What you need to know about merchant accounts

A merchant account is essential for businesses that accept payment. It acts as a bridge between customer payments and your merchant’s business bank account. When a transaction occurs, funds first enter the merchant account before reaching the bank.

Having a merchant account for businesses like retailers and FMCG industries is very important. Because having the right merchant account will ensure the smooth and timely processing of payments by the customers.

As a bank/fintech, it is important for you to understand merchant accounts, their types, and how they operate.

In this blog, you will read about merchant accounts and their importance in the industry.

Let’s dive into it.

What is a merchant account?

A merchant account is a type of bank account that is used by merchants to accept payments from their customers. It acts as a medium between your merchants and banks. 

When a customer makes a payment, funds are first deposited into the merchant account before being transferred to the bank.

Types of merchant accounts

Different merchant accounts serve different business needs. Here are the main types:

1. Retail merchant accounts: Would be best for retail stores, bookstores, sporting goods retailers, etc.  

2. Online merchant accounts: It’s Designed for online businesses handling digital payments.

3. High-risk merchant accounts: Used by businesses that process transactions manually via phone or mail

4. Mobile merchant accounts: Required for businesses in industries with high chargeback rates, such as gaming or travel.

Essential considerations about merchant accounts?

Choosing a merchant account requires understanding its key aspects.

How merchant accounts are different from standard business accounts

Merchant accounts are different from business accounts. A merchant account temporarily holds the customer's payments before transferring them to the bank, whereas a business account holds the company’s name and funds. 

Payment processor role

A payment processor’s role is to connect the parties involved, like business, the issuing bank, and the acquiring bank. It handles payment transactions, ensures security, and verifies whether the customer has sufficient funds.

Processing fee

Every merchant account processor charges transaction fees. The fees might vary depending on the provider and the type of transaction;

• Interchange fees: Charged by card networks like Visa and Mastercard.

• Transaction fees: Charged per payment processed.

• Monthly fees: Some providers charge a fixed monthly amount.

Importance for online businesses

Online businesses have a merchant account where they accept payments from their customers securely.  Without a merchant account, it would be difficult to receive the money and process the payment. A merchant account ensures quick fund transfers, fraud protection, and a better customer experience.

How does merchant processing work?

Merchant processing involves four easy steps; they are:

Customer purchase

The customer will have to initiate the payment process after finishing their shopping. They can pay via card or digital wallet.

Authorization

Then, the payment processor will check with the issuing bank to verify the customer's funds and approve the transaction. If approved, the process moves to the next step.

Funds deposited to a merchant account

Once the payment is authorized, then the payment amount is deposited into your merchant’s account.

Settlement

The funds will then be transferred to the bank within 24 hours from the merchant account to a business bank account. 

Parties involved in merchant acquiring

There are several bodies involved in merchant acquiring;

Payment gateway

A payment gateway enable the merchants to handle and manage the payments and processing. It ensures that the merchant payment processing is running smoothly.

Acquiring bank

The acquiring bank holds the merchant account and processes the payment. It works flexibly with all kinds of payments to authorize and settle transactions. 

Payment processor

The payment processor connects the parties involved in the transaction. It makes sure that the communication between the business, the acquiring bank, and the issuing bank is intact.

Issuing bank

The issuing bank is the customer’s bank. It verifes whether the customer has sufficient funds in their account. And if yes, the payment would be approved. If no, the payment would be declined.

Key factors to consider when choosing a merchant account solution

Choosing the right merchant acquiring provider depends upon various aspects. It will then be decided what kind of merchant account to be provided to them:

Business type

You have to select the kind of business merchants you want to cater based on your objectives and goals.

Transaction volume

If the merchant has high business volumes, then you have to set the transaction fees accordingly and make the solution scalable according to their transactions.

Pricing structure

You can compare the pricing structure while choosing the provider. Then you have to accordingly design the transaction fees to be charged from your merchants.

Payment processing features

You can choose what features you want to implement in the merchant-acquiring solution. Such as online payments, in-person payments, invoicing, or recurring payment options. Ensure the provider supports multiple payment methods, including credit cards and digital wallets.

Customer support

You can ensure that the solution provides top-notch customer support to the customers. You can look for providers with 24/7 support, responsive service, and a good reputation in the industry. 

Conclusion

A merchant account is a critical part of modern business operations. It enables smooth and secure payment processing for your merchant's customers. A modernized merchant acquiring solution would offer a merchant account that ensures smooth cash flow and simplifies payment processing.

Choosing the right merchant acquiring solution can help you optimize costs and improve transaction efficiency. Evaluate your business needs carefully to find the best merchant account solution.