The world of commercial finance can feel complicated, particularly for those who are new to the business game. One common point of confusion is what’s called a ‘merchant account’ – an account that is a separate entity from your other business accounts, but that plays a critical role in getting money from a customer to you.
Here we’ll be taking a closer look at merchant accounts: what they are, how they work, how to get one, and indeed whether you need one at all.
What is a merchant account, and how do merchant accounts work? Read on to find out.
What is a merchant account?
As far as a merchant account definition goes, it can be thought of as more or less a middleman between a customer’s credit card and a business’s bank account.
Many people assume that as soon as a transaction is marked as ‘approved’ on the card machine, money is moved directly from the customer’s account straight into the business’s account. But that’s not the case.
The money is instead moved to a merchant account, where it sits for a settlement period of 1-7 days before being moved to the business’s bank account. While the business owns the merchant account, it doesn’t work the same as a normal bank account. The business isn’t given direct access to it, nor can they draw money from it. It is simply there to hold funds while the necessary banking processes are followed and regulatory boxes are ticked before the money is eventually released to the business.
How do merchant accounts work?
Signing up for a merchant account is part of the standard process for getting set up with a card machine. Once you’re set-up, the process for taking payment from the customer is as follows:
The card is tapped: A customer wants to buy one of your products. If they’re in-store or at your stall, they tap their card on your machine in order to make the purchase. If they’re buying from your website or over the phone, they offer up their card details.
The transaction is approved: The card details go on a seemingly long (but in reality almost instant) journey, from card reader to payment gateway, to payment processor, to card network, to bank. If the account attached to the card has sufficient funds, a signal is sent right back to the card reader that the transaction is authorised, often indicated by a green tick on the screen, or a message saying ‘Approved’.
The funds are held: This is where the merchant account enters the fray. After the transaction is approved, the funds are instantly deposited into a merchant account by the customer’s bank. This is where they’ll wait during the ‘settlement period’, which can be as little as 24 hours or as long as a week.
The funds are released: After the settlement period expires, the funds are transferred over to the business’s nominated bank account, where they can be spent, transferred or otherwise used.
Why the need for a settlement period in the first place? There are two main reasons:
It gives financial institutions the time to do all the necessary checks and balances that their internal processes and banking regulations require.
It offers insurance against disputes, accidents, fraud and other adverse events, as funds are far more difficult to recoup after they are sent to a business account where they can be moved on or spent.
Do I need a merchant account to accept credit card payments?
Don’t want to fuss with opening yet another bank account? Do you feel like your business finances are already taking up too much of your time? Good news: there are a wealth of Payment Service Providers (PSPs) that can take care of all this for you!
With Square Payments you can take all forms of credit card, debit card and contactless payments, whether in-store using a POS terminal, or online through a payment gateway, without the need to open up a merchant account!
How to get a merchant account
While the business of issuing merchant accounts is a competitive one, the process of applying and eventually getting approved for a merchant account remains rather clunky. Providers will need a long list of information from you, which can include:
Type of business: Are you at higher risk of returns, disputes or credit card fraud?
Business history: How long have you been in business? Have you had any financial trouble in the past? Have you previously held merchant accounts?
Personal credit history: Have you had any personal financial issues as the business owner?
Merchant account fees
If you choose to go down the merchant account route, be aware that there are a wealth of fees that can be charged as part of the process, including:
Setup and application fees
Monthly account fees
International transaction fees
Terminal rental fees
These fees will vary from business to business and provider to provider. Speak to your bank to find out which apply to your situation, and what the specific numbers are.
Alternative to creating your own merchant account
Many business owners simply don’t have the time to go through the rigmarole of opening up a merchant account. They’re looking for an easier way to take credit cards, debit cards and contactless payments – a service that deals with all aspects of the payment process.
Square is that one-stop-shop.
Accept every payment quickly, easily and securely.
Granting you the ability to take card payments in a quick, easy and 100% pain-free way, Square Payments lets you do away with merchant accounts entirely. From a range of physical terminals for in-store use, through fully-functional online payment solutions, to virtual terminals that allow you to take payment over the phone, Square both simplifies and greatly expands the ability of your business to serve the payment needs of your customers.
No paperwork, no credit checks, no merchant accounts, no worries. If you’re ready for a quick and easy way to start accepting and processing payments, Square is ready to deliver it.