When setting up an internet merchant account for your business, it’s important to understand what it is and how it works. Merchant accounts and payment gateways are two completely different entities, but they go hand-in-hand when accepting payments for goods and services. In this article, we will examine the elements of a merchant account and how to choose the right one for your business.
What is an Internet Merchant Account?
An internet merchant account is essentially a holding account for the money consumers pay for your goods and services. It is an account that the acquiring bank opens to request and transfer funds from the issuing bank.
So what exactly does that mean?
When a customer purchases on your website using a credit card, debit card, or another form of payment, the customer bank is referred to as the issuing bank. In turn, the bank that provides the merchant account services is called the acquiring bank.
When a purchase is made, the acquiring bank reaches out to the issuing bank for transaction authorization and funds transfer.
The issuing bank will check their customer’s account to ensure there are enough funds or enough credit to cover the purchase cost and all security protocols are passed. If everything checks out, the issuing bank will authorize the acquiring bank to approve the transaction and receive the funds.
Once your merchant account receives the funds, they will remain there until transferred into your business bank account. Depending on your merchant account, this can be set up to happen automatically each time a purchase is made, or it can be done on a specified schedule.
Typical Fees for an Internet Merchant Account
Merchant accounts are a critical piece of the puzzle when operating an online business. There are a variety of fees and services associated with a merchant account. A savvy business owner will consider and investigate each of these elements before choosing a merchant account provider.
Most merchant accounts have monthly fees associated with keeping the account open. Some are set costs that are charged monthly for the life of the account, while some can be assessed at different time intervals. It is prudent to look at this fee structure and compare multiple merchant accounts before making a decision.
In addition to monthly fees, merchant accounts will also carry a certain fee per transaction. Most transaction fees will vary based on the type of transaction being completed. For example, credit and debit card payments tend to have higher transaction fees than ACH payments or bank transfers. Again, each merchant account provider will have a different fee structure, so be sure to investigate these, as well.
A discount fee is just another term for a transaction fee, but it is specific to credit and debit card payments. If you see something in the merchant agreement for a potential acquiring bank that says discount rate, it is typically the per-transaction fee charged for credit and debit card purchases.
Application and Setup
Some merchant account providers also charge an application and setup fee. These fees are generally used to pay for the administrative time and costs for the bank to check your credit, your merchant history, and other pertinent information before granting you an account. Some merchant account providers will waive these fees for certain reasons, so be sure to ask if that’s an option.
Although separate from the merchant account itself, the payment gateway is equally important to your business. It is the bridge that connects your website payment portal to your bank account and your customers’ payment methods. Without a payment gateway, online credit card processing is not possible.
It should be noted that payment processors come in many varieties. It’s important to consider your customer base and business model before choosing a payment gateway.
Depending on the type of business you’re running, you may or may not need a credit card terminal or POS system to go along with your merchant account and payment gateway. In general, online businesses don’t need hardware for their payment processing. However, if you have any brick-and-mortar stores, you will need some hardware to accept payments.
Hardware for your payment gateway can include card readers, tablets, scanners, and various other items, depending on the processor you’re using. Like the grocery store, and when you check out, you have to use the card reader and pin pad. This hardware can vary based on the industry and its needs.
Other Fees (PCI compliance, cross border)
Additional fees associated with internet merchant accounts are PCI compliance fees, international fees, and others that may or may not apply to your specific business.
PCI compliance relates to all businesses who accept credit card payments from their customers, so be sure to read and understand the agreement regarding these fees. It’s also helpful to choose a payment processor who handles this for you and guarantees their services. This will protect you from some potentially ugly lawsuits if something goes wrong.
Cross-border, or international fees, are fees that are associated with international transactions. If you are planning to sell goods or services to consumers overseas, you will need a payment processor capable of handling these transactions. You also need to understand the fees associated with these payments, as they will differ from those associated with domestic payments.
Alternative Payment Services
As mentioned earlier, a payment gateway can come in many forms. Most merchant account providers will have affiliate payment processing providers and will come as a package deal, but not always. It’s important to understand the differences between gateways and how they will affect your business.
The key difference between a traditional payment processing gateway and some of the alternative electronic aggregators is versatility. In most cases, a traditional payment gateway can handle a variety of payment methods including, but not limited to:
- Credit / Debit Cards
- Bank transfers
- Electronic checks
- ACH payments
- PayPal and other similar providers
With alternative payment providers, you may or may not have this versatility. In other words, your customers might be limited in their payment options, which could deter them from doing business with you. However, these alternative options might also save you a ton of money, so it’s a good idea to at least explore them as options.
Another key difference between the two types of processors is volatility. With a traditional internet merchant account and accompanying payment processor, you manage your own merchant account affiliated with just your business. When using electronic aggregators, all merchants are added to the same merchant account, which could cause some instability.
If you’re a high-risk merchant, an aggregated account is almost always a bad fit. In this case, it’s essential to understand the risks and look into the services from a high-risk merchant account provider.
PayPal is a good example of a type of payment method that can be restrictive to your customers. If you’re only using PayPal to accept payments for your goods and services, that is the only method your customers can use. They will not have the option to use any other means of payment. Although customers can have their bank account, credit card, or debit card connected to PayPal, they still have to have a PayPal account to pay them.
Stripe & Square
Both of these electronic aggregators will allow you to accept a variety of payment forms, unlike PayPal. They are payment processors that can accept different payment methods. However, Stripe is exclusively for online payment processing, while Square can accommodate both online and brick-and-mortar stores.
To get an online merchant account, all you need to do is go to the merchant account provider’s website and submit an application. You will need to provide some paperwork, and they will likely require information about your personal credit, along with any merchant history if you have it. Here are some examples of what you’ll likely need to provide:
- Certificate of Incorporation
- Certificate of Incumbency
- Bills or other documents listed under the company name and physical address
- Valid photo IDs for all persons listed as directors or owners of the company
Once you complete the application and pay any associated fees, the merchant account provider will review everything and let you know whether or not you’re approved. Alternative services such as Square, Stripe, and PayPal tend to be approved or denied immediately. Traditional merchant accounts might take a few days to process all of the information and potentially conduct background checks and other research about your history.
Setting up an online merchant account is the easiest part of this process. Instead, spend your valuable time on the research of each potential account provider and what they can do for your business. Different merchant account providers will offer different services to their merchants, and it’s a smart choice to do business with the one who provides the most value to you as a business owner rather than the one who has the lowest fees.
About the Author
Cristopher Carillo is one of the co-founders of Allied Payments. Allied Payments is an online payment processing company specializing in medium to higher risk industries.
Guide to Internet Merchant Accounts