Credit Card Processing

What Is a Merchant Account & How Can Your Business Get One?

Read Time: 12 min

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A merchant account is a particular type of bank account that business owners must establish in order to accept credit cards. Currently, consumers’ most preferred payment methods are credit and debit cards. In 2021, consumers paid for 70 percent of their purchases with a credit or debit card.[1]Statista. “Market share of cash, credit cards, and other payment methods at point of sale (POS) in the United States in 2017, 2019, 2020 and 2021“. Accessed September 9, 2022. Worldwide, over one billion credit or debit card transactions occur every day. A business’s inability to accept card payments potentially dissuades an enormous portion of the consumer market from purchasing its goods or services. Perhaps the most essential element of modern payment processing, the first step to being a successful merchant is obtaining a merchant account.

In our ever-digitalized society, this type of account also enables business owners to accept various digital payment methods, including those made online, by eCheck, and with cryptocurrency. How can one little bank account do so much for your business? Below explains how a merchant account works, details its additional benefits, and outlines how to easily acquire one.

What Is a Merchant Account?

A merchant account is a specific bank account integral to payment processing. After obtaining this account, the merchant’s acquiring bank manages electronic payments channeled through their account. The acquiring bank holds unsettled funds in the account, settles transactions, then deposits settled funds into the business bank account. Essentially, transaction funds are stored until payment processing concludes, at which point funds are released to the merchant.

Once your account is set up, you’ll be issued a merchant ID number (MID). This unique 15-digit number helps to ensure the correct transaction funds are sent to the correct account.

What Are the Benefits?

  • Ability to accept numerous payment methods—most notably, credit and debit cards
  • Access to state-of-the-art hardware and software solutions tailored to your business’s specific needs
  • Capacity to support higher transaction volumes
  • Compatible to integrate with the most advanced payment gateways and virtual terminals on today’s market
  • Dedicated customer support from your account advisor
  • Ensured account longevity backed by a comprehensive underwriting process
  • Lowest available processing fees via complete control to choose the pricing plan best fitting your operations
  • Sophisticated security features protect against fraud and mitigate chargebacks

How Does a Merchant Account Work?

To those unfamiliar, payment processing can seem like a magic trick. Your customer swipes, inserts, or taps their card, the transaction is authorized almost instantly, then—abracadabra!—you make money. This isn’t a sleight of hand, but rather several mechanisms working in tandem to effectively transfer complex data in the blink of an eye.

three business owners experiencing merchant account payment processing from a merchant services provider

After your customer inputs their payment information, your payment processor collects and communicates the transaction details to your payment gateway, which secures this sensitive financial information. Then, your gateway transfers the encrypted transaction details to your customer’s bank to authorize the purchase. Your customer’s bank communicates the approval or rejection to your gateway, which transmits this information to your processor. Finally, the vehicle through which your customers input their payment information conveys said approval or rejection. This happens in mere seconds.

A rejection requires another payment method which flows through this process again. Meanwhile, approval does not mark the end of the processing journey. Your processor continues to work routing the transaction funds from your customer’s account, over the payment network, to your merchant account, where funds stay until settlement. Upon settlement, the payment process is complete, and your funds are released into your business bank account.

That is actually the short version. For a more detailed explanation, read our comprehensive guide on how credit card processing works.

How to Get a Merchant Account in 5 Simple Steps

graphic of a happy woman holding a credit card processed with a merchant account provider

Before opening a merchant account, a business owner must contact a merchant services provider. By contacting a merchant services provider, a business owner can acquire all the mechanisms necessary to successfully process credit and debit card payments. A dedicated account manager oversees your relationships with these many moving parts required for payment processing. If issues arise, you don’t have to spend precious time as a business owner contacting several entities to pinpoint the source of the error—your account manager does this for you! Beyond simply contacting a merchant services provider, below are the five basic steps to acquiring a merchant account for your business.

1. Ensure Your Business Details Are in Order

Merchant accounts are only issued to businesses. As such, applying requires verifying that your operation is a legitimate business. Below are three essential steps to legitimizing your business. If you have yet to take these steps, you must do so before applying. However, if you’ve already completed the following three tasks, simply make sure the appropriate paperwork verifying each step is in order.

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Establish Your Business Structure & Get your EIN

Is your business a circle, triangle, or square? Essentially, this is the question your business structure answers. First, decide how to structure your business: sole proprietorship, partnership, limited liability company, or corporation. For more information about these structures, as well as the legal requirements associated with each, read our guide on determining your business structure.

After deciding on your business’s structure, obtain your employer identification number (EIN). This is simply a federal tax identification number issued to businesses for tax-filing purposes.

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Obtain your Business License

The business licenses you need depend on the industry and state in which you operate. To determine the regulations with which you must comply, thus the licenses you must obtain, visit your Secretary of State’s website and follow the steps to register your business.

