Do You Qualify as a Merchant? What is a Merchant Account & How Do You Get One?
There are many different parties involved in a credit or debit card transaction, but the endpoints are almost always going to 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, and what vital information do you need to know?
A merchant can be any party that sells goods or services. A merchant may operate in the brick-and-mortar space or in eCommerce, or a combination of the two. Typically, a merchant maintains an account with an acquiring bank to accept credit and debit card payments from customers, which may be conducted as “card-present” or “card-not-present” transactions.
[noun]/mər • CHənt/
As the name implies, a merchant sells products or services to a buyer. The question of “what is a merchant?” is rather broad, though, so let’s pare it back to focus on merchants who accept payment via credit or debit cards.
In the contemporary sense, a merchant works with an acquiring bank—as well as a processor and other service providers—to facilitate card payments. After a cardholder makes a purchase with a credit or debit card, the merchant submits the transaction information through these service providers, who facilitate the payment on the merchant’s behalf. If you accept card payments in exchange for goods or services, then you qualify as a merchant.
Simple enough…but let’s dig a little deeper than that. In this post, we’ll answer the question “What is a merchant account?”, then explore how you can get one, what risks you need to know about, and your rights and responsibilities as a merchant.
What is a Merchant Account?
A merchant account is a specified type of bank account allowing sellers to accept credit and debit card transactions. 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 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 important to know the difference between all the different parties involved in the transaction process. You have your acquirer, who provides banking services, as well as:
Facilitates payments; essentially operates as a “middleman” between you and the financial institutions involved in a transaction.
The cardholder’s bank; is the financial institution that issued the payment card used.
The Card Network
The brand associated with the card (Visa, Mastercard, etc.) which maintains the payments network.
Transmits authorization requests and other information from you to your processor.
Each party involved in a transaction assesses a fee for every card sale. Your payment processor will want a cut, plus the acquirer, the card network, the gateway, and others.
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; it can streamline operations and ensure compatibility, but at the expense of options in terms of levels or customization. You have to ask: “what is a merchant account provider able to offer me? Do I have a different option?”
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How to Secure a Merchant Account
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
As we mentioned, every party in the chargeback chain charges a fee for their services. There are multiple different factors that determine how much you ultimately pay to conduct card sales. Having a good business credit score, for instance, can help.
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. The fees can be assessed in a few different ways:
The merchant pays a fixed cost assessed per transaction.
The merchant pays a proportionate interchange fee per transaction.
The merchant pays a monthly fee not based on any percentage of sales.
The merchant pays a different rate based on the card brand used.
Of course, the same factors that determine your costs can also help determine whether a service provider is a good pick for you. 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.
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Threats to Your Processing Abilities
Once you secure support from a service provider, you’re set, right? Not exactly: you actually have to put effort into defending your merchant account … which is another way of protecting your bottom line.
You’re probably familiar with the concept of online fraud, where criminals use stolen data to complete purchases at a cardholder’s expense. What you may not realize is that these losses will get passed along to you in the form of chargebacks.
A chargeback is a process that allows cardholders to claw back funds after a transaction in the event of fraud or abuse. If a fraudster uses a cardholder’s information to make a purchase, the cardholder’s bank can reverse the transaction and return the funds back to the cardholder. If that happens, you end up footing the bill for the losses.
Each chargeback means lost sales revenue and merchandise, as well as higher overhead costs. Your acquirer will also assess a fee to cover the cost of handling the chargeback, and these losses add up over time. Also, each chargeback negatively impacts your chargeback ratio; if your chargeback-to-transaction ratio gets out of hand, your acquirer might freeze or even cancel your account.
That sounds bad enough on its own. To make matters worse, though, our research suggests that the majority of chargebacks (60-80%) are probably cases of friendly fraud. This occurs when a buyer files a chargeback without a legitimate reason.
Merchant Rights & Responsibilities
Securing a merchant account allows you to conduct transactions in the card-not-present space, but it also opens you up to card-not-present threats. You need to know how to balance risk management, regulatory compliance, and customer satisfaction if you’re going to succeed.
You have to ensure that you can offer:
- Prompt and attentive customer service
- High-quality products and services
- Attention to detail in managing transaction information and other sensitive data
- Up-to-date security to prevent criminal attacks
Taking these and other necessary steps to detect fraud will allow you to identify transactions that could potentially lead to chargebacks. The merchant account provider you choose will be able to help you set up the optimal strategy to prevent fraud, so long as you remain compliant with procedures. Preventing these fraudsters from making purchases reduces the risk of a resulting chargeback.
Fighting chargebacks is another key responsibility you face in this arena. Banks are less likely to approve chargebacks filed against merchants who regularly dispute claims. Not only does chargeback representment ensure you retain profit, but it also helps educate consumers about what isn't—and what is—a legitimate chargeback.
In this article, we asked “what is a merchant,” and learned a bit about merchant accounts and how you can secure one for your business. We also learned a little about the different parties involved in the transaction process, how they assess fees, and the threats you’ll face once you secure a service provider.
The card-not-present space is an exciting and dynamic environment. But, if you make the mistake of approaching it with an inadequate strategy, you could find yourself losing cash fast.