How to Get a Merchant Account: A 7-Step Guide

How to Get a Merchant Account: A 7-Step Guide

The global credit card market continues to show impressive growth. In April 2022, Research and Markets released a report on the industry’s trends and projected expansion.

It states that the worldwide credit card market attained a $477.63 billion value in 2021. By 2027, the global credit card market will likely be valued at $762.16 billion. This figure represents a 7.80% compound annual growth rate (or CAGR) from 2022 to 2027.

For each credit card transaction, a retailer or eCommerce merchant requires an active merchant account. In this article, we’ll help you learn how a merchant account works, and share a 7-step guide to obtaining one.

Let’s get started.

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What Is a Merchant Account?

A merchant account is a dedicated business bank account that enables a merchant to process customers’ electronic payments. A small business owner works with a merchant account provider to open this digital account.

Afterward, the brick-and-mortar retailer or eCommerce merchant can accept Visa, Mastercard, American Express, and Discover credit card payments. The merchant can also accept debit cards from customers at checkout.

Merchant account description

The business’ merchant account functions like a credit line from the merchant’s bank (or acquiring bank). The merchant account advances funds (less fees) to the merchant before the customer pays their card-issuing bank.

From there, the money is transferred to the business owner’s bank account (usually a checking account). This usually happens within a couple of business days.

A merchant services provider includes the merchant account in each business owner’s services package. Other merchant services components often include a point-of-sale terminal or card reader. Some companies charge for this hardware while others include it in the services package. Finally, each package includes application software and necessary financial tools.

Four Types of Merchant Accounts

Because each company has specific business needs, a merchant account provider offers multiple types of merchant accounts. Each form of account is best for a certain type of business.

  • Retail store accounts. These merchant accounts are structured for brick-and-mortar store locations. In most cases, retail store accounts have low setup fees and processing fees.
  • Mobile merchant accounts. Businesses that generate income on the road will do best with a mobile merchant account. Flea market or craft show vendors, food truck operators, and plumbing and electrical contractors all take mobile payments.
  • eCommerce merchant accounts. An increasing number of companies sell products via phone or through an online business. These companies will benefit from an eCommerce merchant account that includes a virtual terminal.
  • High-risk merchant accounts. Sometimes, an online business has an unusually high chargeback percentage. In that case, the company will be given a high-risk merchant account. This account will carry higher processing fees and may have other restrictions.

A PSP Offers a Viable Alternative

A traditional merchant account is geared to established or growing businesses. This type of account typically requires a long-term (three-year) contract. However, the merchant receives a dedicated account along with additional services.

Fortunately, newer, lower-volume, or mobile businesses have other payment solutions from which to choose. A business with uneven cash flow might also want a more workable payment solution.

These companies can establish an account with a payment service provider (or PSP). These payment processors operate a bit differently than a traditional merchant account provider.

How a payment services provider works

A PSP aggregates all its customers’ net proceeds into one merchant account before transferring funds to each business bank account. For this reason, these businesses are often called payment aggregators. PayPal and Stripe are examples of payment service providers.

PSPs typically offer simpler (and faster) account setup and extra service features. However, payment service providers often don’t devote much attention to underwriting during the application process. This can lead to unexpected account holds and even account freezes later.

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Consider an Independent Sales Organization

Merchants should consider whether an Independent Sales Organization (or ISO) is a worthwhile alternative. An ISO is a third-party payment processor authorized to administer businesses’ merchant accounts.

An ISO typically has a relationship with an acquiring member bank. This arrangement allows the ISO to provide merchant account services to the bank’s business customers.

How Do Merchant Accounts Work?

From the business owner’s perspective, each payment processing cycle involves three parties. First, the merchant is the brick-and-mortar retail store owner or an online business owner.

The merchant account provider (or acquiring bank) maintains the merchant account. This entity also receives funds from credit card transactions. The payment processor actually executes the transactions via the electronic payment gateway.

The Merchant Account’s Role in a Credit Card Transaction

An active merchant account plays a key role in every credit card transaction. This 6-step process describes a typical credit card processing sequence.

  1. A customer purchases a merchant’s product or service with their card.
  2. The payment processor (or card processor) forwards the transaction details to the merchant account.
  3. The merchant account provider sends the details to the customer’s bank (or card-issuing bank).
  4. The card-issuing bank verifies that sufficient funds are available for the transaction. The issuer transmits this acceptance to the payment processor.
  5. The payment processor transmits the approval message to the merchant account.
  6. The merchant account “fronts” the transaction proceeds (less transaction fees) to the merchant’s business bank account.

Merchant Account Pricing and Fees

Each merchant account provider establishes its own pricing structure and account fees. Generally speaking, however, a card-present transaction is regarded as least likely to involve fraud. Therefore, these transactions will likely incur the least expensive processing rates.

3 merchant account pricing structures

Merchant account providers offer three types of pricing models. Each business should choose the model that’s best for its business type, stage, and budget.

  • Flat-rate pricing. This simple pricing model is popular with mobile credit card payment processors. Each time a transaction is processed, the merchant is charged a preset percentage. For a $100 sale, the processor would charge a $3 fee. This model can benefit businesses with smaller-ticket items or low sales volumes.
  • Interchange-plus pricing. Many smaller businesses use this pricing model. The interchange rate is the credit card network’s processing rate. The payment processor charges this rate along with its own markup. This is the most transparent pricing model.
  • Tiered pricing. This often-confusing model separates transactions into qualified, mid-qualified, and non-qualified tiers. Qualified transactions enjoy the best rates while non-qualified transactions have the worst rates. However, each tier has multiple levels, making it difficult for merchants to analyze their processing rates.

