Merchant accounts are a type of bank account for businesses that enables them to accept debit and credit card payments. It is basically an agreement between three parties (retailer, payment processor, and merchant bank) for the settlement of transactions involving credit and debit cards.
The process concerning the transfer of funds is simple. First, the payment is deposited into the merchant account. From there, they are shifted into the bank account owned by the business. This transfer into the business account can occur on a daily or weekly basis, varying according to the merchant bank providing the merchant account services.
It is necessary to have an internet merchant account if you want to start an e-commerce business that accepts credit card payments.
Getting a Merchant Account
Getting a merchant account isn’t that simple. There are a lot of factors that come into play when you’re applying for a merchant account. Merchant account providers have to minimize their risks. They look at a variety of things before approving your merchant account. Here are some questions that give you an idea of what information the bank will look at.
- Does your business have a high risk of credit card fraud?
- How long has your business been operating?
- Is there an event in your business’ history that is worth taking note of? (e.g. Bankruptcy, Default)
- Does your business have any other merchant accounts?
- How is your personal credit history?
It is easier to get approval for a merchant account from a bank that holds your business and/or personal account.
If the answers to the questions above do not look favorable to you, your account may still be approved. However, it is likely that the merchant bank will charge higher transaction fees as reassurance for their risk. That high fee can then be renegotiated later on when the business has a better standing.
Internet Merchant Accounts
An internet merchant account is specifically used to hold and transfer funds that originate from online credit card transactions. These accounts usually have a higher fee than a normal merchant account as there is a higher risk involved in internet card transactions.
Internet card transactions include one more thing, a payment gateway which carries out the authentication of credit card information just like a POS machine does in a retail store. The payment gateway forwards the transaction information to the credit card company which then authorizes the payment. Some merchant banks offer a solution which finishes the requirement of having a separate payment gateway.
You must know that you will need a separate internet merchant account for the different types of cards that you want to accept. It is more convenient to get your internet merchant account through a third party provider, which include Moneris, PS iGATE, Internet Secure, and many others.
The Structure of Fees
There are many different types of fees attached to merchant accounts. Some may be mentioned in the contract, other fees might not be mentioned. Here are a few that you should expect:
- Setup Fees
- Application Fees
- Discount Rate
- Monthly Fees
- Per Transaction Fees
- Credit Card Terminal Rent
- Cross Border Fee
Excessive fees might hurt your business margin, so it is important to compare how much you will have to pay for your business’ merchant accounts. Also, carefully looking into merchant account contracts can help you avoid minimum term agreements which may require a penalty to be paid for cancellation.
Alternatives to Merchant Accounts
PayPal
This service offers a complete solution for online transactions. You can avoid a number of fees if you use PayPal by only paying on a per transaction basis. It can be used to improve your margin, which gets smaller and smaller due to the extra fee associated with using internet merchant accounts.
You can simply have a PayPal pay button placed on the checkout page of your website. You can also choose to use the Website Payments Pro option which offers a more professional payment interface for your e-commerce website.
Credit Card Reader
These are devices that connect to your phone in order to carry out transactions. Offered by a variety of service providers, they are very cheap (or even free) and charge a reasonable per transaction fee.
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