So, you’re on the hunt to answer the question 'what is a merchant account?' No sweat, we’ve got you covered.
What Is a Merchant Account?
A merchant account enables a business to accept credit and debit card payments in exchange for its products or services. Funds are directly deposited into the business’s bank account and fees are automatically debited from the same account.
True merchant accounts are backed by a direct agreement between a Merchant Service Provider and a bank, providing more pricing plan options to businesses. Every account is subject to fees covering the provider’s services, costs to maintain the account and the wholesale costs to run cards.
These accounts are as important to businesses as electricity, but there are many pitfalls when it comes to selecting this vital utility for your business. To truly understand them, it's important to address these additional questions:
Does a merchant account require a contract?
The majority of providers lock businesses into contracts spanning anywhere from two to six years. Unethical providers often fail to mention early termination and auto-renew clauses within their contracts. If you’re considering an account and are faced with a contract, be sure to look for these two terms.
If you don’t have the time to apply for an account, you can opt to work with a Payment Facilitator, such as PayPal or Square. But, be warned, a PayPal or Square account lacks the benefits a true merchant account provides. If you’re a larger business, stay away from this option because it often leads to long hold times on your funds and expensive transactional costs due to a Flat rate plan.
The ideal account requires no long-term contract and offers month-to-month service. With exceptional products and services, the provider should earn your business every month and not penalize you if you wish to end the partnership.
What equipment options do I have?
There are two types of terminals to avoid when it comes to equipment: leased terminals and outdated terminals. Leased terminals are falsely advertised as the cheapest option but will actually cost you more than purchasing the terminal when the length of the lease is considered. The ideal terminal is a month-to-month rental with no strings attached.
Outdated terminals are just as bad. They limit the payment types you can accept, slow down your business and increase your vulnerability to fraud. The best equipment option for your account is a Smart Terminal. These future-proof terminals automatically update their software so you never miss out on the latest technology or payment methods.
What are the rate plan options?
There are three typical rate plans: Flat, Tiered and Interchange-Plus. Each provides its own unique benefits depending on your business. As we mentioned before, if you’re a large, established business Flat pricing is not right for you. We recommend Interchange-Plus for the most transparent pricing.
Some providers offer a fourth rate plan option: Billback. Any variation of Billback is bad for business. Unethical providers offer an appealingly low rate up front but fail to mention what’s to follow … more fees than you anticipated.
Will I get the best processing rates?
Merchant credit card processing rates are determined by a number of factors, some of which you can control and others you cannot. Unfortunately there are providers that profit from you not knowing what you can control to decrease your rates, which results in transaction downgrades and more money out of your pocket.
Your provider should offer exemplary customer service, let you know what you can do to improve your payment practices and offer you the best technology available to ensure your business is as efficient as it can be.
How will refunds work?
If you’re on an Interchange-Plus rate plan, you should always get Interchange refunded on returns. Despite this industry rule, some providers fail to refund Interchange. Your provider shouldn’t be benefiting from your business’s returns or refunds and pocketing money that should be returned to you.
How will the merchant account deal with processing over the anticipated volume?
Every provider sets processing limits. Typically if you process more than the anticipated volume limit, your provider will need to verify the amount before approving the large transaction.
Some providers don’t stop you from processing over your limits, but will charge a markup on your processing volume. If providers claim there is no processing volume limit, they most likely are charging you for it.
Will I pay the true cost for regulated fees?
Interchange and dues and assessments are wholesale costs established by card brands (Visa, MasterCard, Discover, Amex) which your provider will pass onto you.
Since these fees are regulated by the card brands and not providers, they are the same for every business. However, unethical providers will take advantage of the complexity of merchant statements and charge padded Interchange or padded dues and assessments and create another revenue stream for themselves.
What other fees will I pay?
Providers love to pack in extra fees that cover services they claim are unique to them. The truth is that most of these fees are unnecessary and are solely another means of income. We found six common unnecessary fees that you can easily avoid if you select the best option.
Becoming A Pro
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Editor's Note: This post was originally published in October 2016 and has been updated for comprehensiveness and accuracy.