What is a Merchant?What Qualifies You as a Merchant? How Do You Secure a Merchant Account?

What is a Merchant Account & Why Do You Need One?

Many different parties are involved in a credit or debit card transaction, but the endpoints will almost always be a cardholder and a merchant. This begs the question: what exactly is a merchant? 

What do you need to have to be considered a merchant? What vital information do you need to know, and how do you secure a merchant account that will allow you to conduct business? Let’s take a look.

What is a Merchant?

Merchant

[noun]/mər • CHənt/

A merchant is a business entity that sells goods or services, either directly to consumers or to other businesses.

Let’s start with the primary question.

In a general sense, a merchant can be any party that sells goods or services. A merchant may operate in the brick-and-mortar space, eCommerce, or a combination of the two. You qualify as a merchant if you take payments for goods and services.

In the context of the payments industry, though, a merchant is a party that holds a merchant account. As a merchant, you’d maintain this account with an acquiring bank, which will allow you to accept credit and debit card payments from customers. These payments may be conducted as card-present (brick-and-mortar) or card-not-present (eCommerce) transactions.

Without a merchant account, you’d be limited to accepting cash transactions. You’d also be required to manually conduct your own bookkeeping for tax and other reporting purposes.

What is a Merchant Account?

A merchant account is a specified type of bank account allowing sellers to accept credit and debit card transactions. Having a merchant account is especially important if you plan to operate in the eCommerce space; after all, you can’t accept cash payments, so credit and debt are going to be central to your operations.

Customers need to be able to trust your framework for accepting payments. This means working with a reputable account provider (the acquirer), maintaining security standards, and ensuring compliance with all industry protocols.

It’s also important that you know the difference between your merchant account provider and your processor or payment gateway. Your processor facilitates payments; they essentially operate as a “middleman” between you and the financial institutions involved in a transaction. We’ll get into more detail on this later.

Some providers offer multiple different services. For instance, many processors also offer merchant acquiring and payment gateway services. This all-in-one approach has upsides and downsides. For instance, it can streamline operations and ensure compatibility, but at the expense of options in terms of levels or customization.

How Does a Merchant Account Work?

Your merchant account is a key point in the transaction process. It’s where you ultimately receive the funds from each transaction.

Let’s say you’re conducting a transaction with a customer. After requesting and receiving authorization from the cardholder’s bank, you submit the transaction for processing. The issuer debits the amount from the cardholder’s bank, then forwards it to the processor.

The processor may then deduct any fees they’re entitled to, then deposit the final amount into your merchant account. From there, you may then transfer funds out of your merchant account and into the account you use for regular banking.

A merchant account is essential for any business looking to thrive in a digital marketplace. It only offers convenient payment options to customers, and also ensures secure transaction processing. 

Without a merchant account, you wouldn’t be able to process credit and debit card transactions. In this way, your merchant account is a sort of middleman between banks and credit card networks, facilitating a smooth and secure transfer of funds between parties. 

How to Secure a Merchant Account

As mentioned above, every party in the transaction chain charges a fee for their services. Multiple different factors determine how much you ultimately pay to conduct card sales. Having a good business credit score, for instance, can help.

This is why two of the most important things to keep in mind when choosing an account provider are:

• The fee schedule
• Whether the acquirer is a good fit for your business

For instance, The level of risk posed by your business vertical, on the other hand, can go against you: so-called “high-risk” verticals (gaming, neutraceuticals, adult entertainment, etc.) are all considered riskier by banks. As a result, acquirers and processors may charge a premium for providing services.

Fees can be assessed in a few different ways:

• Flat Rate: A fixed cost assessed per transaction.
• Interchange-Plus: An interchange-plus transaction fee is a fixed markup charged by the payment processor for each transaction.
• Direct Interchange: A monthly fee not based on any percentage of sales.
• Tiered Rates: The merchant pays a different rate based on the card brand used.

Of course, the same factors determining your costs can also help determine whether a service provider is a good pick. There are a number of merchant account providers that specialize in high-risk verticals. For example, we’ve assembled a list of several of these providers, which is available here on our blog.

Other service providers cater to smaller sales volumes or those in specific industries, while others are best suited to massive global brands. You should choose one that best fits your business’s unique profile with a fee schedule that works for you.

Requirements for a Merchant Account

Whether you're a startup or an established entity, understanding what you need to open and operate a merchant account is essential.

Different acquiring banks may require different pieces of paperwork to validate or verify your business. That said, here's a breakdown of the basic requirements for which most providers will ask:

• Company Information: The foundation of your merchant account is your company's identity. You'll need your company's legal name as a primary identifier.
• Tax ID or Employer Identification Number (EIN): This number is crucial for tax purposes and serves as a unique identifier for your business in financial and legal transactions.
• Contact Information: Providing accurate contact details, including your business address, phone number, and email, is vital for effective communication and account management.
• Financial Information: Your bank account details are necessary for the transfer of funds. Additionally, financial statements might be required to evaluate your business's fiscal stability.
• Business Type & Description: A clear description of your business type and the services or products you offer help in setting up an account that aligns with your business model.
• Estimated Sales Volume: An estimate of your monthly sales volume is important in determining your business's most suitable account type and fee structure.
• Website URL (if applicable): Providing your website URL is important for online businesses for verification and compliance purposes.
• Legal Documents: Depending on the nature and location of your business, you might need to submit legal documents like incorporation certificates or business licenses.
• Credit History: Your business's credit history may be reviewed to assess the risk and determine the terms of your account.
• Proof of Identity: Finally, personal identification documents of the business owner(s), like a driver’s license or passport, are required to verify identity.