When you apply for a merchant account, underwriters review many documents to make their decision. If your business is in good standing with the state, your application may be more quickly approved.

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Set up a Business Bank Account

Because your merchant account will be linked to your business bank account, you cannot apply without first establishing a business bank account. Compare banks and the perks offered by each before deciding on your business bank account home.

Once you’ve decided on your bank of choice, follow its steps to set up a business bank account. Typically, you must provide your business license and EIN when you apply for a business bank account, so it’s advised you acquire both before attempting to secure a business bank account.

2. Gather Required Documents

The amount of documentation required to apply for your merchant account fluctuates based on the risk level assessment of your business. Lower-risk retail small businesses usually only require a valid ID and a voided business check. Whereas, mid-level risk businesses additionally tend to require three months of business bank statements. (Personal bank statements will do if the business is new.) If your business is considered high-risk, additional documentation may be requested.

3. Complete & Submit the Online Application

Once you’ve organized the previously listed documentation, begin the application process with a merchant services provider. Before submission, ensure every detail of your application is accurate, as merchant service providers employ sophisticated software to cross-reference applications with legal data sources.

4. Prepare for & Complete the Underwriting Process

After submitting your application, the underwriting begins. During this process, underwriters conduct due diligence and identify risks associated with your business. At this point, you may receive stipulations you must meet in order to be approved for a merchant account. A common stipulation, especially for small businesses considered to be high-risk, is a rolling reserve. But even the requirements of rolling reserves vary based on the details of the business.

5. Activate & Integrate Your Account

After approval, activate your merchant account by working with a customer service representative to input any necessary information. (This information is typically related to banking and billing.) After this, you may execute a test transaction to ensure every mechanism necessary to effectively process payments is properly working.

Most providers offer seamless API integrations through which you can completely customize your payment system. If you employ a web developer, you can request integration assistance from them. You may also request assistance from your account manager.

Choose a dependable merchant services provider that can get you the best rate!

graphic of a woman watering money growing on a tree from her merchant account services

What to Consider Before Setting Up a Merchant Account

As such an essential building block of your business’s success, a merchant account should be optimized to best fit your type of business. To help you determine which option offers the best solutions for your operations, below are a few considerations you should weigh before signing a merchant account agreement.

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How you accept payments

Businesses acquire merchant accounts to support their payment processing. As such, ask yourself what your business needs in terms of payment processing:

If you have difficulty answering these questions, consider evaluating your competitors. How do they accept customer payments? Additionally, your account manager can help you determine which payment methods are most useful for your operations and most popular among your target demographic.

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Customer service

When choosing a merchant account provider, consider the type of support it offers. Your provider should be reliable, resulting in hassle-free payment processing, but issues can still arise. This is why it’s important to review customer testimonials of real-life experiences to ensure you’ll receive appropriate support.

Prior to issues arising, you need to set up your merchant account. If you expect your provider to assist in the setup of your solutions or to conduct a test transaction, you should inquire as to whether they offer this support at no extra cost.

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Fraud & chargeback prevention services

While getting a merchant account is important, keeping it is arguably more important. Fraudulent transactions and excessive chargebacks endanger your account’s standings. However, many providers offer ancillary services to business owners, including access to fraud management tools and chargeback protection software. Search for a provider that will not only issue you a merchant account, but will also provide you with the necessary tools to keep your account in good standing.

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Many processors and merchant service providers offer plug-in and API integrations connecting directly to your website’s shopping cart. With these integrations, digital payments processed through your eCommerce site link directly to your merchant account. This is an invaluable tool for businesses with eCommerce sites.

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Ensure PCI Compliance

The Payment Card Industry (PCI) Security Standards Council sets regulations ensuring the protection of consumer financial data. If your business does not successfully achieve PCI compliance, it may be subject to a PCI non-compliance fee or, worse, risk losing its merchant account.

While it’s your responsibility to ensure your business is compliant with PCI standards, your provider may offer guidelines for achieving compliance and services that aid in maintaining compliance.

Understanding Merchant Account Fees

graphic of a man wearing a tie and using a magnifying glass to inspect merchant account fees

The best things in life are free—however, this doesn’t apply to merchant accounts. Providers assess the transaction fees based on a range of factors, including your processing history, chargeback ratio, and credit score. Additionally, credit card networks will assign your business a merchant category code (MCC) to identify the business’s industry. When determining your processing fees, providers take the risk level associated with your MCC into consideration.

Providers typically charge your business via one of the basic pricing models: flat rate, bundled rate, interchange plus, subscription, or tiered. On your merchant statement, you should be able to locate your processing fees, pricing model, and other related information. (For a full breakdown of processing fees and pricing structures, refer to our credit card transaction fees guide.)

