If you own or are planning to start a small business, you may have heard about merchant accounts. Many business owners are unsure exactly what these are and how to use them. A lot of people are unsure whether they need a merchant account to run their businesses. Understanding the answers to these questions could help you run your business more effectively.
What Is a Merchant Account?
A merchant account is a special type of bank account that can accept credit and debit payments. Some accounts can also or alternatively accept other payments such as mobile payment apps.
Having a merchant account is an important part of payment processing. Despite what you may expect, when you accept a credit card payment from a customer, you aren’t the only two parties involved. These are the key players involved in processing a payment:
- The Seller: This is your business. The seller initiates the transaction using the customer’s payment card.
- The Customer: This is the person trying to buy from you. They have a credit card issued by their bank.
- Payment Gateway/Processor: This is an important middleman that does a lot of the work of the processing. The processor or gateway collects the card information, does a fraud check and sends it to the acquiring bank.
- Acquiring Bank: This is the bank that issued your business your merchant account. It handles the collection of payment and part of the authorization process.
- Issuing Bank: This is the customer’s bank. It authorizes (or not) the payment at the request of the acquiring bank.
- Card Network: This is the network that provides the card and handles the communication between banks. VISA, MasterCard and American Express are all card networks.
When you start a payment, you will begin by trying to authorize it. During this phase, your processor will collect the information, send it to your acquiring bank which will then check if the payment can be authorized with the issuing bank. If it can be authorized, the settlement and funding phase can begin. During this phase, the payment is double-checked, and the funds are transferred. The whole process typically takes about 48 hours or less.
Having a merchant account is at the heart of this whole process. Without it, you wouldn’t have a relationship with the acquiring bank to accept payments.
Do You Need One?
As you may have gathered from the above information, you need a merchant account if you want to accept payments through credit cards, debit cards and other non-cash payment types. This applies to both online and brick-and-mortar businesses. For the former, you will need a website with an e-commerce platform and checkout process. For the latter, you will need a credit card reader.
Almost all businesses, especially those selling to consumers, need to have a merchant account in the modern world. There are an estimated one billion credit cards in the United States. People are simply paying with cards more than cash. These are a few examples of the types of businesses that could benefit from accepting payment cards:
- Retail stores
- E-Commerce businesses
- Service businesses
- Grocery stores
- Many more
Chances are that your business falls into the above categories. Typically, only business-to-business brands that primarily accept wire transfers and checks can avoid having a merchant account. However, even they can benefit from one.
How Do You Select the Right Merchant Account?
If you have decided that you need to get a merchant account, you will need to consider which is right for you. Typically, acquiring banks do not directly provide accounts. Instead, they work with merchant services providers to act as middlemen.
Think about how many transactions you expect to be processing each month in the coming year. Also, think about what the average value of the transaction may be. Similarly, you will need to plan how customers will pay you.
Explore your options. You can learn a little about Instabill’s merchant accounts. Finding the right merchant services provider is essential to your business’s success.
You may need a high-risk or other specialty merchant account. Consider contacting the provider you are considering working with to learn more about this. At Instabill, we are happy to discuss our different account types.
What Else Do You Need?
As mentioned, you will need a credit card reader or website that is ready for payments. Additionally, you will need to provide some documentation for the underwriting process. During this stage, the acquiring bank will evaluate your risk profile.
Expect to provide your personal information, credit details, bank statements and some other documents. Additionally, you will need a dedicated business bank account and may need a business license. When you have these items ready, you will need to submit an application.
Once you have submitted everything and been approved, you will be ready to go. You may be ready to start accepting payments within a matter of days. This could be an opportunity to grow your business.