What Is a Merchant Account?
A merchant account is a type of bank account that allows your business to accept debit and credit card payments from customers. Your merchant account will front your business the funds—minus fees—from the credit card transactions you accept, before your customers pay off their card issuers.
In other words, the payments from your debit and credit card sales will be deposited into your merchant account, and then transferred to your business bank account. It’s important to note, therefore, that a merchant account is distinct from a traditional business bank account.
How Do Merchant Accounts Work?
Once again, a merchant account itself is simply the bank account through which your business will receive the money you earn through your customers’ card purchases from your business. On its own, a merchant account does not include other technology or services associated with merchant processing, like card readers, payment gateways, or other software used to accept credit card payments — these accounts are only the banking service that allows you immediate access to transaction proceeds.
In essence, a merchant account prevents you from having to wait for the proceeds from credit card transactions—caused by the delay between the moment your customer pays for your good or service with a credit card and the moment they pay their credit card bills. Therefore, the process of accepting credit card payments—and the role your merchant account plays—can be broken down like this:
– After one of your customers pays for your good or service with a card, the card processor will send the
transaction details to your merchant account.
– Your merchant account provider will then send the transaction details, through the card processor, to the
customer’s card issuer.
– Once the customer’s card issuer confirms that there are sufficient funds available to cover the transaction,
the issuer then contacts the processor who, in turn, contacts the merchant account with approval. Credit
card networks like Visa and Mastercard oversee this process of data exchanges, called interchange.
– After all of this back-and-forth, your merchant account then begins to front your business the proceeds of
the card transaction—minus all of the fees—to your business bank account.
Merchant Account Fees
As we just mentioned above, the final step in the process of accepting credit card payments involves funds being transferred from your merchant account to your business bank account—minus fees. When you open a merchant account, which we’ll explain in greater detail below, your merchant account provider will charge fees for the services they’re providing.
First and foremost, merchant service providers need to fortify themselves against the risk they take on by fronting your business your revenues, so they charge you merchant account fees. In addition, you’ll also pay wholesale fees that processors, networks, and issuers charge for their part in the interchange process. Depending on your merchant account provider, you might also pay for additional tools, hardware, software, and basic setup and maintenance.
Merchant Account Alternatives
Typical merchant account providers are not an only option to accept credit card payments. If you’re wondering how to accept credit card payments without a merchant account, you can turn to a payment service provider (PSP), sometimes called a payment facilitator or payment aggregator.
Instead of issuing dedicated merchant accounts for all of their customers, payment service providers, like Square and PayPal, have a single merchant account through which they aggregate all of their customers’ funds. Therefore, all of the funds from your credit card transactions are deposited in this account (with the funds from other customers) and then are transferred to your business bank account.
With payment service providers, you’ll typically find lower fees, faster and simpler setup processes, and additional features (such as payment gateways, POS software, etc.) included with their services. This setup, however, is also prone to slower customer service and account freezes or delays, so if you have a larger business that accepts a high-volume of card transactions on a daily basis, it may be advantageous to use a more traditional merchant account provider.