Unlock the potential of your business with our guide to merchant accounts: essential for seamless transactions and financial management.
With the use of cash in decline, having a merchant account has never been more important for businesses which want to offer a full range of payment options to their customers. But what are they, how do they work, and how can your business best make them work for you?
A merchant account is a type of bank account which allows businesses to accept payment by credit and debit card. Held with an acquiring bank, a merchant account holds customer payments while they're approved by the customer's bank, before sending them to the merchant.
It is important to differentiate between a business bank account and a merchant account. A business bank account is a repository for all of your company funds, both cash and credit card sales. This is the account from which payroll and bills are deducted and into which your merchant account deposits the funds from your credit card sales. To take credit or debit card payments, you need both a merchant account and a business bank account.
Not all merchant types are created equal, and it’s important to choose the right one for the specific type of business that you operate.
Aggregate merchant accounts offer lower rates by pooling (or aggregating) a lot of purchases together and processing them as one large transaction. They're offered by payment facilitators like Square or Zettle, and they're often better choices for businesses with a relatively low level of card transactions per month. Transactions are then processed along with those from other businesses with the same code.
Processing times are a little longer as a result, but small businesses can save 1-2% on processing fees as a trade-off, though you may be able to negotiate better rates yourself, depending on the size of your business.
“Merchant services provider” is a broad term that encompasses a variety of entities. A merchant services provider is any company that provides services allowing a business to accept electronic payments, including credit and debit cards, and one type of merchant service provider is an Independent Sales Organisation or ISO.
An ISO is a type of merchant services provider. ISOs are third-party entities that have relationships with banks and credit card companies and are authorised to sell or lease their services to businesses. They may provide a variety of services such as setting up merchant accounts, selling or leasing payment processing equipment, offering customer support, and more. So, while all ISOs can be considered merchant services providers, not all merchant services providers are ISOs. Other types of merchant service providers might include payment processors, payment gateway providers, and businesses that offer Point of Sale systems. You can expect 24/7 customer service and all security bells and whistles with an ISO, but this comes at a cost. ISOs may charge higher fees than direct processors or banks. This can include merchant account setup fees, transaction fees, monthly fees, and equipment lease or purchase fees, while contracts can be long and difficult to get out of and other fees may be hidden.
There are several reasons why your business may be considered high risk. It may not have been trading long enough to give an accurate representation of the risk level that it exposes a merchant service provider to. The credit records of the directors may have blemishes. It may even be that your business falls into a high-risk category. There are high-risk merchant accounts for exactly these scenarios. They charge a little more, but some companies will do business with you if you happen to be turned down elsewhere.
An internet merchant account is a merchant account specifically designed for online businesses. One of the main differences between a regular merchant account and an internet merchant account is the fees – the fee involved in internet merchant accounts is comparatively higher because of all the risks involved in online transactions. The merchant has to pay a special processing fee for every transaction made on the internet merchant account.
Even if you already have a merchant account for in-store transactions, for example, an aggregate account, you will still need an Internet Merchant Account to accept online payments directly from customers' credit or debit cards.
Depending on your payment processor, you may require a separate merchant account for international transactions. If this is something that you will need, consult with payment providers to understand their specific requirements.
The payment process through merchant accounts is more complex than it at first seems because it involves several different parties all working seamlessly with each other. There are essentially three steps to this payment.
For in-house payments, you’ll need to use a card reader, which is generally provided by your payment processor. This may be done contactless (for payments under £100), using a chip and PIN, or by swiping the card.
These card details are then transmitted from the card reader to the payment gateway, before being forwarded on to the payment processor. Then, the information is sent to the card network - most commonly Visa or Mastercard - and then forwarded to the customer’s bank. Assuming sufficient funds are in the account and security checks have been passed, the transaction is authorised and a confirmation is sent back to the card reader.
The customer’s bank will deposit the funds into your merchant account, where they’ll wait before being sent to your business bank account. This usually takes between 24 hours to seven days.
There are challenges to all of this. Your payment platforms need to integrate seamlessly with your existing operations and software, while you need to ensure that as many of the competing payment methods as possible are correctly set up. Security also matters. Data breaches can be ruinous for your reputation, and customers expect to be able to make payments to you safe in the knowledge that they can do so securely. Point-to-point encryption, fraud management filters and tokenisation can all help to make transactions more secure. And when things go wrong, you need to know that there is someone out there who can help. Increasingly, businesses do not keep to strict 9-5 hours, but some payment processors do, so it’s always worth checking on when you can get customer support.
Remember, if you make sales online you will need an internet merchant account no matter what. There are some merchant accounts which can do more than one type.
