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Does Your Business Need a Merchant Account?
January 28, 2021
Does Your Business Need a Merchant Account

Does Your Business Need a Merchant Account?

In the second quarter of 2020, credit cards share of purchase volume was 44.7 percent. In other words, nearly half of the dollars spent in the U.S. were spent using credit cards.

The message is clear: American consumers love their credit cards. Increasingly, so do consumers in the rest of the world.

As a small business owner, these preferences matter. Accepting credit card payments expands your market and can ignite your business’s growth.

Before you can accept credit card payments, though, you need a merchant account.

To decide whether you need a merchant services account, it’ll help to understand what they are and how they work. In this post, we’ll define merchant accounts, explain how they can benefit your business, and highlight other important considerations, like fees.

What is a Merchant Account?

A merchant account is a kind of commercial business bank account that enables you to accept and process credit and debit card payments. Essentially, merchant accounts facilitate the communication involved in an electronic payment card transaction.

However, like any other bank account, different merchant accounts offer differing capabilities. For example, some may only accept certain cards while others might only support in-person transactions. Moreover, merchant accounts may be set up to accept only online card payments or in-person payments.

How Merchant Accounts Work:

How merchant accounts work differs slightly depending on whether you’re accepting card payments online or in-person. In the next two sections, we’ll explain both how merchant services accounts work in both scenarios.

Merchant Accounts for In-Person Card Payments

Typically, there are four parties involved when a merchant account is set up for in-person transactions. The four parties are the business, the merchant bank, the credit card processing company, and the card issuer.

When a customer pays your business with a card, the card reader will gather the card information so that it can be sent to the merchant bank, who contacts the credit card company. After the card issuer approves the transaction, the processor again contacts the merchant bank.

Once the bank receives approval, the transaction is authorized and the funds are settled in the merchant account. Depending on the terms of the account, these funds are transferred to the business on a daily or weekly basis.

Merchant Accounts for Online Card Payments

The key difference between internet accounts and traditional ones is the point of sale. With in-person transactions, you have a credit card terminal where customers insert, swipe, or tap their card. Since physical credit card terminals aren’t an option with online transactions, you need a payment gateway.

Fortunately, there are merchant account vendors who also offer payment gateways so you won’t need to shop for separate payment processing solutions.

Other than the payment gateway, internet merchant accounts function very similarly to traditional ones. That said, internet merchant accounts typically come with higher monthly fees. Therefore, you should consider your business’s budget before pursuing this option.

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Merchant Account Costs and Fees

When you set up a merchant account, your business and the merchant account will be bound by a detailed agreement. This contract will include all your fees, which can be complicated.

On top of per-transaction fees, your contract will include fee structures per card network as well as monthly or annual maintenance fees. Your contract will also include fees for special scenarios, such as chargebacks or non-sufficient funds.

In addition to these ongoing fees, you’ll need to pay an upfront fee for merchant account setup. You may also need to pay fees for any hardware, such as a card terminal, that you need to process transactions.

A merchant account’s fee structure makes a big difference for your business and fees vary significantly from one vendor to another. The good news is, with so many vendors out there, you’ll find several that have the capabilities you need. So, once you’ve determined your needs and identified a few vendors, your decision will come down to a cost comparison.

The Downside of Not Having a Merchant Account

If you choose not to open this type of account, you won’t be able to accept electronic credit card transactions. Depending on the nature of your business, the inability to accept card payments has varying consequences.

For example, for a strictly e-commerce business, not accepting credit card payments is a non-starter. This is because over 90 percent of e-commerce customers use cards or mobile wallets to pay for goods.

Alternatively, if you run a small restaurant, only accepting cash may be possible, but it will turn many customers off.

In short, whatever kind of business you own, some of your customers will feel inconvenienced by your lack of payment options. Consider that just 15 percent of transactions in the United States were made with cash in 2019.

Business Merchant Accounts: Are They Right for You?

When you ask yourself if you need a merchant account, what you’re really asking is whether you need to accept card payments. For most businesses, the answer to that question is yes, because it’s unusual to not accept credit cards these days.

While the costs of merchant accounts aren’t negligible, not accepting card payments can be a serious obstacle to growth. So long as your investment in a merchant account results in sufficiently greater revenue, opening one is a no-brainer.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].