More than ever before, consumers are choosing non-cash transactions over cash payments for their purchases. A staggering 70% of the United States population carries at least one credit card—more than a third carry three or more—and more than 1 billion credit cards are in use in the U.S. alone.
With increasing dependence on credit cards and other online payment methods, businesses must prepare themselves to go cashless by exploring merchant services.
Merchant services entail everything from equipment to the services needed to accept and process credit or debit card payments from customers.
If you want to use merchant services, here’s the lowdown on merchant accounts and how you can optimize them for your business.
Table of Contents
What is a merchant account?
A merchant account is a business bank account that allows you to process credit and debit payments from customers. You can get a merchant account by partnering with a merchant account provider or a payment processor.
Unlike a regular bank account, a merchant account functions as a middleman between your business and the banks that provide credit or debit cards for your customers to use, with a merchant acquiring bank that lends you the funds to ensure there is no delay in payout
How does a merchant account work?
- The transaction passes through a payment gateway
- The merchant account deducts the money from the customer’s account
- Your business account receives the due amount
Here is what takes place when a customer uses a credit card to pay for a transaction:
1. The transaction passes through a payment gateway
A payment gateway gets in touch with the credit card company to make sure the cardholder has enough funds for the transaction. You can set up the payment gateway at the same time you create a merchant account.
2. The merchant account deducts the money from the customer’s account
Once approved, the merchant account deducts the transaction amount from the customer’s bank account or credit card account. At the same time, it deducts a transaction fee, which is usually 3% to 5% of the total amount.
3. Your business account receives the due amount
Lastly, the merchant account transfers the money to your company’s bank account. This does not happen as soon as a transaction goes through; it takes place in batches toward the end of the working day or sometimes later.
Start selling in-person with Shopify
Shopify POS is the easiest way to unify your sales channels and sell both online and in-person. Have all the tools you need to manage your business, market to customers, and sell everywhere in one easy-to-understand back office.
Why should you opt for a merchant account?
- Increases sales
- Improves cash flows
- Easy money management
- Better customer experience
- Enables secure payment processing
Creating a merchant account can seem daunting. But joining forces with the right merchant account provider can make the process less tedious and bring valuable benefits.
Increases sales
According to a report from American Consumer Credit Counseling, nearly 80% of consumers prefer card transactions over cash. Given that a lot of customers are inclined toward using credit cards for bigger purchases, your business can increase sales by being able to process such payments.
Improves cash flows
With a merchant account in place, payment authorizations are quicker. The money reaches your account within 1 or 2 working days, as opposed to individually billing your customers and waiting up to 30 days or more to receive payment.
💡 PRO TIP: Take control of your cash flow with Shopify Payments. Get a complete view of your business finances, know when to expect payouts, track in-store and online sales and payments, and manage your money where you run your business.
Easy money management
Merchant accounts enable better money management for ecommerce merchants. With the bulk of the transactions taking place online via debit and credit payments, you eliminate the need to keep track of, count, and manage money physically.
Better customer experience
Your customers are in for a hassle-free shopping experience when they have the liberty to shop and make payments using the payment methods of their choice. This leads to a better customer experience which, in turn, can ensure that the shoppers come back for more.
💡 PRO TIP: Sending digital receipts via email is a great way to organically collect customer contact information at checkout and build an email list to fuel your retention marketing. Just make sure they’ve opted in to hearing from you before sending them anything.
Enables secure payment processing
Payment gateways act like a bridge that integrates online card processing capabilities with your business operations, reducing the likelihood of fraud and theft. While you ensure secure checkouts, you can also boost conversions by giving your customers the option to pay the way they want.
Types of merchant account
- Retail
- Mobile
- Ecommerce
There are different types of merchant accounts that cater to the specific needs of businesses. You can choose the one that is a perfect fit for your business type.
Retail
Retail businesses with a brick-and-mortar setup should use a retail merchant account. Such companies can enjoy low setup and transaction costs.
📌 GET STARTED: Get the funding you need to open a physical store with Shopify Capital. Avoid lengthy application processes, paperwork, and credit checks, and receive funding within days of accepting an offer.
Mobile
Your business will require a mobile merchant account if it is on the move. For example, if you are a florist or are running a bookstore out of a truck, this account is ideal for you. To process credit card payments while on the move, you can set up mobile credit card processing equipment.
Ecommerce
If you sell your products or services online, you can adopt an ecommerce merchant account. Merchant accounts for ecommerce businesses are not the same as those of brick-and-mortar stores. There are various categories:
- Offshore: An international merchant account, outside your home country
- Local: A merchant account available within your home country
- Direct: This is where you approach a merchant bank directly to open a merchant account
How to open a merchant account
- Organize the necessary documents
- Apply for a merchant account
- Gain approval and set up your account.
Here are the quick steps to opening a merchant account:
1. Organize the necessary documents
You will need to provide your business information, the name of your company, contact details, the amount of time you have been in business, bank account details, and financial statements.
PRO TIP: If you are already using a credit card processing tool, make sure to share this information with your merchant account provider to ensure fast approval.
2. Apply for a merchant account
After you have provided all the necessary information about your company, it’s time to send in your application. The processor may want to check your personal and business credit history to ensure your business is financially sound.
