What Is A Merchant Account REALLY & Why Do I Need One?
Without the ability to accept payment for your product, then you don’t have much of a business at all. And while you may think that accepting cash is a sound way of doing business, small business owners have a lot to gain from card sales.
Cash also leaves you vulnerable to theft & managing the financials of a cash-only business can be a headache.
We also see some clients offering the most rudimentary payment methods to their customers, such as using a money transfer or “cash” app.
Unfortunately, these “alternative methods” of payment impose additional steps to the transaction process, showing that you don’t value the convenience of your customers.
Frankly, I trust businesses that don’t accept my VISA less than those that do. And I’m confident that I’m not alone in this.
But, let’s face the obvious. It’s 2020. You need a modern way to get money from point A to point B.
For this reason, the merchant services industry exists to offer businesses a legitimate method of accepting payment for their services.
And what does the industry provide to merchants like you?
Merchant accounts that allow business owners to safely manage the flow of revenue into their business bank account.
What Is A Merchant Account?
In order for you to understand what a merchant account is & how it plays a part in credit card transactions, I’ll offer up the following analogy.
A merchant account is a lot like a loading dock in that it acts as an intermediary between external parties & your business. In this analogy, your customers are the trucks that bring money to the loading dock & your business bank account is the actual warehouse that money is loaded into.
With that being said, you can think of electronic payment technologies as the workers who load money from the trucks onto your loading dock.
These technologies include:
- Credit cards & mobile wallets that a consumer uses to pay for goods & services.
- A point of sale device or card reader that a merchant uses to process a credit card.
- The payment gateway that sends & retrieves data from the card network & issuing bank.
The payment gateway then either approves or declines a transaction & associates that data with your merchant account.
Only approved transactions will count toward your daily batch balance.
A payment processor or payment facilitator will then transfer your daily batches to your business banking account. Thus, processing or facilitating all of your payment transactions.
One of the major differences between the two is that a payment facilitator handles the whole process (even funding), whereas a processor only handles a few pieces of the process.
Nonetheless, when you open a merchant account, you don’t open an account with a teller or banker like you do a checking account. You open an account with a payment processor or facilitator that supplies the tools necessary to manage the flow of money into your business.
These tools include hardware, a secure payment gateway & a reporting interface that allows you to keep your financials in check.
How To Open A Merchant Account
Now that you know what a merchant account is, you may be asking how you can open one yourself. The process isn’t that difficult (or at least it doesn’t have to be).
But I should note that by working with a bank or ISO, you may have to jump through some unnecessary hoops, which could cost you extra time & effort.
The reason is that banks & ISOs do not approve merchant accounts themselves. Payment processors & payment facilitation companies do. Therefore, by going through an ISO or bank, you are inserting a third party into the equation.
With that being said, there are also some industries that are generally more high risk than others. For this reason, some businesses may have a more difficult time getting their accounts approved.
Nevertheless, I recommend that you ask yourself the following questions when deciding which company you want to open an account with.
- How do I want to accept payments?
- What kind of devices do I need to accomplish this?
- How soon do I want my money after I batch out? (Most people would say ASAP.)
- If I’ve ever worked with payment companies before, what are the things I didn’t like?
Once you have answered these questions, you’ll be in a better position to start shopping around. At the very least, you’ll be able to get into the nitty-gritty of available solutions as well as the fees that you’ll pay on each transaction.
How Much Does A Merchant Account Cost?
At the end of the day, a merchant account is a service & for services you have to pay. More often than not, you’ll pay for a merchant account in the form of a monthly fee. This covers the cost of ongoing customer service that you’ll receive for your account.
However, in order to actually use the merchant account & accept payments, you’ll often pay a processing fee & sometimes a transaction fee on each transaction. A processing fee is often rate-based & includes not just one, but many fees to the many parties involved in the payments ecosystem.
The biggest ‘chunk’ of a processing fee is the interchange rate. Each card issuer has its own set interchange rates that a merchant must pay for the use of its cards.
Important Notes For Merchant Account ‘Shopping’
As a merchant account shopper, you’ll want to figure out the things that you need to run your business efficiently. This means understanding the ways that your customers may want to pay you & how you can accommodate them.
With this understanding, you can then seek a merchant services provider who offers the solutions that you desire.
You’ll also want to ask the merchant services provider the following questions:
- What pricing model do you implement?
- Who all is really involved in the process?
- When can I expect my batches to hit my business bank account?
What Do You Need In Order To Open A Merchant Account
You have to understand that payment service providers will not allow just anybody to have a merchant account. For one, you’ll need to demonstrate that you are operating a legitimate business.
As a result, you’ll have to provide the following info in order for your merchant account to be approved:
- Registered business name
- Legal business address
- Business bank account info
- Industry that you operate in
- Driver’s license number
- Social security number or EIN
Although this may seem like a lot of information, security of paramount importance when it comes to payment data. And just as you’d want your business to be safeguarded from fraudulent activity, these requirements help us protect our business & clients from criminal activity.