Again, the key here is to understand your own business. Aggregated merchant accounts are simple to set up and are usually competitively priced, particularly for small businesses. Dedicated merchant accounts often provide faster access to funds and have discounted transaction rates for high-volume customers, but they cost more to set up. High-risk merchant accounts are suitable if you operate in a higher-risk sphere (travel or gambling, for example), or if your credit record is not perfect.
You need to consider such factors as their pricing structure, contract terms, how easy it will be to integrate them into your existing structure, their security measures, customer service, reputation and any additional services that they may offer.
Check that you have all the required documentation to begin your application process. This will vary from provider to provider.
The application process usually involves filling out an online form with your business information and submitting the required documents.
After submitting your application, the provider will conduct a risk assessment. This process involves checking your credit history, assessing your business’s financial health, and reviewing your sales projections.
Once the risk assessment is complete, you’ll receive a merchant agreement from the provider. Make sure that you review this document thoroughly; it’s a legal contract outlining the terms and conditions of your account, including fees, responsibilities, and termination policies. If you’re happy with the terms and terms and conditions, sign the agreement to set up your merchant account.
What devices will you need to ring up sales? (e.g., computers, tablets etc.) How many registers do you need? What types of payments will you accept?
If you have a simple store setup (e.g., all you need is an iPad), then you can likely get your POS system to function all on your own. Simple retail workflows typically involve launching or installing your POS software (which takes a few clicks) and entering your business details. If your retail operations are slightly more complex, it’s a good idea to seek assistance from your POS vendor. Most solution providers offer onboarding services to get retailers up and running quickly and seamlessly.
To make this process smoother, you may wish to consider looking up video tutorials, help articles and documentation from your provider. Some POS vendors offer free technical support. It’ll be worth checking whether yours does; they may have someone who will walk you through the process.
This may, depending on your business, include training your team, uploading your products onto your storefront, migrating your store data, configuring your settings or integrating your chosen POS solution with other apps.
The key to getting a merchant account set up quickly and seamlessly is preparation and research. Make sure that you understand your exact business needs before you even start looking at merchant providers. That way, you can discount those that do not offer the specific services you’ll need. Don’t submit any applications until you’ve made sure that you’ve gathered together all the paperwork needed for your application.
With traditional processors, the approval process can take anywhere from a couple of days to a few weeks. On average, a processor can approve an account in a few business days. However, if you don't provide all the information upfront or if you're a high-risk business, it will take longer.
This will vary from provider to provider, but generally speaking you should ensure that you have the following available at the time that you submit your application:
Business registration documents (e.g., Certificate of Incorporation, Partnership Agreement).
Proof of identity for business owners or directors (e.g., passport, driving licence).
Proof of address for business owners or directors (e.g., utility bills, bank statements).
Financial statements (e.g., bank statements, balance sheets, profit and loss statements).
VAT registration certificate (if applicable).
Business plan or description of the nature of your business.
Business licences or permits relevant to your industry (if applicable).
Once everything is in place, you should be ready to get up and running. The specifics of how you’ll do this will vary greatly, depending on your circumstances, but at the very least you’ll need to set up users on your software, input (or, in the case of larger loads, upload) your inventory, set up your hardware and payments and connect your POS with any other software that you use, such as E-commerce platforms or accounting software. You must integrate with payment gateways and other platforms that you may use. Failure to do so will cost you money when you start trying to take payments from your customers!
There are various fees and costs with setting merchant accounts up. You can minimise these fees by identifying the right vendor for you before applying. You may be charged a one-off set-up fee for setting up your account in the first place, while some merchant accounts charge a monthly fee for their service and others charge either one-off or monthly hire charges for equipment. Other fees, such as card processing costs, transaction fees or cross-border fees, will be on a transaction-by-transaction basis.
Cybercriminals often target merchant accounts because of the personal and financial data that flows through them, such as credit or debit card information. That’s why you need to invest in a reputable merchant account provider that takes security seriously.
If your business is considered high-risk for a merchant account, don’t panic! Some vendors specialise in higher-risk businesses, and although their charges will be a little higher, they can still help to get you up and running.
It’s complex, because a lot of different organisations get involved and because security is the utmost concern when it comes to accepting card payments. But if you intend for your business to move with the times, then opening a merchant account to sit alongside your business bank account is increasingly necessary. And once it’s all set up, it should all run seamlessly, allowing you to reap the rewards of the vast new marketplaces that have opened up with these new ways of making payments. If you haven’t climbed aboard this bandwagon, it’s time to do so now!
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