What Is A Merchant Account And How Does It Work?

A merchant account is essential for running a successful e-commerce store or business. The primary purpose of merchant accounts is to provide reliable payment solutions for online businesses.

Merchant accounts are essentially credit card processing services offered by banks, such as First Data Corporation (FDC). 

These accounts allow merchants to accept credit cards, debit cards, checks, and cash payments from their customers. This article will discuss merchant accounts and how they work. To get a wholistic view on credit card processing make sure to also read our complete guide to payment processing. 

Ok, let’s dig into this…

What Is A Merchant Account?

A merchant account is an account that allows you to process transactions on behalf of your clients. It provides the ability to receive funds from your client’s bank account and deposit them into your own bank account. 

When a customer makes a purchase using his/her credit card, he/she authorizes the transaction with his/her bank. Then, the bank sends the authorization request to the merchant account provider, which then processes the transaction.

The merchant account provider receives this information and credits the merchant’s account accordingly. 

Once the money has been received in the merchant’s account, the merchant can pay any necessary fees associated with the transaction, such as shipping charges. In addition, the merchant account provider may charge a fee based on the amount of the transaction.

How Does A Merchant Account Work?

The following steps explain how a merchant account works:

Step 1: Authorization Request

When a customer purchases through your website, the bank involved in the transaction requests authorization from your merchant account provider. 

Your merchant account provider verifies the customer’s identity and authorizes the transaction. After verifying all of these details, the merchant account provider returns the authorization code to the bank.

Step 2: Payment Processing

Once the bank receives the authorization code, it transfers the money from the customer’s bank account to your merchant account provider. The merchant account provider then deposits the money into your bank account.

Step 3: Fee Collection

Once the money has been deposited in your account, the merchant account provider collects any applicable fees. You should be able to see these fees when you log into your account.

Benefits Of Using A Merchant Account Provider

There are many benefits to having a merchant account. For example, a merchant account provider offers 24-hour access to funds. This means that you don’t have to wait until the next day to get paid.

You also don’t need to worry about whether or not you’re going to make enough money to cover your expenses. If you run out of money before the end of the month, you won’t have to worry about losing any sales because you’ll still have time to collect the money owed to you.

You can use a merchant account provider to help you manage your finances. They offer online tools for tracking your income and expenses.

Using a merchant account provider also gives you more control over your business. You can set up recurring billing options and other features that will help you keep track of your finances.

To open a merchant account, you must apply directly to the financial institution that you plan to accept payments. To find out if you qualify, visit the application page for your preferred provider. Even if you have bad credit, you can still get a merchant account to run your small business.

Merchant accounts are used by businesses to allow customers to make purchases without providing their personal information. 

Merchants often use a third-party service to process credit cards. These services usually require merchants to sign up for a monthly subscription fee. Most providers offer free trials so that new merchants can test their systems.

Mergers And Acquisitions

If two companies merge, they might want to share one common payment gateway. Sometimes, however, the merged company wants to maintain its separate system. In this case, the merged company would need to create a new merchant account.

If an acquiring bank acquires another bank, the acquired bank may continue to operate as usual while the acquiring bank takes over its operations. 

However, some banks choose to close down their acquisition. In this case, both the acquiring and acquired banks would need to open new merchant accounts with different providers.

Merchant Account Fees

The cost of opening a merchant account depends on several factors. Some of these include the type of card processing service being offered, the number of transactions processed per year, and the amount of risk associated with the merchant.

Most providers charge a flat rate for each transaction. This includes all types of transactions, including cash withdrawals, checks, debit card transactions, and credit card transactions.

Some providers also charge a percentage of the total amount charged to the customer. This fee is called the interchange fee. The higher the interchange fee, the lower the profit margin for the provider.

Some providers also charge fees based on the size of the transaction. Smaller transactions typically incur smaller fees than larger ones.

Merchant Account Alternatives

There are many alternatives available when it comes to accepting credit card payments. Here are some of the most popular:

1. PayPal 

This is an online payment platform that allows users to send and receive funds through email. It’s easy to use and has no setup costs.

2. Square 

This is a mobile-friendly point of sale (POS) device that connects to a smartphone or tablet. It works well for small businesses because it doesn’t require any software installation.

3. Stripe 

This is a cloud-based POS solution that works with almost any web browser. It’s easy to install and offers great security features.

4. Amazon Payments 

This is a service provided by Amazon that lets shoppers pay using their Amazon accounts.

5. Google Wallet 

This is a digital wallet that works with Android devices. Users can load money onto their phone balance at participating retailers. It’s easy to set up and there are no maintenance fees.

6. Apple Pay 

This is a mobile payment option developed by Apple. It requires a compatible iPhone or iPad.

7. Dwolla 

This is a mobile app that enables consumers to transfer money from their bank account to a business’ bank account.

Final Thoughts

When deciding which method to use, consider your needs, budget, and existing infrastructure. You should always strive to find a provider that will offer you the best value for your business. It is always good to educate yourself upfront as much as possible before making these decisions. Our card processing resource bank will help you do just that.