their administrative expenditures, similar to a statement fee. It’s best to stay away from suppliers that impose these costs.
• Application fee: You must first apply to create a merchant account. Fees related with the application procedure are sometimes passed on to the business by the merchant account provider.
• Assessment cost: The assessment fee is calculated as a percentage of your total monthly sales and is paid to the card associations. It is unavoidable.
• Batch fees: You may be charged a batch fee each time you settle your terminal. Inquire about the batch costs in detail, and think about how often you batch your transactions (often daily).
• Chargeback costs are incurred when a cardholder falls victim to fraud. Each instance will incur a cost from merchant service providers. Fines may be imposed in many circumstances. Chargebacks cost an average of 2.5 times the selling price, according to Chargeback Gurus, when all additional fees are included in.
• Rates for credit card payment processing: According to Fundera, card processing costs range from 1.7 percent to 3.5 percent per transaction. Processing fees make up the majority of the costs associated with accepting credit cards. This rate usually includes both interchange and assessment costs.
• Costs of equipment: You may already have gear that is suitable. If you don’t, you’ll have to buy it yourself or get it from your merchant account provider. Many service providers also have the option of renting equipment, which may have upfront and continuing charges.
• Merchant services providers apply a markup to the processing fees charged by the card organizations. These are always up to discussion.
• Certain transaction processing fee: Depending on your service provider and package, you may be required to perform a minimum number of transactions. If you don’t meet this requirement, you may be charged a price.
• Payment Depot, for example, is transparent about their monthly cost and what you receive in return. If the cost isn’t listed on their website but they still charge it, try to get it deleted or reduced.
• The not-sufficient-funds charge is incurred when a cardholder’s account balance is insufficient to meet the transaction’s amount. This fee is normally charged by the issuing bank to the cardholder, therefore retailers are unaffected.
• PCI compliance fees: Some providers charge a fee to stay PCI compliant, but it’s best to look for one that includes PCI compliance as part of their overall price. Noncompliance might result in monthly costs of about $19.95 plus further penalties if there is a violation.
• Setup/installation fees may apply when you first begin working with a new merchant services provider. These costs may be applied to both assisted on-site and self-installed installations.
• Statement fee: Similar to account, statement, and monthly fees, this is a hidden expense. Statement fees are not charged by the finest merchant service providers.

Read our complete guide to credit card processing costs to learn more about various sorts of merchant service markups and what to anticipate for typical processing rates.

How to Save Money on Credit Card Processing

For starters, you may be resourceful and come up with methods to collect money for free online. However, this does not apply to in-person transactions. Here are some suggestions for lowering processing times:

• Take a look around. Investigate who charges the lowest rates and which price structure works best for your typical transactions.
• Ask. Your existing business tools may be able to negotiate pricing for you. If you have a lengthy and solid connection with your merchant services provider, this works extremely effectively.
• Defend yourself against deception. Look for strategies to avoid chargebacks and other forms of fraud so you don’t have to spend time and money on recovery. Many merchant services include fraud prevention features, some of which are free and others which require a fee.

2022 Merchant Account Trends

COVID-19 has altered the way we shop, and the trend is continuing even as the globe heals. Here are some trends to look forward to in 2022, as well as some to anticipate:

• Rates will be raised by Visa and Mastercard: Visa’s rates will be raised in April 2021, while Mastercard’s rates will be raised in 2022. This will result in higher rates for interchange-plus accounts at the very least, with possible spillover effects on flat rates.
• Consumers are increasingly searching for ACH, or bank-to-bank, transfers as a method to pay for things, especially online, according to NACHA. This is a feature that not all merchant services have, so seek for it, particularly if you sell to businesses.
• Contactless Payments: This is on the increase and is quickly becoming the norm. Many card readers, such as Square and PayPal, currently support NFC payments. Because mobile applications employ encrypted microchips, contactless payments are also more secure than conventional swipe or chip purchases.
• Finances/brands-as-banks: Embedded finances/brands-as-banks: Well-known companies such as Amazon and Google are beginning to develop their own payment systems. Other retailers, such as Target, are developing debit cards. Merchants must be able to accept these new payment methods.
• Instagram debuted its Shopping tab in 2020, and other social media platforms have purchase buttons and other tools for users to sell via their services. The ecommerce group in the United Kingdom, IMRG, predicts that social selling will continue to rise in the coming years. While PayPal makes it simple to include social selling, other merchant systems are beginning to do so as well.
• Biometric authentication: As the need for improved security and multi-factor identification grows, biometrics are increasingly being used to validate payments. BiometricUpdate.com covers new face and iris recognition technology, as well as cards and banks that have adopted them.
• Buying using bitcoin and other cryptocurrencies began to enter the mainstream in 2021, and many payment processors, including as PayPal, were fast to incorporate this new currency.

Check out these great resources to assist you in making future plans:

Conclusion

It’s not simple to choose the ideal merchant services provider for your small company. Though it may be tempting to choose the first one that comes highly recommended or has the best prices, there are additional considerations to consider. Consider security features, technological linkages, and chargeback management. To make an educated, strategic selection, start by defining your particular company goals and difficulties, and then score each alternative against your criteria.

A merchant account is a type of bank account that allows businesses to process credit card payments. They are often used by small business owners for their online stores, but can also be used for brick-and-mortar stores. The “merchant account examples” will give you an idea of what one looks like and the benefits it offers.

Related Tags

• is square a merchant account
• how to get a merchant account
• is stripe a merchant account
• best merchant account for small business
• merchant account fees for small business