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If you buy or sell goods or services for payment other than cash, then the likelihood is that you will need a merchant account. In this article, we will explain what a merchant is, how merchant accounts work and how to choose a merchant services provider, whilst answering other important questions along the way.
What is a merchant?
A merchant is a person or business that sells goods or services. Who the merchant buys it from and who they then sell it to, will define what type of merchant they are:
- If the merchant buys goods or services in bulk and then resells them in smaller quantities, then they are a wholesale merchant.
- Retail merchants will buy goods or services from a manufacturer or wholesaler to sell it to their customers.
- If the merchant only sells their goods or services online, then they are known as an ecommerce merchant.
- Affiliate merchants use their network of affiliates to sell their goods or services to retailers, who then eventually sell them to the end user.
What is a merchant account?
A merchant account is a type of commercial bank account offered by a merchant service provider, also known as an acquiring bank or merchant acquirer.
The important thing about a merchant account is that, by offering a suite of financial solutions, the merchant service provider can ensure that the person or business can make and accept electronic payment card transactions.
This is crucial for people or businesses who wish to trade by accepting payments other than in cash.
How do I choose a merchant service provider?
If you are a merchant that intends to accept credit and debit cards or other forms of electronic payment from your customers, then you will need to choose a merchant service provider who can support you. This is an important decision.
We’ve put together nine questions to ask yourself before choosing your merchant service provider.
1. What are my payment processing needs?
Begin by assessing your business needs. Think about factors, such as the average transaction value and the typical sales volume along with likely highs and lows for each of these. Also think about the types of payment methods that your competitors offer, and whether these differ from those that you intend to accept. Once you’ve done this, you’ll know whether you need in-person, online, or mobile payments, or a combination of these.
2. Which merchant service providers could meet my needs?
Do some research to create a shortlist of merchant service providers who could potentially meet your needs. Rather than starting your research online, why not speak to friends and fellow business owners to listen to their experiences. You can then take this insight to explore online resources such as online forums and peer review sites, at which point you should now have a solid shortlist of anywhere between two and five credible merchant service providers.
3. How do the fees and pricing structures compare?
With your shortlist in hand, you can go to the websites of your preferred merchant service providers to assess their fees and pricing approach. Study the fee structures to understand how their fees are compiled. These may include transaction fees, monthly fees, setup fees, and equipment rental costs.
4. What customer support am I likely to require?
Merchant service providers are normally clear in explaining what support they can offer and whether, for example, they have 24/7 365-day cover. They should also tell you what communication channels they offer i.e. phone, email, live chat, etc.
Sometimes there is a difference between what a company says they will do when you need help or support, and what they end up doing. This can be the case for customer service. So, if you’ve highlighted any concerns during your peer review conversations or review site feedback, now’s the time to take note and hone your research down to identify when you are most likely to require customer support and how good you feel each provider will be at meeting your customer service needs.
5. What security and compliance arrangements are in place?
The payments industry has agreed to follow a set of security standards known as the “Payment Card Industry Data Security Standard” (PCI DSS). PCI DSS has been established to protect sensitive cardholder data whilst card transactions are being processed. So, ask them some questions such as:
- How do you stay PCI compliant?
- What fraud-prevention measures do you have in place?
- What is your track record is in dealing with security incidents?
- What security-related priorities are your development team working on?
6. What integration will I need?
It is important that all your systems are compatible with one another. Check to ensure that your e-commerce platform, accounting software, and customer relationship management (CRM) systems can be integrated with the systems used by your merchant service provider. If a smooth integration isn’t possible, then look to see what other merchant services providers can put in place.
7. What reporting and analysis is available?
The beauty of digital is that it provides a bounty of data. Take a careful look at the reporting and analytics features to understand how these insights could help improve the management of your business, and whether any could help you make more profit.
8. Can I test or trial my preferred provider’s platform?
These days, most systems are plug and play. Once you have identified your preferred partner, then request a demo or trial period to test the merchant service provider’s platform to see how it performs.
9. What contract terms are important to me?
If you have ticked all the above boxes, then you are on the home straight! Now is the time to look at the fine print and examine the contract length, termination fees, and any potential penalties. It pays to think ahead, and, for example, be aware what the provider’s policies are if your business needs change and you require additional services. Understand how long the provider would expect you to stick with the equipment they issue, and what would trigger a kit upgrade.
