These days, most businesses that depend on consumer patronage don’t really have the option of excluding credit transactions from their range of accepted payment methods. There’s just too many customers who depend on them as a regular option for most new companies to pass up the opportunity, even if there are some costs associated with accepting cards. Even established businesses that have traditionally been cash only have moved to broaden their options in recent years, and for those whose income relies in whole or in part on e-commerce, it’s almost the only way to get your money quickly. So, the next question is what does it take to accept credit cards? That’s where many first-timers get confused, and why so many newcomers wonder if the merchant account is necessary. Let’s start by understanding what it is and what it does.
Credit Card Processing Explained
The merchant account is a key piece of infrastructure for businesses that take credit cards as payment. You really can’t operate without one, because it serves as the intermediary between your regular business bank account and your customers’ credit accounts. Even when a service offers to provide you with processing end to end with no additional work on your part, you’re not really skipping the merchant account. Instead, you’re getting a closed bundle of services that includes processing, the merchant account fee, and additional fees. Most of the time, those black box services that obscure the role of the merchant account are a lot more expensive than setting up your own, too.
When you accept payment with a card, you have to count on a processor to read the card and transmit the information about the transaction to the card provider. The provider then approves or denies the transaction and initiates the electronic transfer of payment to your merchant account. The merchant account receives it, then passes the money through to your business account after the transaction clears. It’s the same for any electronic transfer your hardware can handle, too. Chip cards, swipe cards, fast tap payment, and debit all run through the merchant account. Not all merchant account costs are equal, though. There are also other fees that often apply, although many plans bundle them for simplicity’s sake.
Finding the Right Merchant Account
The merchant account, processing agreement with your processor, and hardware you need to execute card in hand transactions are three separate things, but much of the time processors offer merchant account services bundled with the processing agreement. It’s also common to find them either selling the equipment you need or offering it as part of the service with a processing contract. That’s often a great deal, but not always. Sometimes, you do save more by acquiring each part of the equation separately. If you’re looking for e-commerce support, you’ll also need a payment gateway that can handle keyed-in transactions through your web store.
When you’re trying to do the math about whether a bundle is a better deal than buying services separately, it helps to know the difference between merchant account fee models and what they bring to the table. The first option we’ve already discussed, and that black box of services that handles everything for you is typically called a third-party merchant account. It costs processors more to work with that kind of service, and the fee charged by the processor is bundled right into your costs, which is part of the reason why this is the most expensive out of the bunch. The other options are:
- Direct merchant accounts, which are applied for at the bank where your regular business banking is done
- Offshore accounts, which handle the payment outside your home country
- Domestic accounts, which are separate from your regular bank but inside your home country
- High-risk accounts also exist for companies with a large number of chargebacks and refunds
Very often, domestic and direct accounts are the most cost-effective, but not always. For those who need a high-risk account, it’s important to work with the right provider regardless of the cost, because in the end those accounts are built to serve your needs better, so they will wind up being cost-effective for the right customers. Similarly, there are very good reasons why a business might want to process payments offshore, and for those companies an offshore account will simply work better.
So, Do You Need a Merchant Account?
The question at the top was whether your new business should get a merchant account. If you’re planning on processing card transactions and other electronic payments, the answer is a resounding yes, because it’s how you accept them. The real question is whether you’re ready to commit to the process of setting up a commercial grade merchant account you can keep when changing processors and upgrading equipment, or if you’re going for an end to end service that hands you everything but costs you more per transaction. For companies that plan on doing a lot of business, there’s no question which one will make you more money, and it’s not the one that’s also aimed at people who want to take credit cards at their garage sales.