More than ever before, consumers are choosing non-cash transactions over cash payments for their purchases. A staggering 70% of the United States population carries at least one credit card—more than a third carry three or more—and more than 1 billion credit cards are in use in the U.S. alone.
With increasing dependence on credit cards and other online payment methods, businesses must prepare to go cashless by exploring merchant services.
Merchant services entail everything from equipment to the services needed to accept and process customer credit or debit card payments.
If you want to use merchant services, here’s the lowdown on merchant accounts and how you can optimize them for your business.
What is a merchant account?
A merchant account is a business bank account that allows you to process customer credit and debit payments. You can get a merchant account by partnering with a merchant account provider or a payment processor.
Unlike a regular bank account, a merchant account functions as a middleman between your business and the banks that provide credit or debit cards for your customers to use, with a merchant acquiring bank that lends you the funds to ensure there is no delay in the payout.
How does a merchant account work?
- The transaction passes through a payment gateway.
- The merchant account deducts the money from the customer’s account
- Your business account receives the due amount
Here is what takes place when a customer uses a credit card to pay for a transaction:
1. The transaction passes through a payment gateway
A payment gateway gets in touch with the credit card company to ensure the cardholder has enough funds for the transaction. You can set up the payment gateway at the same time you create a merchant account.
2. The merchant account deducts the money from the customer’s account
Once approved, the merchant account deducts the transaction amount from the customer’s bank account or credit card account. At the same time, it removes a transaction fee, which is usually 3% to 5% of the total amount.
3. Your business account receives the due amount
Lastly, the merchant account transfers the money to your company’s bank account. This does not happen as soon as a transaction goes through; it occurs in batches toward the end of the working day or sometimes later.
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Why should you opt for a merchant account?
- Increases sales
- Improves cash flows
- Easy money management
- Better customer experience
- Enables secure payment processing
Creating a merchant account can seem daunting. But joining forces with the right merchant account provider can make the process less tedious and bring valuable benefits.
According to an American Consumer Credit Counseling report, nearly 80% of consumers prefer card transactions over cash. Given that a lot of customers are inclined toward using credit cards for more significant purchases, your business can increase sales by being able to process such payments.
Improves cash flows
With a merchant account in place, payment authorizations are quicker. The money reaches your account within 1 or 2 working days, instead of individually billing your customers and waiting up to 30 days or more to receive payment.
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Easy money management
Merchant accounts enable better money management for ecommerce merchants. With the bulk of transactions occurring online via debit and credit payments, you eliminate the need to keep track of, count, and manage money physically.
Better customer experience
Your customers are in for a hassle-free shopping experience when they can shop and make payments using the payment methods of their choice. This leads to a better customer experience which, in turn, can ensure that the shoppers return for more.
💡 PRO TIP: Sending digital receipts via email is a great way to organically collect customer contact information at checkout and build an email list to fuel your retention marketing. Just ensure they’ve opted into hearing from you before sending them anything.
Enables secure payment processing
Payment gateways act like a bridge that integrates online card processing capabilities with your business operations, reducing the likelihood of fraud and theft. While you ensure secure checkouts, you can boost conversions by giving your customers the option to pay how they want.
Types of the merchant account
Different types of merchant accounts cater to the specific needs of businesses. You can choose the one that is a perfect fit for your business type.
Retail businesses with a brick-and-mortar setup should use a retail merchant account. Such companies can enjoy low design and transaction costs.
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Your business will require a mobile merchant account if it is on the move. For example, this account is ideal for you if you are a florist running a bookstore out of a truck. You can set up mobile credit card processing equipment to process credit card payments while on the move.
If you sell your products or services online, you can adopt an ecommerce merchant account. Merchant accounts for ecommerce businesses are not the same as those of brick-and-mortar stores. There are various categories:
- Offshore: An international merchant account outside your home country
- Local: A merchant account available within your home country
- Direct: This is where you approach a merchant bank directly to open a merchant account
How to open a merchant account
- Organize the necessary documents
- Apply for a merchant account
- Gain approval and set up your account.
Here are the quick steps to opening a merchant account:
1. Organize the necessary documents
You will need to provide your business information, company name, contact details, the time you have been in business, bank account details, and financial statements.
PRO TIP: If you already use a credit card processing tool, share this information with your merchant account provider to ensure fast approval.
2. Apply for a merchant account
After you have provided all the necessary information about your company, it’s time to send in your application. The processor may want to check your credit history to ensure your business is financially sound.
At this point, you may also have to pay an application fee to your merchant account provider.
