Whether you’re a new business just starting out or one well-established and looking to expand, sooner or later you’ll want to be able to process credit and debit card transactions.
The San Francisco Federal Reserve Bank found that in 2020, customers made 55% of their in-person, non-bill payments by credit or debit card. While cash transactions remain a major source of revenue (28%), every business that wants to grow its customer base needs to be flexible in what payments it can process–or accept losing out on a major source of revenue.
To get started accepting credit cards, debit cards, and contactless payment methods, you’ll need to open a merchant account.
What is a Merchant Account?
A merchant account is a unique type of bank account that allows businesses to accept credit cards, debit cards, and electronic payments.
Instead of functioning like a traditional bank account (where money is deposited or withdrawn), your merchant account provider functions like a business partner. After you complete a credited transaction at your business, your merchant account provider loans you that credited amount (minus service fees). This “loaned” money ends up in your business’ bank account in a day or two, liquid and ready to use.
Don’t worry: you aren’t responsible for paying back the money loaned from your merchant account provider. Your merchant account provider gets paid out from your customers’ issuing banks over the next few months.
Why You Need a Merchant Account
You’re probably wondering: is it really necessary to receive loaned money from your merchant account? Why can’t you just wait for the credited funds to drop into your bank account?
It all comes back to time: even the smallest credit card transaction kicks off a long chain of communication that could take months to complete. As most businesses can’t afford to wait multiple months to receive revenue from their sales, to haggle for long-forgotten funds, or to absorb credit transactions that fall through, having a merchant account becomes a necessity.
Dedicated Merchant Accounts vs. Payment Service Processors
Businesses do not have to rely solely on merchant account providers for credit card processing services. Certain businesses may instead turn to a payment processing company to perform similar services.
Merchant account providers offer a merchant account that is dedicated; it’s customized to work and grow with one business partner in mind. This service can be the right move for businesses that expect to quickly grow and evolve, as dedicated merchant account providers will often work 1-on-1 with their clients to provide custom service.
A payment service provider on the other hand offers a merchant account that is aggregated. The payment service provider uses a one-size-fits-all merchant account to offer faster, and sometimes cheaper, services. This service can be the way to go for businesses that prioritize speed. If you need to be able to accept credit cards ASAP, payment service providers will take less time to set up.
Choose a Dedicated Merchant Account Provider if:
- Your business has a high volume of transactions. Your business’ success might be rewarded with lower transaction fees.
- Your business requires 1-on-1 customer service. If you’re expecting dramatic future growth or change, a dedicated merchant account will better grow alongside your company.
Choose a Payment Service Provider if:
- You’d like to save money on account and transaction fees. Payment service providers are often cheaper for businesses with lower sales volume.
- You want to accept credit card payments as quickly as possible. Payment service providers may be set up and ready to go months earlier than a dedicated account.
We recommend you get a quote from both dedicated merchant account providers and payment service providers to see which works best with your business.
How to Sign Up for a Merchant Account
The signup process is mostly the same for both dedicated merchant account providers and payment service providers:
- Apply: Contact a merchant account or payment service provider to begin the application process. Be prepared to list information such as your Employer Identification Number (EIN), bank account and routing information, and proof of identity.
- Sign: If your business is accepted, you’ll then be given a pricing quote and be asked to sign a contract with your new merchant account provider.
- Set Up: Once your contract is signed, it’s time to pick and choose card processing hardware, if needed. For more information on essential hardware, check out our article.
The signup processes differ slightly by service type, mainly in how much time they take to complete. A payment processing provider will typically get your business up and running within a few weeks of your application, whereas a dedicated merchant account provider may take several months to review your application.
Merchant Account Pricing and Fees
Merchant accounts are a service provided by a banking institution, and as a service, they come with their own set of costs and fees. You’ll want to understand all of the fees and pricing details associated with your merchant account before signing a contract. Although every company’s pricing model will differ, these are the price points to look out for:
- Transaction fees: A percentage fee and/or flat fee placed on every credit card transaction completed at your store. These charges will make up the bulk of your charges.
- Account fees: Yearly fee(s) associated with the upkeep of your merchant account.
- Minimum fee: The minimum fee required to be paid out through transaction fees each month. If you have low sales one month and don’t hit your minimum fee, you’ll have to make up the difference.
- Chargeback fee: A fee you owe every time a customer disputes a charge from your place of business.
- Hardware and software prices: If you purchase any hardware or software for your business—such as POS software, payment terminals, mobile card processors, or UPC scanners—you’ll likely have to pay for it wholesale.
Find a Credit Card Processor Today
At BusinessAdvisors.org, we specialize in helping business owners team up with top-rated credit card processing companies. If you’re looking to accept cards at your business, you just might find the solution for you on our list.