Each merchant account provider may have additional requirements, but these are the general essentials for opening and operating a merchant account. With these in hand, you’re well on your way to expanding your business's payment capabilities and enhancing your customer experience.

Merchant Banking vs. Processing

As we referenced above, a merchant processor may offer merchant acquiring services, but the two are not inherently the same thing. Acquirers and payment processors have two distinct roles:

Moreover, a payment processor plays a crucial role in safeguarding payment information and ensuring transactions adhere to stringent security protocols. These firms engage in extensive behind-the-scenes work, such as authenticating card details, overseeing fund transfers, and exchanging data between various parties, all while maintaining the confidentiality and security of information.

In comparison, a merchant account can be thought of as being like a virtual bank account that’s connected to another account. It’s set up specifically for receiving payment card transactions. The bank takes the transactions authorized by the payment processor and reconciles the respective accounts.

Learn more about payment processors

Merchant Account Providers

Here in the US, a variety of banks offer accounts for merchants. These institutions are responsible for receiving transactions with major card networks, including American Express, Discover, JCB, Mastercard, and Visa. In addition to this, they also manage settlements for various payment facilitators and aggregators, such as Block, Clover, PayPal, and Square, as well as a multitude of independent sales organizations (ISOs).

The fees each bank charges are often referred to as a “merchant discount rate.” This is typically based on a percentage of your overall transaction volume.

To clarify, let's look at ten of the largest merchant account providers in the US and examine their specific merchant service fees:

Acquiring Bank	Annual Transaction Volume (Approx).	Merchant Account Fees
Fiserv	100 billion	*Pass-through plus interchange; no data
WorldPay From FIS	75 billion	Discount rates and per-transaction fees for Visa, Mastercard, and Discover will be assessed an additional 0.0966% and $0.045 per transaction. Transaction Risk Fee for non-qualified, mid-qualified, and high-risk rates will be assessed an additional 0.15%.
Global Payments	50 billion	Flat-rate plus interchange; 2.9% + $0.29 per transaction
JP Morgan Chase	31 billion	$1.80 interchange fee 90% of total fee. Assessed by the payment network to cover the risk and cost of a card transaction. 7% $0.14 network (switch) fee 7% of total fee. Assessed by the payment network for its use. 3% $0.06 processor fee 3% of total fee. Assessed by a merchant services provider for authorization, settlement, chargebacks, reporting, and customer service
Wells Fargo	7.7 billion	3.1% plus 15 cents and up for online transactions; 2.2% plus 15 cents and up for in-person transactions; 3.1% plus 15 cents and up for manually keyed transactions; 2.4% plus 20 cents and up for in-person B2B transactions; 3.5% plus 20 cents and up for online or manually keyed B2B transactions
Bank of America	8.7 billion	2.65% + $0.10 per swiped, dipped, or tapped transaction (card-present) 2.99% + $0.30 per eCommerce transaction. 3.50% + $0.10 per keyed-in/virtual terminal transaction
Merrick Bank	6 billion	Swiped Rate 2.5% + $0.20, 3.5% + $0.20, $75.20 Per Year ($18.80 charged each quarter), Equipment Lease Terms 48 Month (locked), Early Termination Fee 1% of Gross Volume
Elavon	5 billion	0.16% + $0.25 per transaction. $0.25 per transaction authorization. 0.60% per international transaction. $0.40 per settled batch
Paysafe	N/A (~$120 billion each year)	2.9% plus 30 cents for online transactions or invoices without a card on file (2.6% plus 30 cents with Premium plan)
North American Bancard	N/A (~$45 billion each year)	Flat-rate plus interchange; 0.29 percent per transaction

Can Your Merchant Account be Canceled?

So, you’ve weighed your options, and managed to secure support from a merchant service provider. You’re all set to start operating like a proper merchant now… right?

Not exactly. Now, you have to put effort into protecting your merchant account. This means complying with the requirements imposed by your account provider, as well as other entities like Visa and Mastercard.

By agreeing to do business with you, an acquirer is taking on a degree of liability. Specifically, they accept the risk of funds reversals, in the form of payment disputes and chargebacks, if you are unable to cover your liabilities.

Most acquirers will seek to limit their outgoing expenses and risk by limiting problematic merchant accounts. Merchants that consistently breach the fraud or chargeback thresholds set by Visa and Mastercard will have restrictions imposed on their accounts. They may even have their merchant account frozen or terminated altogether.

Concerned that chargebacks could put your merchant status in jeopardy? Don’t worry — Chargebacks911® is here to help. Click below to learn more.