What Is a Merchant Account?

To understand what a merchant account is, we first need to define a traditional bank account to see how the two compare. Whether as a business owner or an individual, you use a bank account to save whatever money you’ve collected throughout the week, month, or year. In effect, bank accounts are designed to safeguard your money in the long term.

Woman using mobile smart phone, online payment, banking and online shopping

By contrast, a merchant account is a special type of business bank account that allows you to securely accept credit, debit, and other electronic payments within your organization. It functions as an intermediary between your business and the card-issuing banks that your customers use when they pay you with a debit or credit card.

Without a merchant account, all of your sales are restricted to cash and paper checks. At a time when fewer Americans carry neither, your business’s growth potential will be severely limited.

Because we don’t want that to happen to your small business, the free resource below covers everything you need to know about merchant accounts, including:  

Let’s get started.

Who Should Get a Merchant Account?

If you plan on accepting plastic of any kind (e.g., credit, debit, or gift cards), you need to set up a merchant account first. Note that this is in addition to your normal bank account or any other add-ons, including:

  • A physical point-of-sale (POS) system or credit card reader to process cards in-person.
  • A payment gateway to capture card information in your e-commerce store.

It’s also worth noting that merchant accounts are still necessary — even if you only accept credit cards when soliciting charitable donations. In other words, churches and nonprofits also need merchant accounts if they want to accept electronic payments of any kind.

Why Is a Merchant Account Important?

Some might ask why you couldn’t simply link your business’s bank account with your payment processor to ensure that all incoming credit card sales are automatically deposited. Unfortunately, it’s not that simple. That’s because there would be long delays as your bank and customers’ card-issuing banks verify each transaction before authorizing the sale.

A merchant account is not like a traditional bank account where money is moved in and out. It’s a business account/relationship with a Visa and/or Mastercard acquiring member bank that essentially “loans” the merchant the funds from the credit card transactions they accept (less the fees). The acquiring banks wait to get paid from the issuing banks, which happens at a much later time. Essentially, you are applying for a small business loan when you apply for a merchant account because the acquiring bank is “loaning” you the funds from the card transactions.

Although you can’t actually access your merchant account, the funds acquired from the issuing bank are automatically transferred to your bank account on average within 1-2 business days. This fast authorization process helps minimize delays, so you get paid quicker.

What Can a Merchant Account Do for Your Small Business?

Electronic payment acceptance is the primary purpose of having a merchant account. At a time when consumers carry less cash and write fewer checks, it is important that you offer as many payment options as possible. With a merchant account, you can accept:

  • The “physical” cards that come branded with Visa, American Express, Discover and Mastercard
  • The “virtual” cards that customers frequently upload to mobile wallets such as Apple Pay

Accepting electronic payments offers several benefits:

  • Speed – Credit card authorizations take seconds as opposed to checks clearing. If you invoice your customers, you may be waiting on payment for 30+ days considering the time it takes for your invoice to reach your customers, time spent waiting for a check to be mailed, and then time spent to clear the check with your bank. A merchant services account enables you to accept payments in person, online, via phone, or by mail.
  • Increase in Spending It has been found that consumers tend to spend more when paying with a credit card versus cash. Sometimes as much as 83 percent more. While the average cash transaction is about $22, the average non-cash transaction is $112. As ironic as it seems, “cash in” on your consumers’ willingness to spend more by applying for a merchant account.

Black credit card and one hundred-dollar bill

How Do Merchant Accounts Differ From Bank Accounts and Payment Gateways?

The payment processing landscape can be confusing, which is why you often hear merchant account, bank account, and payment gateway used interchangeably. In truth, you often need to include all three when designing your payment environment. This is especially true for online retailers.

Each component performs a different function:

  • Bank account: As already discussed, this is where you store your money for safekeeping. As the account holder, you can deposit and withdraw from this account whenever you want.
  • Merchant account: This is the temporary “waiting room” for any money you’ve earned from your most recent credit or debit card sales. However, you don’t have direct access to your merchant account. Instead, you can only access funds once they’ve been approved, cleared, and transferred to your designated bank account.
  • Payment gateway: This is the cloud-based digital version of a POS system or desktop terminal. It only applies to e-commerce. Your payment gateway is what allows your online store to securely capture electronic payment information during the checkout process.

How Can Your Business Establish a Merchant Account?

For many small business owners interested in payment card acceptance, opening a merchant account is the hardest single step — simply because there are so many options out there:

  • Some merchant accounts allow you to separate hardware or gateway.
  • Other companies provide the hardware, payment gateway, and merchant account all in one. This is the model BluePay follows.

Getting started with either of these two options always involves filling out an application form and going through an approval process. If you’d like to apply for a BluePay merchant account, you can do so here.

There is a third type of merchant account, as well.

When signing up for payment processing solutions such as PayPal, Square, or Stripe, you’re essentially using the provider’s merchant account infrastructure to securely accept credit cards. This is known as a payment facilitator service, or PayFac. There’s no need to apply for a separate merchant account, because all merchants are boarded under one main merchant account.

Although sign up is simpler, there are some disadvantages with payment solutions like these:

  • You’ll be charged a premium for this ease and convenience
  • Funding time is typically 4-8 days versus 1-2 days
  • Customer service may be limited and less responsive
  • You aren’t building credit for your business

How Do You Choose the Best Merchant Account Provider?

Merchant account providers strive to create “frictionless” payment processing starting with an easy online application, fast approvals, and the highest network uptime – all while helping reduce fraud and losses.

Fraud and abuse continues to evolve. Although credit card fraud dropped from $8.1 billion in 2017 to $6.4 billion in 2018, fraudsters are shifting gears to debit cards, prepaid cards, reward programs, and account takeovers.

That’s why it’s important to choose a merchant account provider with security and fraud features to prevent your business from getting hit with fraudulent payments.

Additionally, you’ll want to select a merchant account provider that complies with the latest PCI Data Security Standards (PCI DSS) and provides the solutions and support to enable you to achieve and maintain compliance.

Below are three additional considerations when shopping for a merchant account solution:

Setup ease

A merchant account is something that you shouldn’t have to actively manage. Instead, you should be able to quickly configure it once before turning your attention to other aspects of running a successful business.

Infographic showing easy setup

Expandability

Many merchant accounts come with payment integration, API customizations, and additional features to help expand your payment environment’s functionality. Payment integration streamlines your operation by working with the accounting or CRM software you already use to run your business. You’ll reduce manual data entry, minimize errors, and ease reporting – all helping to save time and money.

Infographic showing Expandability

Interoperability

Although this isn’t a requirement, it’s always a good idea to select an all-in-one provider for your merchant account and payment gateway, POS, or terminal. Doing so dramatically reduces the likelihood of interoperability issues. By keeping everything under one roof, you also benefit from the latest patches and updates. As a bonus, troubleshooting any problems becomes much easier if you only have to make one phone call instead of two.

Infographic showing Interoperability

For many small business owners, navigating the “merchant account” terrain seems like a daunting and unpleasant task. They’d prefer to focus on selling widgets or services instead of trudging through the technical aspects of payment acceptance.

With the right payment processor, getting started is a lot easier than you think. At BluePay, for example, we make applying for a secure merchant account simple. Once accepted, you can begin using any of our PCI-compliant payment processing solutions — complete with the small business tools or enterprise payment processing solutions you need for long-term success.

To learn more about our award-winning merchant account solutions, schedule a free consultation with our payments team today.

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