What is a Merchant Account and Why You Need One

Feb 12, 2024

A merchant account is a type of bank account that temporarily holds funds from credit and debit card transactions until they’re transferred to your primary business account. If you want to accept card payments from your customers, you’ll need a merchant account. Confused about how a merchant account works? Read on, we’ll help you understand some of the basics.

What is a Merchant Account?

In payment processing, a merchant is a business or individual that accepts payments for goods and services.

A merchant account is a bank account specifically used for accepting credit and debit card payments. Unlike a traditional bank account, businesses can’t directly access funds in their merchant account. Instead, the account simply holds funds until they’re automatically transferred to the business’s main bank account, which can take up to five days depending on the payment processor.

After you sign up for a merchant account, you’ll be given a way to accept card payments. For in person payments, you’ll need a credit card terminal. For online or phone transactions, it’s a payment gateway. Many payment processors provide a virtual terminal for accepting online or phone payments, but you can also build your own payment portal or license one from a trusted provider.

Opening a Merchant Account

As with other financial accounts, there are a few steps involved with opening a merchant account. The process can vary slightly depending on the account provider, but most providers follow these basic steps.

  1. Research Providers. Banks, independent sales organizations (ISOs), and software providers are a good place to start. Compare their fees, services, customer support, and any hardware or software requirements. Consider your business model, transaction volume, and the types of payments you want to accept.
  2. Gather the Required Documents. These may vary by merchant account provider, but typically include business and personal identification documents, business license, proof of bank account, financial statements, and, for online businesses, details of your website and how you plan to accept payments online.
  3. Submit Your Application. Many providers provide a PDF or online application. The application will ask for detailed information about your business, including your estimated sales volume, average transaction amounts, and the types of goods or services you sell. You may need to provide additional details about your business operations, including your sales process, refund policy, and how you intend to deliver goods or services. This helps the provider understand your business model and assess the level risk.
  4. Wait for Approval. The underwriting process can take anywhere from a few hours to several days, depending on the provider and the complexity of your business. During underwriting, the merchant account provider will do a credit check on both the business and the business owner(s). This is to assess the risk associated with providing you with a merchant account, as the provider may be liable for chargebacks or fraud associated with your transactions.
  5. Set Up Payment Processing Equipment and Software. Your merchant account provider may offer hardware and software directly or you can use a third-party. If you’re using a third-party shopping cart or payment system, be sure to test thoroughly to be sure transactions are processed smoothy and securely.
  6. Start Accepting Payments. Be sure to monitor transactions closely in the initial weeks to address any issues promptly.

Do You Need a Merchant Account?

To determine whether you need a merchant account consider your business needs, the nature of your transactions, and your plans for future growth. You may need a merchant account if:

  • You plan to accept credit and debit card payments, either in person, online, or through mobile devices
  • You want to offer a variety of payment options for your customers
  • You have high transaction volumes and sales amounts
  • Your target market prefers using credit or debit cards
  • You want to offer subscriptions or recurring billing
  • You want to strengthen your business’s credibility
  • You want the flexibility to customize your payment processing
  • You prioritize fraud protection and risk management

Unless you’re planning to accept cash and check payments only, you’ll need a merchant account to accept payments from customers. Fortunately, there are payment software providers like HealPay who can work with you to establish your merchant account and set up an online payment platform to have you ready to accept payments quickly.

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