If you run a business, you may well need a merchant bank account, which is an account that allows you to make and accept credit cards and other forms of electronic payment. That’s because for those who are merchants today, the once-popular forms of payment, such as cash and checks, are often replaced by newer, seamless options. To keep pace and facilitate your business, you need to adapt and adopt the latest technologies.
But even if you are convinced that you need a merchant bank account, you may wonder:
• What exactly are merchant bank accounts?
• How do they work?
• When and why might you need one?
• What does an application involve?
This guide will answer these questions and much more.
What is a Merchant Account?
As the name suggests, a merchant account is a specific type of business account, designed for those who sell products and/or services. This kind of account allows a company to accept credit cards and other forms of electronic payments when a customer is making a purchase. It differs from a basic business account in that the bank gets deeply involved in the payments. In fact, every single dollar that flows through their system on behalf of their client (the merchant) could wind up being charged back, which might mean the bank is responsible for refunds. So as you can see, it’s not at all your usual business account.
Recommended: How to Set Up and Use a Business Bank Account
How Do Merchant Accounts Work?
Let’s take a closer look at how merchant business accounts actually work. If a business wants to accept credit cards, debit cards, and/or electronic forms of payment, they must first apply to open an account with a bank that provides merchant services. When they get accepted by that merchant bank, they can begin their transactions. Among merchant banks, fees for conducting these transactions will vary, so it’s wise to comparison-shop before you decide which financial institution is your first choice.
Here’s a bit more detail on how merchant accounts actually work. Let’s say that Retailer A has chosen a merchant bank, been approved, and now accepts credit and debit cards in their store. When customers at Retailer A’s store use credit cards and other electronic payment forms to make their purchases, the dollar amounts of these purchases are credited to the retailer’s merchant account.
Funds may sit tight for a day or two while processing takes place. Once this is completed, the merchant services provider may place those funds into Retailer A’s bank account, making them available for the retailer to use. Processing fees are usually deducted from the amount deposited, which is how the merchant bank gets paid for their services.
Typically, the bank takes a per-transaction fee and the network processing the payment also gets a cut. A wide range of fees is possible, from 0.5% to 5.0% of the transaction, plus an additional 20 or 30 cents per transaction.
Documents Required for Opening a Merchant Account
If you decide that a merchant account is right for you, you’ll need to apply for one. You may be asked to provide the following pieces of information:
• A completed application form that includes:
◦ Business name, contact information, and tax ID (EIN)
◦ Bank account information and a voided check to provide the account number and routing number
◦ Estimated monthly processing volume
◦ Authorized signer information
• Valid IDs, such as a driver’s license and passport for each of the business owners
• Current utility bill to verify the business address
• Business banking statements (perhaps three months’ worth)
• Credit card processing statements (perhaps three months’ worth) if the business has been using another merchant bank
Specifics can vary, so ask the merchant bank of choice what they require.
Merchant Acquiring Bank Services
If you are pursuing a merchant bank account, you are likely to hear the term “merchant acquiring bank,” “acquiring bank,” or “acquirer.” In all these cases, this language refers to the bank that is going to approve your account and handle the payment acceptance and processing. So an acquiring bank (or “acquirer”) is the financial institution that processes a business’s credit and debit card payments. In other words, these are the services being provided by a merchant bank.
How Merchant Transaction Processing Works
Curious about how these merchant bank accounts operate? Here’s a behind-the-scenes look at what happens as transactions are processed, step by step.
1. The acquirer receives details about credit and debit card transactions from the merchant (Retailer A). This information is then sent to the card issuers—the financial institutions that issue credit cards to consumers — for authorization.
2. Once that’s received, the credit card processing can continue.
3. The acquirer will then typically forward funds to the merchant’s (Retailer A’s) business bank account according to the terms of their agreement. In other words, an acquirer facilitates this payment process.
4. The bank that issued a credit card to a consumer, as part of this process, will add the charges made by an individual to their credit card balance.
Those steps give you an idea of how the process flows for transactions in a merchant bank account.
What is Underwriting for a Merchant Account?
