Merchant accounts are necessary in order to accept payments made by credit card from your customers, whether you are operating a retail store or an online business. The following article answers key questions that you may have regarding merchant accounts. It is part of a series of articles offered by EasyPay123 to help merchants understand many facets of processing credit card payments.

1. Why Do I Need a Merchant Account?

Merchant accounts provide you with ability to accept credit card payments from customers for goods and services. A merchant account establishes a relationship between your business, a bank and a credit card processor such that funds generated from credit card sales are deposited into your bank account on a regular basis, less merchant account fees (to be discussed later).

Without a merchant account, your customers will not be able to pay you using their credit card. Given that credit card payments are still dominant form of payment on Internet, this would place you at a competitive disadvantage in a highly competitive business environment.

2. What Are Different Types of Merchant Accounts?

There are two primary kinds of merchant accounts that are issued, depending upon your method of capturing credit card information at time a payment is made.

The first type of merchant account is called a “card present”, “signature-based” or “retail” merchant account. This type of account is issued to merchants whose customers will be physically present at time of payment. In such a case, you would be able to inspect card and signature on reverse of card, and would also be able to match sales receipt signature against that on back of card. Typically, these types of payments are captured by using either a card imprinter (using credit card slips) or a “card swipe” (Point of Sale) terminal.

The second type of merchant account is called a “card not present”, “non-signature-based”, or MOTO (Mail Order/Telephone Order) merchant account. This type of merchant account is issued to merchants whose customers are not physically present when they make a payment. This is typical of most Internet payments - where customers key their payment information into an online payment form - and phone-in payments - where operators key payment information into some kind of payment application.

The types of merchant accounts will be a key factor in determining your fees, since banks typically view card not present payments as higher risk (i.e. a higher risk of fraud) than card present payments.

3. Where Can I Obtain a Merchant Account?

Merchant accounts are traditionally obtained through a bank that issues merchant accounts called an “acquiring bank” or “acquirer”. Generally, there is a separate group within bank that processes merchant account applications.

When you apply for a merchant account, there is no guarantee that your application will be accepted. The merchant account risk group will assess a number of factors before approving your application, including (but not limited to):

– Your company and/or personal credit history – The type of product/service you are selling (note that it is extremely difficult to obtain merchant accounts in U.S. for certain types of “high risk” products and services such as online gambling, pornography, outbound telephone sales, prepaid phone cards, travel agencies and others. What is perceived as high risk varies by acquirer). Falsifying nature of product or service you are selling when applying for a merchant account could lead to termination of your merchant account. – Estimated dollar volume – Average order size

A good place to start is with your existing bank, since you already have a relationship with them. You may also choose to inquire about merchant accounts with other banks to compare rates and policies (in fact, we strongly recommend this). It is possible to have a merchant account with an acquiring bank that is different from one where you have your bank account, although they may encourage you to move your bank account if you obtain a merchant account from them. It is likely that you will need to open a bank account with your acquiring bank so that funds can be deposited there. Some acquiring banks will route funds to a bank account of your choice (within U.S.) if you request it, although there may be an additional fee for this service.

Note that American Express and Discover are their own acquiring banks, so if you want to accept either of these cards, you will typically complete a merchant account application directly with them.

Another option for obtaining merchant accounts is through a credit card broker or “ISO” (Independent Sales Organization). These companies have relationships with many banks, and attempt to match your credit history and type of business with a bank that will accept your application. They are typically paid a commission from acquiring bank for your business, and this is passed on to you in form of a set-up fee or a percentage of sale fee. There are many ISO’s to choose from. Be aware that not all of them are reputable, so you would be well-advised to do some research on them before “signing on dotted line”.

When you start process of investigating merchant account options, we recommend strongly that you shop around so that you can compare rates and service levels. The merchant account business is highly competitive, and it is not uncommon for rates to vary even within acquiring banks, depending upon which merchant account representative you speak with, and how valuable they perceive your business. Having said that, price should not be your sole factor in obtaining a merchant account. Service is important too. Understand acquiring bank’s policies with respect to such factors as charge-backs (when a customer refuses to pay a charge). You may wish to reevaluate your merchant account provider if their policy is to revoke your merchant account status after a small number of charge-backs.

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