A merchant account is a critical tool for businesses looking to accept electronic payments, whether they’re operating online, in-store, or both. However, qualifying for one can feel daunting if you’re unsure about the requirements or process.
In this guide from Payment Nerds, we’ll break down everything you need to know — from what a merchant account is to how you can open one for your business. Let’s dive in!
What is a Merchant Account?
A merchant account is a type of bank account businesses need to securely accept and process electronic payments via credit cards, debit cards, and digital wallets. It acts as an intermediary between customers’ payments and a business’s bank account[1].
Whichever merchant service provider you sign up with will often also be your merchant account provider. They will process your payments and temporarily hold funds in your merchant account before they are deposited into your primary business account.
Businesses That Need a Merchant Account
Merchant accounts are a necessity for businesses in a wide range of industries. In fact, if your business accepts electronic payments, chances are you’ll need a merchant account. These include:
- Retailers: Physical stores using point-of-sale systems for debit and credit card transactions[2].
- eCommerce Businesses: Online stores that require a payment gateway and online payment processing to accept online payments[2].
- Restaurants: Establishments using mobile or in-store payment terminals.
- Service Providers: Freelancers or professionals who accept card payments for their services.
- Subscription Businesses: Companies that offer monthly services, which usually involve recurring billing or memberships.
Whether you’re a small startup or a large enterprise, a merchant account is vital to processing payments efficiently and securely.
Types of Merchant Accounts
Merchant accounts aren’t one-size-fits-all. Depending on your business model, location, and risk profile, you’ll need to choose the right type of account:
Direct accounts are merchant accounts directly provided by acquiring banks, which are sometimes also your merchant services provider. These accounts offer high levels of control, transparency, and lower transaction fees but often involve stringent qualification processes[2].
In addition to direct merchant accounts, there are also local accounts, which are merchant accounts based in banks within your business’s home country[2]. A huge advantage of these accounts is that they are tailored to local payment processing, simplifying transactions in the local currency, and are often assured to comply with regional regulations.
In contrast to local accounts, off-shore accounts are merchant accounts hosted in foreign countries[2]. These are often chosen because they provide tax advantages or lower processing fees. They are also a strong option for international payment processing, so they’re common in industries with high international transactions. However, more foreign transactions also mean your business will experience stricter scrutiny.
On top of location, merchant accounts are also categorized according to risk. In particular, high-risk accounts are assigned to businesses operating in industries considered high-risk for fraud or customer chargebacks — like gaming, CBD, or travel[2]. If your business works within a high-risk industry, you’re likely to only qualify for a high-risk merchant account. These accounts handle the elevated likelihood of chargebacks and fraud but come with higher fees and stricter requirements.
Finally, third-party accounts are managed by payment aggregators like PayPal or Stripe. They’re easy to set up but often have higher fees and less control. They’re ideal for small businesses or startups with lower transaction volumes. Additionally, Payment Nerds provides merchant accounts for startups and enterprise businesses, along with a range of solutions that we tailor to your business’s precise needs.
What You Need to Qualify & Get A Merchant Account
To qualify for a merchant account, you must meet certain criteria and provide documentation proving your business’s legitimacy. These include:
- Registered Business & Tax Info: Your business must be legally registered and compliant with local laws. You should also have valid tax information such as an Employer Identification Number (EIN) ready[1].
- Business Bank Account: A dedicated account for processing payments and receiving funds.
- Good Credit Score: Both personal and business credit scores may be assessed[1].
- Secure Payment Infrastructure: Ensure you’re PCI-DSS compliant and have fraud protection measures in place.
- Industry Risk Assessment: High-risk industries may require additional documentation, higher fees, or specialized accounts[3].
How to Open a Merchant Account
Opening a merchant account isn’t a super-complicated process, but it does involve several steps you should remember. Here’s a step-by-step breakdown of how opening a merchant account will largely occur:
Register Your Business & Gather the Right Documents
First, you will ensure your business is officially registered and in good standing with the appropriate authorities. Gather documents such as your business license, tax ID, and proof of identity for all key stakeholders. This paperwork demonstrates your legitimacy and simplifies the application process[2].
Get a Business Bank Account
A dedicated business bank account is essential for receiving funds from your merchant account. Ensure the account is active and has a history of transactions if your business is already operational. This will help during the underwriting process later on.
