How a Merchant Account Works
Are you thinking about getting a merchant account for your business? Whether you have a classic business or an online store, a merchant account is what you need to take your store to the next level.
What Is a Merchant Account?
If you don’t know what exactly this is, a merchant account is a bank account that serves a very special purpose: it allows you to hold any funds you get through making sales to customers using credit cards or debit cards.
Have you ever been to a store and used your card to pay for the items you bought? At some point, you might have wondered how the money left your account and where it went. Well, a merchant account is your answer for that particular question. It isn’t a permanent account, of course. It serves as a staging ground for holding payments before transferring them over to a normal bank account.
In short, the merchant account is the middle man of bank accounts. It collects the money from the credit and debit card sales you make, then holds these until they can be transferred over to your standard bank account.
What You Need to Open a Merchant Account
There are online service providers who allow businesses and individuals to open their own merchant accounts. These sites are generally trustworthy as long as they are secure. There are also third-party services that use their own merchant accounts to process your payments for you– meaning that you will not have to open up your own. A good example of this kind of service is PayPal.
Note: It would do you well to remember that the merchant account agreement is legally binding. You have to sign or accept the terms of the account. Be sure to read the small print before you sign any legal contract – the last thing you need is to be cheated or scammed out of money and not be able to do a thing about it!
After a merchant account is opened, imagine a situation where a customer comes into your store, purchases something, and swipes their card through your machine. At this point, the transaction begins. The first step is for the card reader to figure out if the customer has enough funds to pay for the purchase. This is where the payment gateway comes into play. You might know it as the point of sales system, or a third party online gateway system like Shopify.
The request for a transaction comes into the gateway. The details of that customer’s bank account and card, as well as the price of the purchase, are consolidated and sent to the customer’s credit card issuer. Here, the account is checked for sufficient funds to make the purchase, and if the answer is positive, the transaction is authorized by the issuer. After this, the funds that the customer has to pay are transferred out of their own bank account and into your merchant account.
The journey doesn’t end there either. When the payment gateway sends the request out into the world, it is received by a payment processor. This is the company that issued the credit card the customer is using. Examples of payment processors include Visa, Mastercard or their affiliated companies. A payment processor analyzes the request for the funds to be transferred, and then sends either approval or denial based on the funds in the sending account.
Payment gateways and processors work in tandem with merchant accounts and standard business accounts at banks to seamlessly process transactions. All the communication is done in a fraction of a second, allowing for smooth and easy business all day long. Getting a merchant account is now widely regarded as the standard if you want your online store to get anywhere.
With so many of the transactions in the world today being conducted using credit cards instead of cash, you will need one of these accounts to stay ahead of the times. Get your business a merchant account today, ensure that you read the small print in the contract, and make sure that you also set up your own payment gateway with your account issuer!