Can You Accept Credit Cards Online Without a Merchant Account?
Credit cards really do make the world go round. Whether you’re shopping online or in-store, dining in a restaurant, or booking a flight—swiping your credit card at checkout gives you the product or service you desire—very quickly.
Likewise, if you’re selling goods in person, through an online store, or building a web-based service business, you want to make it easy for your customers to purchase what you offer. From that perspective, your customers’ credit card orders really are the lifeblood of your business.
To process all major credit cards (Visa, Mastercard, Discover, American Express), digital wallets (Venmo or Apple Pay), and other payment methods (ACH, payment links, mobile payments, contactless payments, or recurring payments), and get those funds flowing into your company, you must set up a merchant account to receive them.
You must also work with a payment processing provider, a business that interfaces with the customer’s bank and (ideally) gets a green light for the payment.
When the payment goes through, the payment processor deducts the transaction fees and routes the remaining funds to your merchant account. In most cases, this entire process is completed within seconds, and both parties get the desired result.
But to get your own merchant account, you need to go through an application and underwriting process, which can take days, even weeks to complete. Also, depending on the nature of your business and finances, there is a chance that your application will be declined.
In the event that you’re unable to get a merchant account, will you still be able to process credit card payments? The short answer is yes. Read on below to learn more about how to do it.
How to Accept Credit Cards Online Without a Merchant Account
You can still accept credit and debit cards online without a merchant account. To do that, you must engage the services of third-party credit card processing companies. Essentially, these companies process multiple customers’ credit card payments and funnel the proceeds into one single merchant account. Payment service providers authorize, process, and settle payments on behalf of their clients.
After deducting your transaction processing fees, they route your business’ net funds to your business bank account. This transfer generally occurs within one to two days after each credit card transaction. Third-party payment providers include PayPal, Square, and Stripe, among others.
Pros of Not Using a Merchant Account
There may be several advantages to not using a merchant account to process payments. Let’s take a look at some of them below.
Easier sign-up process
Small business owners looking for a streamlined account sign-up process, will likely find it with a third-party payment processing provider. You won’t need any extensive documentation, and the lead time will be mercifully short. Best of all, after completing your account set-up work, you can quickly begin accepting payments online without a merchant account.
Simplified, understandable fee structure
By using a third-party payment processing provider, you’ll pay a standard transaction fee that often varies with the transaction type. Just note that the fee will likely be a bit higher than you’d encounter with a bank-based merchant account.
The good news? You likely won’t have to deal with a set-up fee, monthly service fee, Payment Card Industry (PCI) fee, security fee, refund fee, chargeback fee, or early contract termination fee.
No long-term contracts
Working with a payment processing provider means you’ll deal with some form of contractual structure. However, you won’t be stuck with a long-term contract that locks you in even if your business needs change. If you decide to cancel the contract, that’s generally a simple online process.
In contrast, bank-based merchant account terms typically require you to sign a long-term contract (generally for three years). The contract likely includes an automatic renewal provision that extends the contract for another year. And, if you close the account early, you’ll pay a hefty termination fee.
Analytics
A merchant account basically acts as a hold for funds. On the other hand, a payment processor can not only take care of your credit card transactions but also give insightful data about them. Many payment processors out there provide powerful analytics functionalities with which you can learn more about your company’s finances and identify trends and patterns.
Understanding customer shopping behavior and uncovering trends will help your business stock items better and give customers what they are looking for. You’ll also be able to spot issues and delays in the payment process and smoothen them out quickly.
Apart from analyzing historical data, you can even avail real-time monitoring features to track transactions as they happen. This is a great way of catching anomalies and preventing fraudulent transactions.
The Cons of Not Using a Merchant Account
All said and done, not using a merchant account does come with a few shortfalls. Here are some of the most notable ones.
Higher fees
A prominent drawback of using a payment processor compared to a traditional merchant account is potentially higher processing fees. Payment processors often charge additional fees, such as transaction fees or monthly service charges, which may accumulate over time and be more expensive than the flat rates offered by some merchant account providers.
Also, there could be a variety of hidden fees that might differ from one payment processor to another. This is why you need to read your contract carefully before choosing a payment solutions provider.
Less rate flexibility
A payment processing provider’s one-fee rate plan can be a blessing and a curse. If your business doesn’t process many transactions, you won’t be penalized for generating a lower business volume.
However, the opposite is also true. A business with more customer transactions won’t receive any savings from its increased business volume. In that case, a dedicated merchant account with rate plans catering to higher-volume businesses would be a better choice.
Service interruptions or cancellations
There is an inherent risk with using any third-party service provider, not just for credit card processing. Payment processing providers often accept higher-risk business clients that wouldn’t qualify for a bank-based merchant account. That translates into increased risk for the payment processor. If your business falls into that category, you’re more likely to experience an account hold for certain transactions.
When the payment processor decides they no longer want to assume that higher risk, they can simply cancel your account. Now, you’re scrambling to find another payment processing service before your customers take their business to a competitor.
So while working with a payment processor may be convenient, this also means that issues on their end can lead to a complete shutdown of your credit card services. Moreover, you’d be completely helpless in this situation as you’d have no control over fixing the issues.