Do you need a merchant account?
If you or your or business sells goods or services, then you are a merchant. If you wish to accept and process electronic payments such as credit and debit card payments, online payments and mobile payments, then you will need a merchant account provided by a merchant service provider, also known as an acquiring bank or merchant acquirer. Merchant service providers offer some important services including fraud prevention, payment management, customer service as well as equipment and software required to accept payments, such as point-of-sale (POS) systems, card readers, and payment processing software.
Merchant account fees
It is important that you understand how the merchant acquirer’s fees could affect the profitability of your business. For example:
- The fees can vary substantially – If you have a strong understanding of your business and how customers pay, then you should be able to predict likely fees with reasonable accuracy. This is because merchant acquirers charge different rates depending upon what type of cards have been used, the transaction amounts and which industry the merchant is in.
- You may want to factor the merchant fees into your pricing – If you understand your merchant fees and your customer’s spend patterns then you’ll be well positioned to decide whether to absorb the merchant fees or pass them on to your customers in the form of higher prices.
- Some fees can be negotiated – Because interchange fees are set by the card networks and passed on to the merchant acquirer, they can’t be negotiated by the merchant. However other fees, such as merchant account fees can be negotiated with your merchant service provider.
The main types of merchant fee include:
- Interchange fees – Interchange fees are often a small amount of money that the cardholder’s bank will charge the merchant acquirer bank, who will then pass on the fee to the merchant. It is typically a percentage of the transaction value, although it may also include a fixed fee. Interchange fees vary based on several factors including the type of card used, the merchant’s industry type, and whether the transaction was in person or online.
- Assessment fees - These fees, which are charged by the credit card networks to the merchant acquirer’s bank, are often a fixed percentage of the transaction amount.
- Payment processor fees – As the name suggests, these are fees charged by the payment processor in lieu of the work that they are doing processing the payment transactions on behalf of the merchant. Payment processor fees can be structured as a percentage of each transaction, a flat fee per transaction, as a monthly fee, or as a combination of all or some of these.
- Minimum monthly fees – If the processing fees don’t add up to a specific, named amount, then the payment processor may charge the merchant a minimum monthly fee.
- Monthly statement fees - Some payment processors charge a fee for issuing a monthly transaction statement to the merchant.
- Payment gateway fees - Payment gateways are often used to help process online transactions, and this service may come with fees which can be charged per-transaction, monthly, or both.
- Setup and equipment fees – The merchant service provider may charge a fee to cover the cost of setting up a merchant account or facilitating essential hardware such as POS systems or card readers.
- Chargeback fees – A chargeback occurs when a customer disputes a transaction, and the merchant is required to return the funds. The merchant service provider charges a chargeback fee to cover the administrative cost associated with handling this dispute.
- Early termination fees – Some merchant service providers will charge merchants an early termination fee if the merchant terminates the contract within a specific period. This is intended to cover some of the costs that the merchant service provider will have incurred in setting up the merchant account.
- Incidental fees – These fees are designed to cover miscellaneous things such as additional services like processing paper statements or batch processing.
FAQs
What's the difference between a merchant and a retailer?
A merchant is a business that sells goods or services directly to consumers to earn a profit. There are many types of merchants, including wholesalers, retailers, ecommerce merchants and affiliate merchants. So, retailers are just one type of merchant.
What is a wholesale merchant?
A wholesale merchant is a person or business that buys goods or services in bulk so that they can resell them in smaller quantities to retailers or suppliers.
What is a retail merchant?
A retail merchant is a person or business that purchases goods or services from a manufacturer or wholesaler so that they can then sell it at a profit to their customer.
What is an ecommerce merchant?
An ecommerce merchant is a business or person that only sells their goods or services online, either through their own websites and digital platforms, or by using online marketplace platforms such as Amazon or Etsy.
What is an affiliate merchant?
An affiliate merchant uses a network of affiliates to sell their goods or services to retailers who will sell it to the end user.
What is the difference between an issuing bank and an acquiring bank?
An issuing bank deals with the cardholder by issuing funds to help complete the transaction. An acquiring bank deals with merchants by requesting and authorising payments for cardholders. Although they have specific roles, it is quite common for the issuing bank and the acquiring bank to be the same financial institution.
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