Search for Good Merchant Account Providers
Next, research merchant service providers and payment processors[2]. You should base your search on a set of precise criteria, such as fees and feasible pricing structures for your business. They should also provide an array of service features and tools that will help you manage your merchant account and business more effectively.
Also, remember to consider whether or not a merchant account provider has experience serving businesses in your particular industry. Review what other businesses similar to yours say about each provider.
Apply for Your Merchant Account
Once you’ve selected a provider, complete their merchant account application. This typically requires submitting your business documents and answering questions about your monthly sales volume, average transaction sizes, and your business’s risk profile[2].
Wait for Approval
Approval times vary from one provider to the next, ranging from a few days to over a week. High-risk businesses will typically take longer and involve more scrutiny. During this period, the provider’s underwriting team will assess aspects of your business and you, such as your creditworthiness, the legitimacy of your business, as well as your transaction and sales history[2].
Setup and Start to Accept Payments
Once approved, your provider will help you integrate tools like point-of-sale systems, payment gateways, or mobile payment solutions. To avoid customer issues, test the setup before opening your store or site for operations.
How Merchant Accounts Work
Merchant accounts are a critical part of the payment process, acting as a middle-ground between your customers’ banks and your business bank account. While they work behind the scenes, understanding their function can help clarify how payments are processed and showcase their importance to your business. Here’s how merchant accounts handle payment transactions from start to finish:
Transaction is Made & Payment is Processed
The process begins when a customer makes a purchase, either online or in person. The payment information is securely transmitted to your merchant account provider through a point-of-sale (POS) system or payment gateway[2]. At this stage, the provider communicates with the customer’s issuing bank to validate the transaction and ensure sufficient funds are available.
If a transaction occurs in-store, merchant account providers will ensure that card readers encrypt the cardholder data and send it to the provider. On the other hand, if a customer is shopping on your website, your website’s online payment gateway will ensure that all details are sent securely.
Funds Are Taken From Customer’s Account
Once the transaction is authorized, the issuing bank deducts the payment amount from the customer’s account. This step ensures the funds are reserved and marked for transfer to the merchant[2].
Funds Are Transferred To Your Merchant Account
After the customer’s bank authorizes the transaction, the funds are transferred to your merchant account. This usually occurs 1-2 business days after the initial transaction. Some providers offer faster payouts, although they usually include higher charges.
The business’s merchant account holds all customer funds from the issuing bank. Your merchant account provider will ensure your transactions are legitimate and comply with security standards. After they confirm customer funds are safe and approved, the total amount from your sales is sent to your main business bank account[2].
Customer Payments Are Settled (or Refunded)
If a refund or chargeback is requested, your merchant account provider will facilitate the reversal of funds to the customer, often involving additional fees[2].
Merchant Account Fees & Costs
Merchant accounts come with various fees, which can add up depending on your provider and transaction volume. Here’s a breakdown of the common fees associated with merchant accounts[2]:
- Monthly minimum fee: This fee ensures that your provider earns a minimum amount from your account each month. You’ll pay the difference if your transaction fees don’t meet the minimum.
- Transaction fee: A transaction fee is charged for every processed payment, usually expressed as a percentage of the transaction amount plus a fixed fee (e.g., 2.9% + $0.30 per transaction).
- Payment gateway fee: A payment gateway fee covers the cost of securely transmitting payment data for online transactions. This fee is typically charged monthly and ranges from $10 to $25, with additional per-transaction costs.
- Setup fee: Some providers charge a one-time setup fee for account activation, hardware installation, or software configuration. However, many waive this fee to attract new clients.
- Address Verification Service (AVS) fee: AVS checks whether the billing address provided matches the one on file with the customer’s bank. This adds an extra layer of fraud prevention, typically costing $0.01–$0.10 per transaction.
- Chargeback fee: If a customer disputes a charge and requests a refund, a chargeback fee is assessed to cover administrative costs. These fees typically range from $15 to $50 per chargeback.
- Early termination fee: If you cancel your contract with a merchant account provider before the agreed-upon term ends, you may face an early termination fee ranging from $100 to $500.
