What Is A Merchant Account And Why Would You Need One?
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What is a Merchant Account and Why Would You Need One?

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With the ease at which people can set up online stores, more and more are doing it. These stores might be places you can sell things you make, where you can sell services or digital products, or maybe dropshipping sites where someone else maintains the inventory.

In many cases, you’ll need to create a payment gateway so that you can receive online payments, which means that you might require a merchant account. Depending on your industry and your credit history, you might also need a specialized high-risk merchant account.

So what does this mean, and what should you know about setting up a merchant account?

What is a Merchant Account and Why Would You Need One?

What Is a Merchant Account?

A merchant account is a way for you to get paid online. When someone pays you, they do so through a third-party service. You get a payment into your third-party account, and then you might manually transfer that money to your personal or business account, or you might set it up, so payments automatically go into your account on a particular schedule.

From the time someone pays you until the money goes into your actual account, it’s in a merchant account.

The reason for this intermediary is because banks are agreeing to take upfront payments and give them to you on behalf of customers using credit cards.

The issuing bank incurs risks in this process as does the payment processor, so merchant accounts help minimize this risk.

It basically creates a delay that protects banks and payment processors, like an escrow account.

This helps limit the number of recalled payments.

As part of opening a merchant account, you are being approved through an underwriting process. The issuer of a merchant account will look at your business and make the determination of how likely whatever you get paid will create problems for them, or not.

What About High-Risk Merchant Accounts?

If you’re considered a high-risk merchant, you may not qualify for a standard merchant account, but high-risk options are available.

Some of the factors that could make you a high-risk merchant include having a higher average monthly sales volume, offering subscription payment options, and taking multiple currencies. High-risk merchants may also offer high-risk products such as software and digital products, financial products such as payday lending, or things that could pose a health risk, like CBD or e-cigarettes.

Other industries where a high-risk merchant can be required include any pharmaceutical company, travel companies, gambling or gaming, and travel or accommodations.

Specific sales methods can be characterized as high-risk also.

For example, lead-based advertising where you pay for sales leads or impression-based advertising may mean your business needs a high-risk account.

Setting Up a Merchant Account for Online Businesses

Setting up a merchant account isn’t necessarily easy, but if you are planning to accept online payments, you’ll need one. Vendors work to minimize their risk exposure, so along with looking at the type of business and the likelihood of credit fraud and returns, they’ll also look at how long you’ve been in business and your general business history. For example, have you gone through a bankruptcy?

If you are viewed as being a high-risk merchant, it doesn’t inherently mean you’ll be rejected, but your vendor may want something in exchange for taking on your level of risk. For example, they may want higher transaction fees.

Then, as you become a more established client of the merchant company, you may be able to negotiate those lower.

Brick-and-mortar businesses require merchant accounts as well, but internet merchant fees are usually higher because there’s a greater assumed level of risk.

If you are going to accept credit card payments online, you’ll need a payment gateway as well.

What Is a Payment Gateway?

A payment gateway processes credit card payments and options include PayPal, Square, and Stripe, among others.

Sometimes a payment gateway is compared to a cash register.

There is encryption between your browser if you’re buying something online and the retailer’s server because of the payment gateway. Encryption means the data is encoded for security and so that it’s only available for use between a seller and buyer.

There is an authorization request when a processor gets the approval from a credit card company or financial institution, giving the transaction the green light. Then, once there’s an authorization that goes through to the payment gateway, the site can move to the next step.

Payment gateways can also do certain screening tasks for orders and calculate tax.

Sometimes there’s confusion about the differences between gateways and payment processors.

A payment processor is responsible for the transmission of transaction data after it’s analyzed. For example, this might mean the transmission of information to a credit card company. The payment gateway authorizes the funds to be transferred in the exchange between buyer and seller.

There are three specific types of payment gateways.

One is a redirect. With a redirect, you go directly to the payment gateway page. This is simple but takes some of the control out of the hands of the business and adds an additional step to the process for customers.

Another option is to have customers check out on your site, but processing goes through the back end of the gateway.

The third option is the onsite payments. This is usually reserved for larger businesses with the capabilities to handle every step of the payment process through their own system.

It is important to choose a merchant as well as a gateway after doing your research. For example, when you’re choosing a gateway, be aware that not all gateways accept all types of cards and payments.

If you hope to attract international shoppers, you’re going to have to offer a gateway that will work in their country also.

Many retailers will use multiple gateways so that customers have the option to choose the payment process that works best for them, and this convenience can help boost sales and repeat customers.