When you apply to open a merchant bank account, the process is considerably different than opening, say, a business bank account or personal checking account. Underwriting is part of the process. This process occurs when an acquirer reviews the application of a merchant/retailer who wants to accept credit and debit payments and so needs a merchant bank. The underwriter reviews the risks involved if they were to serve as a merchant bank for that retailer (which can involve their being on the hook for refunds for a period of time). They want to delve into your business to know that you are worth their taking on the risk of being your merchant bank. Once they’ve assessed a variety of factors and indicators, they then determines whether or not to approve your application.
Do I Need a Business Bank Account?
If you’re thinking about applying for a merchant bank account, you will also need a business bank account. Here’s why: That’s where the merchant bank can deposit your funds from electronic payments. This holds true even if you are a sole proprietor. In other words, you’ll need a merchant checking account that’s separate from a personal account. Hopefully, that account will grow along with your business’ value.
Ask your bank of choice about opening a business account, including about the documentation you’ll need to give them. Expect to provide them with an employer identification number (EIN).
Do I Need a Business License?
As you consider a merchant bank account, you may wonder if you need a business license, and the answer is usually yes. While there may be exceptions, you will likely need a business license for other reasons on your professional journey. So it can make sense to explore business structure options at your soonest opportunity. You might look into whether your business should be an LLC or if you should becoming incorporated.
If you’re just starting a business, you’ll probably want to delve into such matters as small business startup costs and small business loan fees, as well as debt financing. Educating yourself about the finances of running a business is an important step beyond getting your accounts and payments established.
Accepting Different Types of Payments
Merchant bank accounts are an important partner for businesses today. A key benefit of having a merchant bank account is that it makes it much easier for customers to transact with you, both in person and online. Nowadays, fewer people walk around with cash in their pockets or a checkbook in a wallet or purse. Allowing them to swipe a plastic card or enter their card numbers online can significantly expand the number of people who can shop with your business.
How Long Does It Take to Set Up a Merchant Account?
If you’re wondering how long it takes to set up a merchant bank account, the answer is honestly a not so helpful “It depends.” Situations differ — and so can timelines. That said, if everything on a retailer’s application is complete and acceptable to the merchant bank, the process can be quite fast. You might get up and running in perhaps just a day.
What is PCI Compliance?
As you embark on your pursuit of a merchant bank account, you will probably encounter the initials PCI. Short for “payment card industry,” PCI compliance is required by credit card companies to ensure that electronic transactions are secure, operationally and technically. PCI standards. There are a variety of standards these businesses must adhere to in order to keep their business safe. If you are operating a business, you will probably see assurances of PCI compliance in your communications with credit card companies, reassuring you that they are following these guidelines.
Other Considerations for Merchant Accounts
Before we wrap up, let’s mention a few other terms and considerations you are likely to learn about as you pursue a merchant bank account. The industry uses the term “payments processor” in more than one way. Here’s a little intel to keep in mind:
• An issuer processor focuses on helping banks to issue credit and debit cards to consumers and otherwise manage that process.
• An acquiring processor, however, addresses the issues we’ve discussed above. An acquiring process also deals with customer requests for information about transactions, disputes made about them, and chargebacks.
Knowing the difference between these terms can be helpful as you understand how merchant banks conduct business.
By exploring the questions “What is a merchant bank account?” and “How do merchant accounts work?” you’ll gain an understanding of what is involved if you are a business owner accepting credit card and online payments. These merchant accounts facilitate the handling and processing of payments so your company can thrive.
But business bank accounts aren’t the only ones to study. If you’re curious about just how good your personal accounts could be, take a look at what online banking with SoFi offers. If you join and set up direct deposit, you’ll earn a terrific 2.50% APY, plus you’ll have access to your paycheck up to two days early, and you won’t pay any account fees, whether minimum-balance, monthly, or overdraft.
Bank better with SoFi.
Is a merchant account the same as a bank account?
A merchant account is a very specific type of business bank account. It allows a business to accept credit cards and other forms of electronic payments when selling products and services to consumers.
What is a merchant service account?
Merchant service accounts are a specific type of business account. They are used by business owners who want to accept credit cards and other electronic payment forms at their company. Businesses that will only accept cash and checks would not need this type of account.
Photo credit: iStock/gece33
SoFi members with direct deposit can earn up to 2.50% annual percentage yield (APY) on all account balances in their Checking and Savings accounts (including Vaults). There is no minimum direct deposit amount required to qualify for 2.50% APY. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.50% APY is current as of 09/30/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.