While these fees do cut into your business’s profits, the government has enacted policies aimed at protecting merchants from exorbitant processing fees. Particularly, the Durbin Amendment—an extension within the Dodd-Frank Act—restricts the interchange fees charged to merchants processing debit cards. Additionally, it’s important to remember processing fees are incurred in order to offer your customer base their preferred payment methods. In doing so, you should see an increase in your sales and growth in your customer base. The notion that the best things in life are free may not apply, but the adage that you have to spend money to make money certainly does.

Alternative Solutions

Recent innovations offer alternative solutions to merchant accounts. However, these newer options are not tried-and-true. As such, there are a few pitfalls of which you should be aware if you’re considering an alternative to a traditional merchant account.

Merchant Accounts vs. Payment Service Providers

graphic of a man reaching for online funds from merchant account providers

Businesses can accept digital payments through a payment service provider (PSP). Even if you’re unfamiliar with payment service providers, chances are you’ve heard of the most popular ones on the market, such as Stripe and Square.

A payment service provider is an all-in-one solution to begin processing credit card transactions immediately. This immediacy forgoes underwriting. You begin processing transactions, and your business is underwritten after the fact. As such, a payment service provider may reject your application after you’ve begun processing payments on its platform, abruptly leaving you without a means to accept digital payments from your customers.

Additionally, payment service providers do not offer customization or flexibility. You cannot negotiate the terms, conditions, or pricing plan to which you’re subject. Because a payment service provider does not issue merchant accounts, but rather funnels funds through its own master account, you cannot tailor your account to the needs of your business.

Peer-to-Peer Payment Solutions

Not originally intended for business use, peer-to-peer payment solutions were created to facilitate the movement of individual-to-individual funds, not individual-to-business funds. As such, peer-to-peer solutions lack integrations, delay funding, restrict transaction volume, and do not offer the level of support business owners need. Ultimately, solutions like Venmo and Zelle effectively transfer funds but do little else in terms of supporting business operations.

Opening an Online Merchant Account: Final Thoughts

Despite alternative options, merchant accounts remain the leading method for offering your customers a variety of payment options. Customized to the precise needs of your business, your account is uniquely suited to support your business as it scales its operations. To get started, simply reach out to PaymentCloud today!

Whether you’re a completely new business or a seasoned veteran, we’re here to help.

business owner with a merchant account and their various accepted payment methods

Frequently Asked Questions (FAQs)

What is the difference between a merchant account and a business bank account?

A merchant account holds unsettled transaction funds and incurs charges associated with payment processing. Meanwhile, settled transaction funds transfer from your merchant account to your business checking account.

Alternatively, a business bank account is your repository for all your business’s funds. Your business bank account is the final destination for your funds.

Can I get a merchant account with bad credit?

Yes. You can get a merchant account with bad credit as long as you apply with a high-risk processor. These processors take other factors—aside from just credit score—into consideration, such as the length of time the business has been operating, the business type, its average monthly deposits, its average monthly processing volume, and other such factors.

What’s the difference between an acquirer and a processor?

An “acquirer” refers to the merchant’s acquiring bank. Simply put, the acquirer holds the merchant account into which it accepts unsettled transaction funds. Conversely, a “processor” facilitates all aspects of actually processing the transaction.

A single entity can offer both functionalities, but it’s important to clarify the two distinct functions.

Can I accept payments online without a merchant account?

Yes, however, this is not ideal. Without a merchant account, your options are limited to payment service providers, digital wallets, and peer-to-peer payment methods.

Is PayPal a merchant account?

No, it is not. Though PayPal works similarly, it’s closer in definition to a digital wallet or money transfer service. PayPal can act as a payment service provider by holding unsettled transaction funds, but it does not issue separate merchant accounts. However, it is possible to use both PayPal and a merchant account.

How do I choose a merchant services provider for my business?

With so many merchant service providers on the market, it can be difficult to choose the right one for your business. Thankfully, there are a few considerations to help narrow down your options.

First, consider merchant services providers with strong reputations and positive customer testimonials. Aim to rely on a credentialed provider you can trust.

Additionally, you want a provider that serves businesses like yours. If your business is considered high-risk, work with a provider specializing in high-risk processing.

What banks offer merchant accounts?

Many banks offer merchant accounts, including Chase, Wells Fargo, and Bank of America.

How long does it take to get approved?

The length of the approval process varies depending on the provider, your business’s details, and the type of account for which you’re applying. For example, high-risk merchants usually experience longer underwriting times.

Some providers can approve a merchant account instantly, while others take a couple of days. You may shorten the approval process by ensuring your application materials are complete and your credit is unfrozen with all three bureaus.

Can I get instant approval on my merchant account?

In short, yes. Instant approvals do exist. They are most common for applications from low-risk retail accounts.

Article Sources

  1. Statista. “Market share of cash, credit cards, and other payment methods at point of sale (POS) in the United States in 2017, 2019, 2020 and 2021“. Accessed September 9, 2022.

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