If your business accepts payments from customers, you’re probably familiar with the term ‘merchant account’. A merchant account allows you to accept payments in multiple ways. And with online payment preferences changing and growing all the time, it is essential for most businesses to get one – and it might be vital for you, too.
In this article, we’ll cover what a merchant account is, how it works, and how to get a merchant account for your business.
What is a merchant account?
A merchant account is a type of bank account that allows businesses to accept and process electronic payments via debit or credit cards, as well as open banking payments, such as instant account-to-account payments.
As a business, your merchant account is essentially the bridge between your business and your customers’ money. When you set up a merchant account, you enter into an agreement with a merchant acquiring bank, which handles the processing and settling of your card transactions. This agreement also means your business follows the rules set by card networks.
For most businesses, a merchant account is essential. It acts as a middleman between their customers and their main business account, temporarily holding funds before transferring them to the business. This setup ensures the business doesn’t have to wait for customers to pay their credit card bills: they can receive their money almost immediately.
With a merchant account, you can also accept instant account-to-account payments, giving your customers a faster, smoother way to pay – helping your business get paid quicker. Read more about the benefits of these types of payments for merchants.
Merchant account vs business bank account – what’s the difference?
While a business bank account is where your company stores its money and handles everyday banking, a merchant account is specifically designed to process payments from customers.
Think of your business bank account as your money’s home, and your merchant account as the gateway that moves customer payments safely and quickly into that home. Unlike a regular bank account, a merchant account connects directly with card networks and payment processors to make instant transactions possible.
What fees are associated with a merchant account?
Merchant accounts come with a variety of fees, and knowing them upfront helps you avoid surprises. Common charges include transaction fees (a percentage of each sale), monthly account fees, setup fees, and sometimes chargeback fees if a customer disputes a payment.
These fees vary depending on your provider and the types of payments you accept, so it’s important to compare options and understand the total cost of processing payments for your business.
Do you need a merchant account?
Merchant accounts are essential for businesses that want to accept various payment types from their customers. A wide range of business types and industries require merchant accounts, making it highly likely that your business will need one.
Do you want to learn more about knowing your customers? Read our article: All about Know Your Customer (KYC).
When deciding on whether you need a merchant account, here are some key considerations to take into account:
- Transaction volume: Merchant accounts typically offer competitive rates and efficient processing for businesses with a high transaction volume. This means the higher your transaction volume, the more you’ll benefit from a merchant account.
- Customer preference: Consider your customers’ payment preferences. A merchant account is crucial in markets where cards and newer payment methods are popular.
- Integration with existing systems: Your merchant account needs to work perfectly with your existing sales systems or e-commerce platforms to ensure a seamless customer experience.
Regardless of your industry, if you want to be able to accept debit or credit cards for your business, you’ll likely need a merchant account.
How do merchant accounts work?
There are three primary steps to taking payments via a merchant account:
1. Taking payment
The first step is accepting payment. If your business is exclusively online, customers only need to submit their card details. If the payment is powered by open banking, customers only need to submit their bank account details.
For in-house payments, you need a card reader. Card readers are typically provided by your payment processor and can accommodate various payment types, including digital wallets and phone payments.
You might also be interested in: ‘Payment Processing: What Is It, and How Does It Work?’
2. Processing payment
When the payment is accepted, the card reader or payment form sends the customer’s payment details to the payment gateway, which then forwards them to the payment processor.
Next, the information is sent to the card network, which forwards it to the customer’s bank. Assuming the account contains sufficient funds, the customer’s bank authorises the transaction and sends confirmation back to the card reader or payment form. The payment details are sent to the payment gateway for processing. Read more about the role and functionality of a payment gateway.
3. Receiving payment
The final step of the process is receiving the payment, which is where the merchant account comes into play.
The customer’s bank deposits the funds into the account. Here, the funds wait before being sent to your business bank account. This typically takes between 24 hours and seven days – a timeframe known as the ‘settlement period’.
How do I get a merchant account?
If you want to open a merchant account for your business, you need to apply and be approved for an account with a merchant acquiring bank, for example.
To apply for your merchant account, you need to provide information about your business, which typically includes the following:
- Company name
- Company tax ID or employer identification number
- Contact information
In addition to your company details, you may also need to include information about your product or service, monthly turnover (or predicted turnover) and average amount per transaction. To apply for your merchant account, you’ll need to provide business information. This process is part of broader regulations like Know Your Customer (KYC).
Get in touch with our payments experts
Want to find out how you can use instant payments for your merchant account? Contact one of our payments experts today. From recurring payments and Pay by Bank to open banking-powered account information services (AIS), Brite has you covered.
