What Is A Merchant Account

What Is A Merchant Account?


If you’re in business, you may have heard the term “merchant account” frequently but you may not understand completely what the term refers to. Even if you have a good idea, you may be wondering whether or not this is something you should learn more about. Below is an explanation of merchant accounts and what they can do for your business.

The Basics of Merchant Accounts

Merchant accounts are contracts that allow you to accept credit card payments from your customers. Basically, a bank extends you credit then takes the payments from the credit cards of your customers. If you do not have a merchant account, you will not be able to accept payments from any of the major credit cards, including Visa and MasterCard.

Three types of merchant accounts are currently used: retail, MOTO (mail order/telephone order), and Internet. You can have separate merchant accounts so you can open one of each kind if that would be necessary for your business.

Using the Merchant Account

To accept credit cards, you will need more than the merchant account. If you are a brick and mortar retailer, you will probably need a credit card terminal. This terminal allows the card holder to swipe his or her card. The information from that card is automatically recorded by the machine and transmitted via a modem for approval. The process takes only seconds to complete. Using this method will allow businesses to earn the lowest transaction fees from their card processing provider.

Another option is the payment gateway. This essentially is a virtual version of the credit card terminal. These are normally used by online retailers. Because the cards are not swiped and need to be entered manually, accounts associated with payment gateways require higher transaction fees to be paid by businesses.

Merchant Account Fees

One of the biggest drawbacks to having a merchant account is the fees. You do have to pay a transaction fee each time a customer uses his or her credit card to pay for a purchase. In addition, you may have monthly or annual service fees for your contract. You will also have a batch fee that is paid daily when you close out your credit card transactions and send them to the credit card processing company.

For some retailers, these fees can be more than their profit on small purchases. However, the benefits of allowing customers to use credit cards to make payments for larger purchases outweigh this risk.

Finding the Right Merchant Account

If you decide to open a merchant account, you should evaluate the different credit card processing companies available to ensure that you get the best deal possible. Remember that you are entering into a contract with the company. The term of the contract is usually between one to two years. While you can terminate the contract early, you will be charged a significant fee for doing so. That’s why you should do your homework before making a choice of merchant account providers.

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