What is a merchant account and why do I need one?

This is a multi part series of short articles designed to help you understand how merchant accounts work and how they relate to the internet environment. This page, “Understanding Merchant Accounts”, is a short commentary and description of merchant accounts in general. For an overview of processing payments on the internet you may want to start at our How Does Credit Card Processing Work page. If you are looking for specific internet merchant account information you can use the navigation box provided here.

Merchant Accounts are bank accounts that are specifically designed to accept and transfer credit card funds via the credit card processing network. Cards are processed through an Internet Merchant Account either manually through an in store credit card terminal, manually online through a web based terminal page, or automatically through an associated payment gateway provider linking to the merchant’s web shopping cart.

The nature of the credit card industry, with high automation and access to personal funds, requires very stringent rules in order to maintain any level of consumer confidence. It would be impossible to obtain that confidence in the typical savings or checking account environment. There are two primary for this:

  1. Checking and savings account funds are unreliable (overdrafts and bounced checks)
  2. Ease in obtaining a standard bank account.

There are a number of other reasons for the industry requiring merchants to establish a unique “merchant account” including the ability for interaction with the credit card network. The primary aspects of merchant accounts, however, are the application and verification processes that give them more reliability.

Credit card companies have strict requirments for merchants that process credit cards. Merchant Account companies act as a middle man between the merchant and the Credit Card Provider and keep track of these requirements to determine if the applicant meets them. The merchant account companies also have various requirement that they must meet with the credit card companies to assure the integrity of the credit card transaction process. They also accept a good deal of the responsibility and liability for the transactions that they process.

Merchant Account Providers compile statistics on industries and the types of businesses that process the least “charge back” (see side panel) transactions. The costs involved in processing bad transactions determine the rates and fees that the Merchant Account Provider can charge. These costs are based on efficiency in the Merchant Account Provider’s payment processing, their flexibility in requirements for accepting a particular merchant, and the number of merchants they have as customers.

With that in mind it is also good to know that internet merchant account providers, such as those in our recommendation list, do want your business. Most will make every attempt to assure that you qualify for one of their products.

Person to Person or P2P and 3rd Party payment systems are alternatives to merchant account and credit card processing. P2P payment processing are typically set up with the buyer and seller having seperate accounts at a central agency (usually the P2P company). The buyer funds his P2P account using standard banking methods and authorizes these funds to be used to pay the vendor. PayPal is an example of a P2P processing company.Though P2P payment processing is becoming more common, it is not as widely accepted as credit card payments which usually makes having your own merchant account a preferred method.

Click here for Merchant Account Alternatives (P2P)

Click here for Merchant Account Alternatives (3rd Party)

Using your internet merchant account requires a payment gateway that links the account to the credit card processing system and your shopping cart. You will need to coordinate the payment gateways that will work with your merchant account with those that work with your shopping cart.

Merchant Account Overview

This page is a consise explanation of merchant accounts. For an overview of the online payment process see our Internet Merchant Accounts page.

What is an Aquiring Bank:

This is the bank that holds the merchant’s merchant account and the funds received from credit card purchases.

What are credit card charge backs?

A charge back is the reversal of a credit card payment usually initiated by the purchasor when they believe they have been charged for an unauthorized item. Purchasors can also initiate a charge back when goods or services are not received.

What are transaction fees?

Transaction fees are usually a specific dollar amount (usually around thirty cents) that is paid for each transaction. In our $0.30 example, the transaction fees for 10 transactions would be $3.00.

Internet Merchant Accounts and Payment Gateways   >