Merchant Accounts Explained

Explaining what a merchant account is, is crucial for businesses wanting to accept all forms of payments and therefore the best way to do this is to firstly give two definitions, one of a merchant account and the other a business account for context and delve into more detail after the definitions:

A merchant account is defined as ‘bank or other current (checking) account into which a trader receives the proceeds of credit card and electronic commerce (onsite or online) sales’ from businessdictionary.com. This is a complicated definition and needs to be broken down further to be easily digestible.

A business bank account is defined as an ‘account used by sole traders or commercial business owners to manage money acquired through the company’ (by moneysupermarket.com) essentially this is describing that business owners set up a separate bank account to track their expenses, manage cash flow and make it easier to calculate tax liabilities made specifically for businesses.

A merchant account is a holding account that allows a business to accept card payments from customers, but why is it needed? Why can’t a normal bank account be used? This is because a merchant account is used to store the payments from customers in one place (could come from multiple sources). This helps to work out and charge the fees from card transactions before it is transferred into a business bank account. A merchant account is also useful with merchandise as if a return is authorised then the money can be easily be returned to the merchant. So, for example, if you are a business that wanted to take face to face payments like we offer (consult the link for more info netpay.co.uk), you wouldn’t be able to.

Types of merchant accounts

There are two main merchant account types (aggregated and dedicated), however, there is also a third type of merchant account that is available in special circumstances. These terms will be explained in the bullet points below:

• Aggregated merchant account:

‘are shared by numerous merchants. All payments are paid into one merchant account then the provider pays out money to each merchant’s individual business bank account. Aggregated merchant accounts are quicker and easier to set up but give merchants less control over their payments’

• Dedicated

‘are opened exclusively for one merchant. Since the account is specific to one merchant, they have more leeway to negotiate transaction fees. The major drawback is that the application process is in-depth and time-consuming’

• High-risk

‘Providers offer these more expensive accounts to merchants who can’t access standard merchant accounts because their business poses a financial or reputational risk.’

(adapted from cardswitcher.co.uk)

With the first two types of merchant accounts, it is easy to figure out which one you would need as a business, but the high-risk merchant account could lead to confusion. The high-risk merchant account may be required if your business is in a sector that is deemed risky by the provider (examples are casinos, alcohol, debt management, etc.).

Fees Involved

There are numerous varying and different charges when it comes to having a merchant account and taking card payments, this is partly due to the number of other companies involved that must interact, so a payment is seen, acquired and issued quickly.

With a merchant account, your fees will be split up into sections. There will be costs per transaction on the payments received and there will also be merchant account fees.

• Processing/transaction fees – these are debit/credit transaction fees (called an interchange fee) and an authorisation fee.
• The charges for the account – the card machine rental/virtual terminal/payment gateway/PCI compliance/non-compliance/minimum monthly service charge/chargeback fees (no need to worry unless you’re a shady business) and a joining fee.

(information from merchantmachine.co.uk)

In conclusion, the term ‘merchant account’ can cause confusion and be intimidating from someone not familiar with the payments industry. However, once the term is broken down it becomes easier to comprehend, as it is essentially used to take card payments. The money received from card payments is stored so that the card transaction fees can be withdrawn before then sending the money to your normal business account.

The other aspects that come after understanding what a merchant account is, are the types and fees included. It is very easy to determine which type of merchant account will suit you and then you’ll need to fill out an application form with generic questions surrounding card payments to obtain an account (name, transaction volume, etc.). The fees included can be more confusing but comparing from banks and ISOs (independent sales organisations) can ensure you get the best deal.