Close up of a woman paying with a credit card

Everything You Should Know About Merchant Accounts

8 min read • Aug 28, 2021 • Derek Miller

It doesn’t matter whether you operate a B2C retail location or a B2B consulting company, customers tend to like flexibility when it comes to paying, which often means paying on credit. Customers don’t just like the ease and convenience of credit card payments—many also prefer them because of the points and cashback bonuses that come with their personal or business credit cards.

Accepting credit and debit payments is no small feat, but a merchant account can give you the tools needed to accept and reconcile these payments efficiently.

There are multiple factors to consider when reviewing merchant accounts. Use this guide to help you choose the best merchant services provider for your individual needs. 

What Is a Merchant Account?

Merchant accounts are specific bank accounts that give businesses the ability to accept various customer payment methods—most often debit and credit card payments.

With a merchant account, you can accept different types of credit cards and digital payments without managing multiple credit accounts. Merchant accounts are run by merchant-acquiring banks that handle communication and transactions between customers and businesses.

As a business owner, you won’t have direct access to the funds in your merchant account. You won’t be able to withdraw or deposit money. However, the merchant account will deposit money into your bank account—usually within 48 hours after the charges occur. Once the money is deposited in your bank account, it’s yours to use freely.

Think of your merchant services provider as a facilitator between credit card companies and your bank. The merchant services provider will streamline your fee payments and customer charges so your finances stay organized for easier bookkeeping.  

How Does a Merchant Account Work?

If you have a credit card as an individual or business, you understand how the customer side of electronic payments works. You tell the business to charge your card for a set amount to the card issuer and then pay them back each month. 

However, credit card usage is actually more complex than that—especially if you view it from the position of the business you buy from. Here’s what happens when a customer charges a card to your business:

  1. Your business communicates the customer’s card information with the merchant bank. 
  2. The merchant bank then contacts the card processor and the card issuer.
  3. The card issuer runs through a series of approval checks (like fund availability) and security reviews. 
  4. Once reviewed, the approval is sent back to the merchant bank. 
  5. The merchant bank authorizes the transaction and releases the funds to the business.  

While this process seems complex, modern technology has sped up the process to happen in a matter of seconds. 

For example, a credit card will get declined if the customer exhibits suspicious activity or tries to spend outside of their limits. By speeding up the process, business owners can stop these types of transactions before they happen and prevent fraud.

During each step of the process, the business will accrue various processing fees and costs. These are then deducted from the merchant account, and the funds are withheld from the credit card payments made to the business. This is how merchant service providers make money. 

When you start working with a merchant account services provider, you’ll need to sign a contract to stay with them. The typical contract length is 3 years, and you’ll need to pay early termination fees if you cancel your account early. You might be able to find a merchant provider who offers month-to-month services—but this could be more expensive if they charge added fees.  

How Do You Get a Merchant Account?

Applying for a merchant account is similar to opening a bank account or working with a credit card provider. You’ll need to provide documentation related to your business and work through an approval process. 

Merchant service companies take on risks by working with your company (or any company). There are always risks that you won’t deliver the products you claim or your customers won’t be happy with them. 

When this happens, the customer will request a refund or chargeback. The merchant service provider will have to pay the customer—often before you pay them back. If your business falls into a crisis, you could have dozens of unhappy customers with no real way to pay back your merchant account firm. This risk is why your company will go through an underwriting process before getting approved. 

To open your merchant account, you will file an application with a provider (examples include Quill and Uline). You will need to have an existing business bank account and up-to-date business licenses. Without these items, your application cannot move forward.  

In most cases, you can complete an application online. The company will review your forms and ask for any supplemental information as needed. The greater the perceived risk, the more information the underwriter will need. If you only have a small amount processed each month, you’ll likely only need a voided check and proof that your business is operational. For riskier accounts, you may need to provide bank statements, P&L statements, and balance sheets. 

Once your application is approved, you can begin your working relationship with your merchant services provider. This whole process can take less than a day if you are a low-risk business.

Even if you operate a high-risk business, you can quickly work through the application process by pulling your requested documents ahead of time and submitting them immediately when requested.

How Do You Pay for a Merchant Account?

As you research merchant service providers, you may encounter different business models and fee structures. Some of these will be easier to manage than others, or they might be more profitable for your business. There are 2 common ways to pay for merchant account services:

1. Flat Pricing

With this option, you’ll pay the same amount on every transaction. This typically exists as a percentage of the whole plus an added fee. 

For example, you can expect to pay between 1.7% and 3% plus a $0.25 fee per transaction. If a customer makes a $100 order and you have a 2% fee agreement plus $0.25, then you would pay $2.25 to your merchant provider. 

Flat pricing is the easiest to calculate—it’s also beneficial if you don’t expect your charges to fluctuate much within a set range.  

2. Interchange Pricing

With interchange pricing, your business pays more depending on the types of cards they use. For example, MasterCard might charge a lower rate than American Express, which means your business pays a smaller fee.

With flat pricing, a business owner will pay more on some transactions but less on others. With tiered pricing, you pay based on the customer’s chosen card or electronic service model. 

If you ever visit a business and they don’t accept a certain card, like American Express or Discover, it could be because the business doesn’t want to accept higher fees associated with those brands.  

Some merchant accounts also offer tiered payment options where they sort the interchange rates into a few different tiers. This is the hybrid model of flat vs. interchange pricing.  

What Fees Will You Pay With a Merchant Account? 

The transaction fees are only one part of the cost associated with a merchant account. Your service provider might also charge additional fees that affect your profits. It’s important to keep track of these fees and costs so you can record them in your books. Any unexplained charges can affect your balance sheet and operational planning. Here are some examples of a few common fees:

  • Assessment fees are established to create fraud checks and prevent false charges. These typically range from 0.13%–0.15% per transaction.
  • Monthly or annual fees are charged as flat rates for using the service. 
  • Statement fees are created to cover the costs of printing and mailing your business statements. These can be avoided by using online statements.
  • Retrieval requests relate to customers disputing or canceling orders. If the merchant services team or credit company needs to review a purchase, then you’ll be charged a fee for their investigation. 

You may also need to pay setup and termination fees to start working with the merchant services provider or to end your relationship. 

These fees can add up. Some of them are standard within the industry and can’t be avoided. However, you may encounter some new fees that seem to lack any purpose or benefit to you. If you think you are being overcharged, it may be time to reconsider your merchant account provider. 

Learn More Ways to Grow Your Business

In the first few years of your business, you’re typically focused on infrastructure and foundation-building. You’ll set up various processes to make your bookkeeping easier and customer service better. A merchant account can save you time and process credit card payments faster. 

To learn more about establishing your business and growing your sales, turn to Lendio. We have a comprehensive resource center that covers everything from filing business taxes to optimizing your profit margin. 

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Derek Miller

Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.