Having to use a payment processor also means that you don’t have complete control over how your business processes credit card payments. Payment providers can have their own restrictions and rules on the type of transactions that can be accepted and the industries they can service. You will have to research the policies of payment processors before choosing the right one so their policies don’t interfere with the goals that you have for your business.
Questionable customer service
If you want 24/7 customer service that solves your immediate problem, a payment processing provider might not be the best choice. Payment processors work with many clients so they most probably won’t be able to provide dedicated staff to handle just your account.
Yes, the payment processor might offer online chat and/or telephone service during certain hours. However, the customer service representatives may not be available when your system goes haywire at 2 a.m.
Even if you reach someone, you might not get the resolution you need, especially regarding an account hold or cancellation. Here’s where a bank-based merchant account provider might prove helpful. These larger, better-staffed businesses are more likely to employ knowledgeable associates who can actually help you.
How to Make the Best Decision for Your Business
So, should you sign up with a third-party payment processing provider, giving you the ability to quickly accept credit cards online without a merchant account? Or, should you apply for a merchant account?
Here are a few points to consider when making this decision.
- Transaction volume: Evaluate your typical transaction volume to determine if a merchant account or payment processor is more cost-effective.
- Fees: Compare processing fees, including transaction fees, monthly fees, and any additional charges, to assess overall cost.
- Contract terms: Review contract terms, including cancellation fees and contract duration, to ensure they align with your business needs.
- Security: Assess the security measures offered by both options to protect sensitive credit card information or other payment data and minimize fraud risks.
- Integration: Consider compatibility with your existing systems, website, or point-of-sale (POS system) for seamless integration.
- Value-added services: Look for additional features or services offered, such as analytics, reporting tools, or fraud prevention, to enhance your payment processing experience.
- Growth potential: Consider scalability and flexibility to accommodate future business growth and changing needs.
Consider what’s most important at this stage of your business.
Let’s say you’re about to launch your company, or you’ve only been in operation for a short time. You want to get up and running with no sign-up delays, no excessive fees and restrictions, and no long-term contracts. In that case, a third-party payment processing provider might be the answer. A small business that is just starting out would do well by partnering with a payment processing company.
If you’re a techie who can generally “make things work,” the third-party processor’s less-than-stellar customer service might not be a big concern. If you’re happy with those conditions, signing up enables you to quickly accept credit cards online without a merchant account.
However, those positive points might not compensate for the payment processing provider’s downsides. First, you’ll pay higher transaction fees, and your established business won’t receive the lower rates that a bank-based merchant account might offer.
If you operate a higher-risk business, you could be impacted by an account freeze or even a cancellation, potentially putting a severe crimp in your business operations. And, after all that, you might not receive adequate customer service when you need it most.
Like most business decisions, putting the pros and cons down on paper (or the computer screen) will help to view the issue objectively. Then, you’ll be prepared to decide how your business will accept credit cards online without a merchant account.
Still Need Help Deciding?
Payment Depot can point you in the right direction. Get in touch with our payment specialists to discuss your business and your needs. If you already have a payment provider, send us your statements. We’ll analyze it for free to determine if you’re getting the most bang for your buck.
Quick FAQs about accepting Credit Cards online
Q: What is a merchant account and why do I need it to accept credit card payments online?
A merchant account is a type of bank account that enables businesses to accept payments in multiple ways, typically debit or credit cards. It is necessary to accept credit card payments online as it acts as a temporary holding place for money that comes in from online sales. Once the transaction is processed, the funds are transferred from the merchant account to the business bank account.
Q: How long does it take to set up a merchant account?
The process of setting up a merchant account involves an application and underwriting process which can take anywhere from a few days to a couple of weeks. The duration depends on various factors like the nature of your business and your financial stability.
Q: Is it possible to accept credit card payments online without a merchant account?
Yes, businesses can still accept credit card payments online without a merchant account. This can be done by using the services of a third-party payment processing provider. These providers process multiple customers’ credit card payments and funnel the proceeds into one single merchant account, then route the net funds to your business bank account.
Q: Who are some examples of third-party payment processing providers?
Some examples of third-party payment processing providers include PayPal, Square, and Stripe. These providers offer a streamlined account sign-up process and allow businesses to quickly accept credit card payments online.
Q: What are the advantages of using a third-party payment processing provider?
Third-party payment processing providers offer a streamlined account set-up process and do not require extensive documentation. They also do not require long-term contracts and allow businesses to quickly accept credit card payments online.
Q: What are the downsides of using a third-party payment processing provider?
The downsides of using a third-party payment processing provider include higher transaction fees and the lack of volume-based discounts. Moreover, these providers may not offer 24/7 customer service, and there’s a risk of account holds or cancellations, especially for businesses categorized as higher-risk.
Q: What should I consider before deciding between a merchant account and a third-party payment processing provider?
Before making a decision, consider factors such as the nature of your business, the volume of transactions, risk level, customer service requirements, and cost considerations. It’s crucial to weigh the pros and cons of each option to determine the best fit for your business.
Q: What services does Payment Depot offer?
Payment Depot offers consultation services to help businesses make an informed decision about their payment processing needs. If you already have a payment provider, they can analyze your statements for free to determine if you’re getting the most value for your money.