How Merchant Accounts Work | Payment Guru
Finding out the best way to run your business will require an enormous amount of time.
It gets even more complicated as you think about ways to move money around. You’ll probably have many questions, for example:
- How will you accept credit card transactions?
- What are debit cards?
- Where can you deposit your cash?
- How will you pay your charges?
The answer to the second two questions is straightforward. You can transfer cash to your bank account for business and then pay your bills with the account too.
The second question is a bit harder because of the amount involved in processing credit card transactions.
That’s why an account with a merchant can be useful to your advantage.
Learn more about a merchant account, the way they function and what it costs, and even how to get one opened.
WHAT IS A MERCHANT ACCOUNT?
Merchant accounts are a specific kind of bank account for business.
It allows you to safely take credit card payments and debit card transactions, payments made through gift cards, and various other forms of electronic payment.
The merchant account functions as a “holding tank” between your specific company and the banks that issue cards. They offer your customers the physical cards they use to make purchases.
For credit card purchases, banks will also offer credit lines to guarantee the purchase.
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HOW DO THEY WORK?
As we’ve mentioned that a merchant account functions as an instrument. With the help of a credit card, the company is able to collect the earnings you make from your customers’ purchases made with credit cards.
When the credit card is used the bank issuing it will advance the funds for that purchase to the cardholder.
A merchant account will mean you don’t need to wait around to receive that cash. If you didn’t, you’d be forced to wait for your client in order to make payment on their credit card charges.
When you are able to take credit cards to make purchases the procedure and the function that the merchant account plays are as follows:
- Your client purchases your product or services using your credit card.
- The processor for your credit card sends specific details about your transaction to the merchant account.
- The company that manages your merchant account sends specific details about your transaction to your bank that issued the card to you through your processor.
- The card’s issuing bank confirms that there is sufficient money available in the account of their customer to pay for the cost of the transaction (in cases of debit card) or confirms that this transaction will not be in excess of the credit limit.
- If there’s enough cash available, the bank that issued the account notifies the processor that it has enough money, and the processor then informs the merchant account company know.
- The bank that issued the card deposits the money into your merchant account less the fees paid by the various parties who are involved in the transaction.
HOW MUCH DOES IT COST?
A variety of charges are imposed by various participants involved in credit or debit card transactions.
First merchant account providers assume the risk to a certain degree when they lend your company cash. Additionally, banks that issue credit cards are at risk of customers not being able to pay their credit card bills.
The above, along with numerous other scenarios will be covered in transaction costs.
Card issuers and card networks as well as card issuers are charged for their participation in the entire process. In the collective, this is known as the interchange process and a substantial portion of the charges associated with processing transactions with credit cards is known in the form of an interchange charge.
The merchant account provider may be charged for the tools they offer including software and hardware. They might also charge costs for setting up and maintenance.
MERCHANT ACCOUNT FEES
The fees charged to merchant accounts generally depend on the amount of credit card transactions that are processed. If you earn a significant amount of cash from transactions made with credit cards it is possible to receive a higher rate.
Typically the charges fall under the following three types: per-transaction costs, monthly charges, and one-time charges.
The charges per transaction are for debit and credit cards and network authorization charges.
The monthly charges may include fees for leasing or renting credit card terminals, or other processing equipment as well as a payment gateway charge as well as the virtual terminal fee.
A majority of merchant account providers offer a monthly minimum fee that you will not be charged if the volume of transactions exceeds or is above a particular threshold specified in the terms of your contract.
One-off costs include a setup fee along with an additional fee if you decide to terminate your contract before the due date.
The PCI Compliance fee is another fee that is typically charged.
In this instance, PCI refers to the Payment Card Industry, which has certain security standards for data. Sometimes, this is known as PCI-DSS.
The PCI standard is required for all businesses that process cards for payment. If all the checks required within PCI compliance are in place and the industry of payment cards is aware that you are handling the personal information of your customers responsibly.
PCI compliance fees could be assessed on an annual or ongoing basis.
Each consumer is entitled to challenge any charge on their credit card to their bank. If the dispute is accepted by the bank, the customer’s funds will be returned – and the merchant is liable for a one-time chargeback fee.
Chargebacks are meant to protect the consumer.
The fees for exchanges are a per-transaction assessment that is paid by the bank of the merchant to the bank of the customer. The transaction fees are not subject to negotiation, and the major card networks have them set by consensus.
The interchange fee for debit cards is restricted to 0.2 percent of the amount of the transaction. Credit cards are set at 0.3 percent.
HOW TO GET A MERCHANT ACCOUNT
There are three kinds of merchant accounts you could purchase Dedicated, Aggregated, and High-Risk.
Payment aggregators gather transactions from a variety of merchants. They then forward all transactions back to the bank that is acquiring them through a single, large merchant account. This allows for setup to be easy and cost-free, but there is the possibility of being able to freeze your funds.
Some examples of payment aggregators include Stripe, Square, and PayPal.
An account with a dedicated business account established by a taking bank. By a process called underwriting, the dedicated accounts are tailored to the requirements of your company.With this type of account, the rates may be negotiable.
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The bank will review your business and industry when you apply for a merchant account.
Your “risk factor” will be based on the stability of your business and the credit history of the principals.
Some industries and business models are considered high-risk.
Payment Guru is a merchant account provider with high risk.
GETTING A MERCHANT ACCOUNT
A provider will review your information to give you an accurate quote on merchant account services.
- Type of business — What you offer and how you deliver it
- Average transaction size
- The volume of card transactions expected or monthly
These are some of the questions you’ll want to know:
- Accepting payments online, in person, or both?
- Do you require a payment gateway in order to accept online payments?
- Are you going to need point-of-sale hardware and/or software
- How much do you have to spend on merchant services?
Once you have this information, you can contact several merchant account providers to get quotes.
Ask about their fees, the level of customer service, and how long it takes to deposit money into your regular bank account.
Merchant accounts are a unique type of bank account that allows you to take debit and credit cards. These accounts can be viewed as “holding tanks” that act as a buffer between customers and the business bank account.
You’ll be paid quicker using a merchant account than if you wait for the banks to verify every part of the transaction.
Merchant accounts carry some risk. These fees are offset by the many banks and merchant account providers that charge for accepting payment cards.
Payment Guru is a leading provider of merchant account services. Contact us today if you are ready to earn through a merchant bank account!