- Statement fee: Some providers charge a monthly fee for generating detailed transaction statements, usually between $5 and $10. Providers with robust online dashboards may not charge this fee.
Pricing Models Used By Merchant Account Providers:
Aside from fees, you’ll also find merchant account providers using different pricing models for their ongoing access to their services, such as:
- Flat-rate – Flat-rate pricing charges a fixed percentage for all transactions, regardless of the card type or payment method.
- Interchange-plus – This adds a small markup to the interchange fee set by card networks like Visa and Mastercard.
- Tiered – Transactions are categorized into tiers with varying rates, offering more flexibility across different businesses.
Top Merchant Account Providers
Now that you know everything about how merchant accounts work, let’s go over some of the top merchant account providers on the market today. Several are specialized in specific industries, while others, like Payment Nerds, work to tailor their offerings to each business they partner with. Here’s our list of merchant account providers:
Payment Nerds
Payment Nerds is a standout merchant account provider, as we offer a more personalized approach to merchant services. We focus on giving you more transparency in our pricing and service offerings, as well as flexible solutions suited to your specific needs. Some of our key features include:
- Tiered pricing tailored to transaction volume, as well as domestic and international payment processing and more.
- 24/7 customer and development support for payment processing and online payment gateway assistance.
- Immense scalability solutions for businesses of all sizes, including startups and enterprise-level organizations.
Helcim
Helcim is known for its competitive rates and customer-friendly policies. It offers highly flexible interchange-plus pricing and no hidden fees, making it a great option for businesses seeking cost transparency[4].
- Discounts are based on transaction volume.
- Streamlined transactions with a proprietary point-of-sale and virtual terminal system.
National Processing
National Processing is a more budget-friendly option that offers low transaction fees for businesses in various industries, including retail, food service, and nonprofits[5].
- It offers low transaction and monthly fees.
- Serves a wide array of businesses, including high-risk companies.
PayPal
PayPal is a household name in payment processing, offering a range of solutions for small businesses, freelancers, and eCommerce stores. It’s especially popular for online transactions due to its ease of use and widespread acceptance[5].
- Although its platform is becoming more complicated to use, it is simple to set up.
- It has a high number of integrations for existing systems.
Square
Square is an all-in-one solution for payment processing and point-of-sale (POS) systems. Its user-friendly hardware and software make it a favorite for small retail stores, cafes, and service-based businesses[5].
- Access to simple, easy-to-install hardware and software.
- Fewer fees than other competitors.
Stax
Stax is designed for businesses with higher transaction volumes. It offers a subscription-based pricing model that eliminates percentage-based markups on transactions[4].
- Monthly flat-rate pricing
- Customizable plans
Stripe
Stripe is a leading payment processor for businesses needing advanced customization and seamless platform integration. Its robust API makes it a favorite among tech-savvy businesses and developers[5].
- Businesses enjoy 24/7 customer support to get the most out of their complex platform.
- Offers chargeback protection, significantly reducing costs.
Conclusion
Many businesses find qualifying for a merchant account difficult, but following the steps outlined above will ensure your business has access to the merchant account services it needs. Also, while there are numerous costs and fees that you’ll have to pay once you get a merchant account, there are many providers to choose from. Selecting the right one for your business will give you everything you need to stay competitive while also keeping your profit margins lucrative.
If you’re looking for a merchant account provider that offers tailor-fitted solutions and transparent pricing, consider Payment Nerds. Our payment processing and merchant account services emphasize transparency and security, and our goal is to ensure that you enjoy fast, seamless transactions with as little hassle as possible. Get started with us today, or contact us to find out how you can qualify for a merchant account with us.
Sources
- [1] Investopedia. “What Is a Merchant Account? How Accounts and Processing Works.” Accessed November 18, 2024.
- [2] Business News Daily. “What Is a Merchant Account, and Do You Really Need One?” Accessed November 18, 2024.
- [3] Forbes. “What Is A Merchant Account? And How Can It Help Your Business?” Accessed November 18, 2024.
- [4] The CFO Club. “20 Best Merchant Account Services To Process Electronic Payments In 2024.” Accessed November 18, 2024.
- [5] Forbes. “Best Merchant Account Service Providers Of 2024.” Accessed November 18, 2024.” Accessed November 18, 2024.