As a guideline, card-present sales processed through POS systems are likely considered qualified transactions. However, a keyed-in phone order will often be considered a non-qualified transaction. A mid-qualified transaction might be a keyed-in sale that verifies the cardholder’s address via an address verification system (or AVS).

Additional Merchant Account Fees

Each merchant account provider assesses additional fees. Although each company determines its own fee package, there are several common types of charges.

Monthly fee. These fees are also called statement fees. This charge covers monthly statement preparation and customer support. Some providers also charge annual fees.

Monthly minimum fee. Certain merchant account providers state that each merchant must show a minimum monthly transaction number or value. If the merchant does not meet this requirement, they will be charged a monthly minimum fee.

PCI compliance fee. Merchants must meet payment card industry (or PCI) compliance standards. These data security standards are designed to decrease card fraud and identity theft threats. Most payment processors provide PCI compliance assistance as part of the merchant services package. However, some companies charge an extra fee for this service. Payment Depot does not charge a PCI compliance fee.

Address verification service fee. The anti-fraud address verification service (or AVS) confirms a cardholder’s address for a keyed transaction. The merchant account provider will likely charge for this service.

Chargeback fee. When customers dispute a previously completed transaction, the merchant will be assessed a chargeback fee. The issuing bank often awards the customer a refund. The merchant must pay the processor for handling the customer refund.

Cross-border fee. Merchants who process transactions involving a non-US bank card will be assessed a cross-border fee. This fee covers electronic currency exchange expenses.

Cancellation fee. When a merchant cancels an account before completing their contract, they will likely be charged cancellation fees. These often-hidden fees can put a big dent in the merchant’s budget.

How to Get a Merchant Account for Your Small Business

Opening a merchant account is not complicated but could take some time. With some advance preparation and careful documentation, the application process should go smoothly. Once the merchant has been approved, they can begin to process payments.

Here are seven simple steps you should follow to get a merchant account:

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1. Obtain a business license

Some states do not require a business license to begin operations. However, the merchant should obtain a business license before applying for a merchant account or other payment service. From the merchant account provider’s perspective, a business license means the business is a legitimate business entity.

2. Establish a business bank account

Each merchant should open a business bank account. This account will be the repository for their net sales proceeds. Most merchants already have a relationship with a local financial institution, so that’s a good place to start.

The merchant must provide their business license and an employer identification number (or EIN). The Internal Revenue Service (or IRS) offers an easy-to-use online EIN application form. When the merchant clicks their correct business entity, the proper EIN application form appears.

3. Determine current (and future) card processing needs

Before a merchant can choose the right card processing package, they must define their needs. A retail store, mobile product seller or service provider, and eCommerce business have different hardware and software requirements.

Let’s say the merchant operates a brick-and-mortar retail store. In this case, a counter-based point-of-sale system makes sense. In contrast, a mobile-based business will need a mobile card reader. This handy little device attaches to the business owner’s mobile phone.

Finally, an online business will need a payment gateway. This virtual data conduit enables the acceptance of electronic payments for deposit to the business’ bank account. 

Payment processing hardware requirements

Each payment processing setup requires a specific combination of equipment. The merchant account provider (or payment solutions provider) will supply this equipment at a predetermined cost. An online business will receive its payment gateway and related software support.

Credit card acceptance decisions

Regardless of the business type, the business owner must choose the credit cards they will process. Mastercard, Visa, American Express, and Discover are the four major card brands. ACH payments and eChecks are other popular payment options.

Anticipation of future processing needs

If a merchant intends to gradually expand their business, they may eventually want to accept additional payment methods. If so, the merchant should add these methods to their payment processing needs.

4. Evaluate merchant account providers

The merchant should compile a shortlist of potential merchant account providers. Next, the merchant should evaluate each company on the same criteria:

  • Excellent industry reputation
  • One provider for all services
  • Compatible hardware and software
  • Next-day net proceeds deposit
  • Reasonable pricing structure and rates
  • No unnecessary fees
  • No long-term contracts
  • Focus on PCI compliance and data security
  • Free in-house customer and tech support
  • Scalability for the future

5. Complete a merchant account application

Next, the merchant should gather their information and apply for a merchant account. Gathering documentation ahead of time will help to streamline the process. Merchant account providers commonly need the following types of information:

  • Owner’s contact information
  • Owner’s personal credit history
  • Federal tax ID number (same as the EIN)
  • Bank account and bank routing numbers
  • Authorized account(s) signers
  • Business’ and/or owner’s financial statements
  • The business’ opening date
  • Estimated business processing volume

6. Submit the account application for underwriting

Next, the merchant should submit the completed application to the merchant account provider’s underwriting department. The underwriter is looking for a high-risk industry or business.

The underwriter is also on the alert for potential fraud signals or brand-new businesses with sparse history. Stated another way, the underwriter wants to minimize processing risks for the merchant account provider and acquiring bank.

7. Obtain the merchant account approval

Ideally, the merchant will receive an approval message within a few days. In certain cases, the underwriter feels that the business presents a higher risk. If so, the account may be approved with higher rates or other restrictions.

Once the merchant has the account approval in hand, they are free to configure their processing equipment. When they have completed this process, they can immediately begin accepting customer payments.

Choosing the Right Merchant Account Provider

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Finding a reputable, small business-friendly merchant account provider is important. Ideally, the provider will be familiar with the merchant’s industry and offer competitive rates with no long-term contracts. Payment Depot checks all these boxes. In addition, the company is known for its superb customer service. Contact our award-winning team today to learn how we help small businesses like yours save hundreds of dollars in credit card processing every month.

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