At this point, you may also have to pay an application fee to your merchant account provider.
PRO TIP: Remember to include a cover letter along with your application stating what your business does and why you are worthy of a merchant account.
3. Gain approval and set up your account.
The merchant account provider will check your risk level before approving your application. They will consider the following criteria:
- The length of time you have been in business
- Personal and business credit history, to check if there were any defaults in payments or if you were ever bankrupt
- If you have had a merchant account in the past
- The type of your business
The processor will consider your business to be less risky if you process transactions in person rather than online or via phone. Online transactions are susceptible to fraud.
To lower the risk, the merchant account provider may seek address verification. The merchant account provider will approve your application if you fall in the low-risk category. The provider may approve riskier applications as well, but at a higher fee.
Merchant account fees
Merchant services should complement and support your business and not drain it with excessive fees. It's important to understand what credit card processing entails and the different fees involved.
Dr. Steven Ghim gave a few tips on how you can minimize merchant service fees on Entrepreneur:
“Long-term contracts can offer predictability, but when it comes to merchant services, they might lock you into fees that could be avoided down the road. Find a provider that allows for short-term or even month-to-month service and doesn’t charge for early termination.”
Usually, merchant services providers will adhere to one of the three pricing models given below:
Flat-rate pricing
This is one of the most common pricing models. The processor charges a fixed fee for all credit and debit card payments, no matter what card the customer uses. This structure is most useful if your sales volume is low.
Interchange-plus pricing
This pricing structure is the most transparent of them all. There are two parts to this pricing model: an interchange and a plus.
The interchange is the processing rate that the credit card company sets. The plus rate refers to the credit card processor’s markup or profit.
For instance, the interchange-plus pricing structure might appear as 2.4% plus USD $0.10 per transaction. Here the interchange rate is 2.4% and the processor’s markup is 10 cents.
Tiered pricing
In this pricing model, the merchant service provider charges a fee depending on the type of card used for the transaction and the total volume of transactions that the business covers.
This pricing structure categorizes the transactions as qualified, mid-qualified, and non-qualified transactions. Predictably, qualified transactions get the best rates, and non-qualified transactions are charged the highest rates.
On top of base pricing models, merchant account services often include additional fees. It's important to know what they are:
- Setup fee: This is a one-time fee. The provider charges this account while setting up a new merchant account.
- Gateway fee: If you need a payment gateway for online transactions, you will incur gateway fees.
- PCI Compliance fee: These are fees that you pay your merchant account provider to ensure that your merchant account meets the Payment Card Industry (PCI) regulations. This is to keep your account safe from theft and fraud.
- Chargeback fee: The merchant account provider charges this fee for every payment amount that goes back to a debit or credit card, after a customer cancels a transaction or returns the products purchased.
- Monthly minimum fee: Some providers set a minimum number of transactions or values that you should cover every month. Otherwise you may have to pay the monthly minimum fee.
Choosing a merchant account
- Cost and fees
- Hardware
- Customer Service
- Integrations
- Volume
To help you make the right choice, we’ve put together a list of criteria you should consider when you’re looking for a merchant account provider:
Cost and fees
Credit card processing rates vary with the type of transaction, card used and your store’s monthly processing volume. Be sure to clarify the exact fee you’ll pay—whether that’s a flat fee or a percentage of your transaction volume.
Ensure that you clearly understand some of the “hidden fees” like cancellation fees, early termination fees, PCI Non-Compliance fees, chargeback fees, account change fees, and equipment rentals. They’re charged separately from your processing fee and can add up pretty quickly.
As general advice, compare multiple vendors and go with the one where the fee is low and their customer service is top-notch.
Hardware
Take stock of the kind of hardware required. Can you manage with a mobile app or a simple card reader or do you need a point-of-sale system? Choose a provider that gives you the hardware you need at an affordable price.
Customer Service
Since this is a long-term commitment, you want a merchant account provider that can readily help with issues big and small. Test their service quality by calling them during peak hours and note their response and resolution time. If it’s satisfactory, take the leap.
Integrations
Take a look at all the integrations the merchant account supports and ensure that you can process payments easily. For instance, with Shopify and Stripe, you can instantly get end-to-end merchant account solutions and reap the benefits of payment gateway and merchant account functionalities combined into a powerful platform.
💡 PRO TIP: With Shopify POS, you can run your online and retail stores from the same platform without using third-party APIs. Shopify is your system of record–product, inventory, sales, and customer data updates automatically whenever you make a sale online or in-person, and you pay just one straight-forward monthly subscription.
Volume
Your business is going to scale and that means more processing volumes. This is where you need a high-volume merchant account—an account that allows you to process an unlimited number of transactions and dollar volume without being hit by a processing limit.
Along with processing high volumes seamlessly, you get better payment security and possibly discounts on processing fees.
Open a merchant account for your store
Choosing a merchant account provider requires careful thinking and planning on your part.
When scanning the market for the right provider, don’t just settle for the one that offers the cheapest rates. Choose a processor that can help you scale your operations, expand your business, and has a transparent pricing model.
Try Shopify POS for omnichannel selling
Bring your in-store and online sales together with Shopify POS. Gain insights about your business from one view so you can work smarter, move faster, and think bigger.
