Merchant Accounts
There are three main types of merchant accounts to choose from: Retail merchant accounts, MOTO merchant accounts and Internet accounts
1. What is a Merchant Account? 2. Tips on Merchant Accounts
3. Frequently Asked Questions  
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What is a Merchant Account?

Sections: What is a Merchant Account? | Pros and Cons | Why Is A Merchant Account Required? | Types of Merchant Accounts


What is a Merchant Account?

A merchant account is an account that enables merchants to accept credit card payments. They can be obtained through a bank, credit card Company, or other payment processor. Any merchant who wants to take credit card orders must establish a merchant account.



Pros and Cons

Advantages of using a merchant account:
Fees are usually low when compared to online payment services.
Fast turn-around time for getting your money into your bank account.
Merchant accounts are generally more trusted by customers than on-line payment services. This enhanced trust encourages more sales.
Merchant accounts offer greater flexibility to the merchant when it comes to the types of transactions allowed (web site, phone, fax, etc). Most on-line payment services limit your transactions to your web site or online auction.

Disadvantages of merchant accounts:
Merchant accounts can be difficult to qualify for. They have stringent personal and/or business credit requirements. They also tend to be picky about the types of businesses that they accept.
It takes a while to get your account approved and set up. This can easily take anywhere from a couple of weeks to a month or more.
There is usually a relatively high application fee and/or set up fee. Around $300 seems to be the normal.



Why Is A Merchant Account Required?

A merchant account is required for your business to accept credit cards from your customers. Once you have a merchant account established, you can begin to accept credit card sales from your customers via the Internet (via an internet merchant account) or process them manually by swiping their credit card using a credit card terminal. Either way, the funds will be deposited automatically into your business checking account.

If you are planning to conduct business on the Internet, then the second step is to obtain an Internet "gateway" account. The gateway allows you to post your credit card transactions from your Internet store to your merchant account via the Internet. The easiest way to understand what a gateway is would be think of it as the "pipeline" that connects your merchant account with your internet store.

The payment gateway is software and network service that operates between your Web site and the bank authorization systems. The Internet payment gateway is the Internet equivalent to the credit card swipe terminals used in your local retail stores.

The job of the payment gateway is to capture, secure, and communicate the credit card and billing information to the bank credit card authorization systems. Let's look at this process in more detail.

Capture & Secure Credit Card Information: As soon as your customer inputs their billing information into your Web site the payment gateway software captures this data. Next the payment gateway software secures the credit card information by scrambling or ENCRYPTING (click here for more about encryption) the credit card and customer related information so it cannot be read by anyone else but the bank authorization systems.

Transmission: Once your customer's credit card data is secured, the payment gateway software transmits the data through the Internet to it's private processing network. The credit card data is merged with additional information such as your Merchant ID Number. Now the data is passed through a connection to the bank authorization systems where the card validity and available credit is verified.

Bank Authorization Response: Finally, the bank replies to the payment gateway with an authorization or decline response. The payment gateway then passes this response back to your Web site where it is ultimately displayed to your customer. The payment gateway stores all of your transaction history into a database that you can access online for reporting purposes.



Types of Merchant Accounts

There are three main types of merchant accounts to choose from:

Retail merchant accounts
This type of account usually offers the lowest transaction fee, but often has restrictive rules. Retail merchant accounts require that a very high percentage of credit card sales be conducted with the "card present" and that the card be "swiped" by passing it through a physical credit card terminal. Retail accounts are usually associated with businesses such as restaurants, grocery stores, and small hotels. This type of merchant account is best for merchants who don't plan on conducting business through the mail or online at any point.

MOTO merchant accounts
Mail Order - Telephone Order accounts tend to charge a higher transaction rate and are used when credit cards cannot be physically swiped. Merchants usually process credit card payments by entering the credit card information directly into a terminal installed on a personal computer, or through a normal Web browser to process transactions on a payment service provider's Web site.

Internet accounts
Internet merchant accounts are similar to MOTO accounts, but can only be used for Internet transactions. Merchants with Internet accounts use a virtual terminal or payment service gateway to process credit card payments. These payment service gateways can are now included with most business web hosting packages, and have custom-designed HTML forms or a shopping cart application.

It is important to choose the right type of merchant account and payment processor for the kind of business you will be conducting. While there are many payment service providers out there, it's a good idea to read their terms of service very carefully, as many of them charge exorbitant fees and have strict rules regarding transactions. If anything sounds questionable, ask questions and do some research before agreeing to anything.

Bank merchant accounts provide credit card processing for the majority of web sites today. These are business accounts (usually) set up through regular banks. Here is how a typical transaction takes place when using a merchant account:

1 - The customer initiates a purchase from a web site, usually by "checking out" with a shopping cart.
2 - The bank that supplies the merchant account "authorizes" the purchaser's credit card, checking for fraud and verifying that the card has enough available credit to pay for the purchase. This process usually takes just a few seconds.
3 - After the purchase is authorized by the bank, the merchant ships the merchandise to the customer or supplies him with a download link in the case of a downloadable digital product (such as an eBook or software package).
4 - After a few days the bank transfers the funds (less transaction fees) for the purchase into the merchant's bank account.