We are living in an era of internet technology that is changing our lives rapidly. As a result, both merchants and consumers have more choices than ever. Consumers can choose the merchant from which they want to buy and the method of payment. In addition, most countries are transforming themselves into digital economies, making transactions completely cashless.
Credit card payments are a common mode of payment used by consumers nowadays, and their use is increasing every year. Credit card payments grew over 10 percent every year, while the use of debit cards for payments is also increasing as consumers prefer multiple options for payments.
To make the multiple payment methods available to consumers, a business needs to have a merchant account. The merchant also needs to tie up with a payment service provider with the necessary tools and technology to use multiple payment methods. Let’s know more about the merchant account and service for businesses.
What is a merchant account?
A merchant account is specially made for businesses that enable them to accept payments through credit cards and debit cards. A merchant account is an agreement between the business, the bank, and the payment processor for the settlement of transactions made through credit or debit cards.
When a consumer buys a product or service, the money first goes into the merchant account and is then transferred to the business’s bank account. The funds are transferred to the business account on a daily or weekly basis.
How does a merchant account work?
Businesses use merchant account to accept online payments from customers using credit or debit cards. But neither business owners nor customers are aware of the whole process. There are many steps involved in accepting the payments through a merchant account.
The entire cycle begins with a card network like VISA or Master Card. When a customer buys a product or service online using their credit or debit card, the card processor relays the transaction to the card network. Once the card processor sends the transaction information to its network, the network routes the same to the issuing bank. The issuing bank approves the transaction and allows the funds to be deposited into the merchant account.
Only after the money is deposited into the merchant account, the merchant can receive the funds in their business bank account. Once the funds are deposited in the business bank account, the merchant can use the funds. It may take a few days for the funds to transfer from a merchant account to a business bank account.
How can a business get a merchant account?
The process of obtaining a merchant account depends on your business requirements. Here are the things you need to apply for a merchant account.
The first thing you need to get a merchant account is to have a bank account. You need to separate personal and business finance. This tells your account provider that you can separate your personal and business expenses accurately.
Your financial statements of your bank accounts are essential for getting a merchant account. The financial documents prove that you are financially responsible regarding your bills and expenses. Businesses may also need to produce processing statements in addition to bank statements to account providers.
You need to get your business ID, which is the Employer Identification Number, also known as the social security number of your business. EIN is required while filing taxes and is the unique identifier found on your tax and legal forms.
Businesses are required to possess multiple licenses such as business license, tax registration license, occupational license, etc. Your merchant account provider will require you to produce these licenses at the time of applying for a merchant account.
The PCI compliance ensures a degree of protection for customer’s payment information. The payment processor and merchant both need to adhere to PCI compliance while processing customer card data and information.
The merchant account providers require supporting documents to open your merchant account. Supporting documents include marketing materials, your business plan, inventory reports, and shipping policies, return policies, etc. It may need some other documents. It’s essential to ask your account provider about the list of documents it needs so that they can be produced at the time of applying for a merchant account.
How Merchant Services Work
Merchant services are the services that a business uses for accepting and processing payments from customers. These services involve the background processes required for accepting payments and tools that merchants need to use for processing payments.
The merchant service process begins when a customer presents their credit card and ends when funds are deposited into their merchant bank account. Your merchant services will determine how you accept payments, which payment method you accept, and which provider you choose.
Usually, the transaction process follows these steps:
Swipe a customer’s credit card or enter information at a credit card processing terminal.
- The payment processor submits this data and checks with the customer’s bank before accepting or rejecting the information.
- If the customer’s bank approves the transaction, they can accept the payment through their terminal, and the purchase will be completed.
- Once the purchase is approved, the payment processor will take your fees (which we will discuss later) and transfer the balance to your merchant account (the bank account required to accept credit card payments).
To make this process easier, you will need a card processing terminal and the technology (provided by a commercial service provider, also called a payment processor) required to make debit or credit card payments. Without companies to facilitate this processor to offer merchants this service, companies would not be able to accept credit card payments from their customers.
Difference between Merchant Account provider and Payment service provider
A payment service provider aggregates all the funds from different clients to a single merchant account. Then it distributes the money from the merchant account to individual business bank accounts. The core difference that distinguishes a payment service like Paypound from a merchant account provider is that the payment processors do not offer merchant account to businesses.
Today there are plenty of merchant account providers and payment processors available, all offering almost the same technology with a little difference in functionality and features. As a business owner, you need to consider the pricing, quality of services, and your requirements before applying for a merchant account or payment processing service for your organization.
Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No Fin Fact Buddy journalist was involved in the writing and production of this article.