What Is A Merchant Account - Applying, Fees and Functionality

Being able to accept card payments is a significant step for businesses. In order to do that you need a merchant account.

Based on a 2020 survey of consumer payment choice, debit cards were the most popular payment method of US consumers, accounting for 33% of total monthly payments, with credit cards coming in second at 27%. On top of this, the number of consumers making at least one online payment per month has increased from 59% to 66% in 2020.¹

If you haven’t already got a merchant account, then stay tuned to learn about all that’s involved - from fees and requirements, to the application process - as well as learn how it differs from a business account.

What is a merchant account?

The definition of a merchant account is: a type of bank account for businesses, looking to accept cashless payments.² Typically, businesses open a merchant account to receive credit and debit card payments.

Once a card payment is processed, your funds will be deposited in your merchant account and will be held there until you actively transfer them to your business account.

Without a merchant account, your business cannot process card payments. This makes merchant accounts particularly important for online as well as e-commerce businesses.

To open a merchant account as a business owner, you need to settle a contract with a merchant acquirer. Merchant account providers can vary in fees and services, depending on what you’re looking for.

Is a merchant account the same as a business account?

A merchant account shouldn’t be mistaken for a business account - they’re separate accounts with different functions.

A business account is an account used to run your company and its day-to-day business transactions. For example, with a business account you can store your funds, pay your employees, make and accept payments, as well as manage subscriptions.

| Additionally, some business account providers, such as Wise, allow you to hold and work with multiple currencies. | |
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| As an international business, this can be especially convenient when receiving payments from abroad, or if you need to pay overseas contractors. | |

Manage international payments
with the Wise multi-currency account

But a business account can’t receive card payments. This is where a merchant account comes in.

The purpose of a merchant account is to receive money via card payments - that’s its main and only function. Unlike a business or personal account, you can’t deposit or withdraw money from it. To use your merchant account funds, you’ll need to first transfer them to your business account.

How does a merchant account work?

As already mentioned, a merchant account allows your business to accept credit and debit card payments. These payments could be in-store, online or even over the phone.

A business merchant account works like this:

1. A customer pays for your product by providing their card details
2. These card details are sent to the merchant acquiring bank
3. The acquiring bank then sends these details to the relevant card association - for example, Mastercard or Visa
4. From here, the card association then forwards these details to the card issuing bank
5. The card issuer then confirms the details and checks that there are sufficient funds available to complete the payment
6. The card issuing bank will then send an approval to the merchant acquiring bank
7. The merchant acquiring bank will then authorize the transaction, and the funds will appear in your merchant account

It’s important to remember that a business merchant account is strictly for receiving funds.

If you want to use your money, you first have to transfer it from your merchant account to your business account. Depending on your provider, this can take between 2 to 10 business days on average, though some providers offer instant transfers.³ ⁴

Applying for a merchant account

If you’re looking to receive cashless payments, then setting up a merchant account is the next logical step in your business plan.

You can apply for either a regular merchant account offered by a merchant acquirer, or a third-party payment provider.

If you’re looking to save money and opt for a more convenient option, then opening a merchant account with a third-party payment provider - such as Stripe - might be a good alternative for you.

| Link your Stripe account with your Wise business account easily, to send and receive payments with the mid-market rate around the globe. | |
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Learn more about Wise for Business

To apply for a merchant account, you need to first fill out an online application form.

Normally, you’ll have to provide basic contact information, the name of your business and the industry it operates in, as well as the state your business is based in. This shouldn’t take more than a few minutes to complete.

But before applying for a merchant account, the first step is deciding exactly what you need from your merchant acquirer.

For example:

• Are you looking for specific Point of Sale (POS) systems such as Multichannel POS or Mobile POS, or just a simple in-store payment terminal? Deciding on what hardware you need will simplify the selection process.
• Similarly, you should also look into additional services offered by merchant acquirers, such as loyalty rewards and other special situation features.
• Lastly, you want to look at the pricing of providers, such as their transaction fees, monthly fees, as well as any upfront fees they charge. By doing this, you’ll be able to compare potential providers and figure out which is best suited to you.

Keep in mind that your fees can be influenced by a number of factors. For example, your type of business and its industry, your credit rating, as well as your sales volume, can all influence the fees you’ll have to pay.

This will be covered below in more detail.

What is required for a merchant account?

Before opening your merchant account, your provider will require some further information about your business and will request supporting documents. Normally, these are:

• Employer Identification Number (EIN)
  This unique identification number is usually found on tax and legal forms relating to your business
• Postal address
  For brick-and-mortar businesses, this is simply the address of your business. If your business if purely online, then you’ll still need to provide a mailing address
• Proof of a business account
  Your merchant acquiring bank needs to know that you’re a reliable, legitimate business. Having a business account is a basic indicator of a serious business.
  It’s likely you’ll be asked for financial statements as well as processing statements too. Sometimes you may even be asked for personal bank account statements, to ensure your credit rating is good
• Articles of incorporation
  On the topic of making your business seem legitimate and trustworthy, having it incorporated (officially recognised by the government) is a key step towards this
• Business license
  This can vary from provider to provider, so it’s best to check the business license requirements with your merchant acquiring bank
• Additional documentation
  Each provider has their own requirements, so it’s always best to check with them. You may be asked for detailed information about your business, such as business plans or records of annual sales volumes

Your provider will let you know exactly what they need from you.

How much do you have to pay on merchant account fees?

When selecting a provider, doing a fee comparison is always wise. But keep in mind that fees depend on several factors rather than just the provider.

It may vary depending on your payment network, the types of card you’re looking to cover, as well as your Merchant Category Code (MCC).

There are quite a few fees your provider can/may charge. Here are just a few:

• Setup fee - a one-time, upfront fee to open a merchant account
• Monthly maintenance fee - this covers the services offered by your merchant account
• Transaction fee - the fee charged per card transaction
• Interchange fee - charged to cover handling charges per transaction
• PCI compliance fee - varies from provider to provider, and covers the protection of card data
• Refund fee - the fee associated with refunds
• Dispute fee - the fee involved with the handling of payment disputes⁵ ⁶

Just like with merchant account requirements, your provider will let you know exactly what fees they charge.

Does your business need a merchant account?

Having a merchant account allows your customers to pay by card. As we move forever closer to a cashless world of lightning-speed transactions, it seems only logical that businesses wanting to grow need to offer the option of card payment.

On top of this, a merchant account expands your business’s infrastructure, as your customers are no longer restricted by having the option of only bank transfer or cash payment.

Just remember that if you do have a merchant account, it’s worth considering what type of business account you’re withdrawing your money to. This is where Wise comes in.

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold balances in multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

Use Wise Business >>

All sources checked on 11 October 2021