What’s a Merchant Account and Who Needs One?

If you own a digital business, you’ve likely heard the term “merchant account” a million times. Maybe you even have a few emails in your inbox promoting certain merchant account services.

The question is – do you need one?

Let’s begin with a definition.

What’s a Merchant Account?

A merchant account is a bank account that allows merchants to process electronic payments. Merchant here means a business owner. An electronic payment, meanwhile, is any payment made digitally, including those made by credit cards, debit cards, or via mobile.

How Does a Merchant Account Work?

Electronic payments are completed in two broad steps – authorization and funding (also known as settlement).

In the authorization phase, the customer initiates a payment, say by swiping their credit card. The shopping cart or POS system then requests authorization and, upon receiving the information, sends it to the credit card company. The card company then passes the information to the shopper’s bank for approval.

If the transaction is approved, the operation moves to the next phase – settlement/funding. This is where the merchant account becomes critical.

The authorized transaction is sent to a payment processor, tasked with collecting the merchant’s payment from the shopper’s bank. The bank charges the customer’s account for the transaction.

The funds are then transferred to the seller’s merchant account, less exchange fee and any other charges, and, within 48 hours, deposited into the merchant’s checking account.

You can now see where the merchant account comes in. It’s a link between the credit card processing and the merchant’s bank account, with the primary purpose of facilitating the transfer of funds from the buyers to the seller’s bank account.

Do You Need One?

Although some businesses get by without one, having a merchant account can be extremely beneficial for digital merchants.

  1. You can accept credit/debit card payments 

Cards are currently the most popular tool for making payments online, with debit cards account for 28% and credit cards 23% of all payments made in 2018. That’s a combined 51% of all payments being made via cards. Merchant accounts allow you to accept cards.

  1. Benefit from increased sales/revenue

There have been multiple studies in this area, and the findings are all the same – a merchant account considerably increases sales. In one survey sponsored by Intuit, 83% of small businesses said they experienced more sales after getting a merchant account as it allowed them to accept card payments.

  1. Enjoy improved cash flow 

Finally, the best merchant services guarantee that all payments will hit your bank account within 1-2 days. It’s a much better situation considering that invoices and checks can sometimes take as many as 30 days to get processed.

Author Bio: Payment industry guru Taylor Cole is a passionate payments expert who understands the complex world of merchant services. He also writes non-fiction, on subjects ranging from personal finance to stocks to cryptopay. He enjoys eating pie on his backyard porch, as should all right-thinking people.