Entrepreneurs looking to take their businesses to the next level should consider setting up a merchant account. Opening a MA in order to accept cards will expand your business’ potential and bring in new customers, increase loyalty in regulars, and enable efficient processing of a larger number of transactions. This guide will take you through everything you need to know, from the setup duration to what kind of paperwork is required.
You’re probably wondering, What is a merchant account? The simplest way to explain what MAs are is to think of them as separate bank accounts for businesses that allow them to accept cards. MAs are crucial in enabling transactions to flow between customers, merchants, banks, and processors. They reconcile funds between all parties involved and serve as a final checkpoint before your business receives the money.
Entrepreneurs that offer online transactions need both a MA and a payment gateway. The latter serves as an online version of a payment reader. The gateway safely processes all the data from approved and processed transactions sent by the MA provider. It adds an extra layer of security to both businesses and customers. After the authorization request, the system is equipped with the correct data from the appropriate party, determining whether the transaction can occur or not. This e-commerce system allows transactions to flow through online channels without being compromised. It protects your business’ reputation with the MA providers by preventing issues such as accepting expired cards, or cards over their limits, and lack of funds.
Underwriting is a process in which banks assess the risks associated with new accounts. They look at the possibility of refunds and check the business’s legitimacy, which prevents any potential fraud from occurring. Credit card processing companies and their partnering banks take on certain risks by providing MA for businesses. All transactions that pass through the system can potentially be charged back, leaving the banks responsible for returning the funds. When a payment is processed, but a product or service can’t be delivered, the customer can request a chargeback, resulting in the bank issuing a refund, often before the funds have been recouped. If you want a smooth underwriting experience, we encourage you to find a partner that knows what to do. Now, let’s get over the necessary documents needed for setting up a MA.
Setting up a MA is similar to other financial accounts, a mortgage, applying for credit cards (CCs), or a car loan. There are several things that you’re required to provide throughout the underwriting process:
Experienced entrepreneurs probably already have a license since they are required for many other things outside merchant account services and credit card processing. If you need to register, do so on the website of your Secretary of State. To validate your business’ standing, your license will have to be reviewed and filed by MA underwriters. By formally having a license, the underwriters are going to consider you as legitimate.
Even if you’re a sole proprietor, you will need this for opening a MA. It will only take about 15 minutes to complete, and it only requires you to have an EIN and a business license. If you don’t already have an EIN, you can apply on the IRS website and receive it almost instantly. EIN can be your social security number if you’re a proprietor without any employees. This will be the default destination for all your transactions, including everything associated with accepting CCs, such as credit card processing services and software fees. Keeping a large enough balance is crucial for covering all these costs. Credits and debits can sometimes be separated into different accounts, but you have to request this option.
If the volume of your intended transactions is larger, underwriters will require more documents for the application. When looking to process a few thousand dollars a month, underwriters will require you to provide a voided check and some marketing materials to get started. To process more massive amounts, you’ll be required to provide more information, such as bank statements for several months, up to two years in some cases. Keep in mind that the provider will monitor the account’s activity, so you must be as accurate as possible when listing estimated volumes. Getting into the habit of exceeding the limits is not recommended, especially early on in the account’s life.
Depending on how quickly you can complete the application and submit all the required documents, your MA can be set up within a single workday, or hours even. Keep in mind that underwriters operate during usual banking hours. Applying later in the day will postpone the review until the following day. By syncing your MA to software provided by a credit card processing company, you can start accepting transactions immediately upon approval. Understandably, MA applications requiring larger volumes are more complicated and will likely require a few more days to complete.
When looking to accept both CCs and ACH payments (Automated Clearing House), you may need to go through two separate underwriting procedures with different processors. Various CCs you offer can be processed through one provider, while ACH and eCheck usually go through another. A separate application is usually not required when going through an Independent Sales Organization (ISO) or a software provider. The application should state which payment types you would like to accept. If somebody is helping you submit, they should compile a submission and a voided check copy and send it to the processors. Your Account’s Terms and Conditions will contain details about various parties involved.
We already established that a MA is necessary for businesses that want to accept CCs online. This must be done before your business’ online payment strategy is established. When looking for service providers, there are three things you should consider:
After you determine which networks work best for you, you should compare MA providers. This will allow you to pick a partner that suits your business’ and customers’ needs the best. Here are a few things to consider when looking for providers:
MA providers charge a variety of ongoing fees. This includes an interchange fee, which is what credit card companies charge on each transaction. It’s set by CC networks and split between them and the CC issuing banks. Average credit card processing fees consist of a per-transaction fee in addition to a percentage of the transaction. The exact rate varies according to specific criteria, such as CC type, who issued it, product or service purchased, and numerous other factors.
Additional fees are charged by MA providers, which may be a bank or an ISO. It also consists of a percentage of the transaction but may include a per-transaction amount as well. Businesses should note these next few additional expenses when setting up a MA:
When you offer multiple options, you may think that you’re better off when a customer pays via ACH by providing their financial information. Although these transactions only have a flat rate, the time it takes for it to land into your account is a lot longer, about 3-5 workdays. CC payments are much quicker, landing as early as 48 hours after the transaction.
While required today, the Payment Card Industry Data Security Standard (PCI DSS) compliance only used to be a smart practice for businesses with MA before 2008. It’s a set of regulations established by the CC companies to ensure merchants safely process customers’ payments. When going through underwriting, make sure you’re securely operating with your customers’ financial information. Installing antivirus software on all computers, implementing strong password and user ID policies, and shredding all documents containing financial data can minimize the risk of a security breach. Like the underwriting itself, software providers will walk you through the compliance.
If you’re an entrepreneur wondering, “Why is a MA a better route?” here are a few reasons why you should use this option;
PayPal and some other options such as Stripe, Square, and Braintree are not real MA. They do provide payment processing services but don’t include many other service types typical for a MA. Accepting CCs via a MA is different from working using an account processor. It’s not to say that these platforms don’t have their uses, but using a MA is far better for serious entrepreneurs. Check out the video below to find out more about alternative options and how to use them.
Selecting the right MA providers powers up your business’ activities with numerous customers’ benefits. Securing a way to process your online payments make getting a MA a necessary step in bringing together all e-commerce elements to your business.
The main advantage of having a MA is, of course, the ability to accept CC payments. If you’re wondering why this is important, according to the American Bankers Association data, there were over 374 million CC accounts in the US by the middle of 2019. The data also shows that the number of CC users is increasing by 2.5% each year. Getting a MA leads to increased sales, improved cash flow, and stronger customer loyalty.