PRO TIP: Remember to include a cover letter and your application stating what your business does and why you are worthy of a merchant account.
3. Gain approval and set up your account.
The merchant account provider will check your risk level before approving your application. They will consider the following criteria:
- The length of time you have been in business
- Personal and business credit history to check if there were any defaults in payments or if you were ever bankrupt.
- If you have had a merchant account in the past
- The type of your business
The processor will consider your business less risky if you process transactions in person rather than online or via phone. Online transactions are susceptible to fraud.
To lower the risk, the merchant account provider may seek address verification. The merchant account provider will approve your application if you fall in the low-risk category. The provider may also support riskier applications but at a higher fee.
Merchant account fees
Merchant services should complement and support your business and not drain it with excessive fees. Understanding what credit card processing entails and the costs is essential.
Dr. Steven Ghim gave a few tips on how you can minimize merchant service fees on Entrepreneur:
“Long-term contracts can offer predictability, but when it comes to merchant services, they might lock you into fees that could be avoided down the road. Find a provider that allows for short-term or even month-to-month service and doesn’t charge for early termination.”
Usually, merchant services providers will adhere to one of the three pricing models shown below:
This is one of the most common pricing models. The processor charges a fixed fee for all credit and debit card payments, no matter what card the customer uses. This structure is most helpful if your sales volume is low.
This pricing structure is the most transparent of them all. There are two parts to this pricing model: an interchange and a plus.
The interchange is the processing rate that the credit card company sets. The plus rate refers to the credit card processor’s markup or profit.
For instance, the interchange-plus pricing structure might appear as 2.4% plus USD 0.10 per transaction. Here the interchange rate is 2.4%, and the processor’s markup is 10 cents.
In this pricing model, the merchant service provider charges a fee depending on the type of card used for the transaction and the total volume of transactions the business covers.
This pricing structure categorizes the transactions as qualified, mid-qualified, and non-qualified. Predictably, eligible transactions get the best rates, and non-qualified transactions are charged the highest.
On top of base pricing models, merchant account services often include additional fees. It’s important to know what they are:
- Setup fee: This is a one-time fee. The provider charges this account while setting up a new merchant account.
- Gateway fee: You will incur gateway fees if you need a payment gateway for online transactions.
- PCI Compliance fee: You pay your merchant account provider to ensure that your merchant account meets the Payment Card Industry (PCI) regulations. This is to keep your account safe from theft and fraud.
- Chargeback fee: The merchant account provider charges this fee for every payment that goes back to a debit or credit card after a customer cancels a transaction or returns the products purchased.
- Monthly minimum fee: Some providers set a minimum number of transactions or values you should cover monthly. Otherwise, you may have to pay the monthly minimum payment.
Choosing a merchant account
- Cost and fees
- Customer Service
To help you make the right choice, we’ve put together a list of criteria you should consider when you’re looking for a merchant account provider:
Cost and fees
Credit card processing rates vary with the type of transaction, card used, and your store’s monthly processing volume. Be sure to clarify the exact fee you’ll pay—whether that’s a flat fee or a percentage of your transaction volume.
Ensure that you clearly understand some “hidden fees” like cancellation fees, early termination fees, PCI Non-Compliance fees, chargeback fees, account change fees, and equipment rentals. They’re charged separately from your processing fee and can add up quickly.
As general advice, compare multiple vendors and go with the one where the fee is low and their customer service is top-notch.
Take stock of the kind of hardware required. Can you manage with a mobile app or a simple card reader, or do you need a point-of-sale system? Choose a provider that gives you the hardware you need at an affordable price.
Since this is a long-term commitment, you want a merchant account provider that can readily help with issues big and small. Test their service quality by calling them during peak hours and note their response and resolution time if it’s a good leap.
Look at all the integrations the merchant account supports and ensure you can process payments quickly. For instance, with Shopify and Stripe, you can instantly get end-to-end merchant account solutions and reap the benefits of combining payment gateway and merchant account functionalities into a powerful platform.
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Your business is going to scale, and that means more processing volumes. This is where you need a high-volume merchant account that allows you to process unlimited transactions and dollar volume without being hit by a processing limit.
Along with processing high volumes seamlessly, you get better payment security and possibly discounts on processing fees.
Open a merchant account for your store.
Choosing a merchant account provider requires careful thinking and planning on your part.
When scanning the market for the right provider, don’t just settle for the one that offers the cheapest rates. Choose a processor to help you scale your operations and expand your business with a transparent pricing model.
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