What Is a Merchant Account and How Do You Get One?

New to merchant accounts? Here we discuss everything you need to know about them.

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What is a Merchant Account?

A merchant account is essential for businesses of all sizes. Consumers are finding less of a reason to carry around spare cash and more of a reason to use their cards. When you factor in payments from smartphones, smartwatches, and cards, there is no incentive to use cash.

It doesn't matter whether you have a brand-new business, or even a well-established one, you should plan to acquire a merchant account. Many business owners do not understand what a merchant account is, how you can obtain one, or what the benefits of having a merchant account are.

Total spending on all debit and credit cards in the UK reached £800 billion in 2018, with 20.4 billion transactions made during the year. (UK Finance)

If you want your business to accept debit& credit card transactions, online payments, and payments over the phone, then you will require a merchant account.

What is a Merchant Account?

A merchant account is a type of bank account that is required for a business to accept debit and credit card payments. When signing up for a merchant account an agreement is made between the providing bank, retailer, and payment processor. This account allows businesses to take payments from any location with a card reader.

A merchant account is generally considered as an “escrow” or “holding account” where funds are held. Once the funds have processed, they are transferred into your business bank account. This is a more secure and efficient method of receiving payments for a business rather than a regular bank account.

Having a merchant account is essential if you want to take payments in person, online, or over the phone. When you are assessing the different merchant accounts you can sign up for, you need to make sure you are aware of the associated fees. This will differ with each payment service provider and the type of account you can get. There are three types of merchant accounts in the UK.

Types of Merchant Accounts

There are three different types of merchant accounts that you can get in the UK, and it is vital that you know which one is right for your business.

Aggregate Merchant Accounts

Aggregate merchant accounts are essentially shared accounts and are a popular choice for small businesses. The payment service providers offering aggregate merchant accounts, will group a number of small businesses together and take payments collectively. It is important to remember that the history of the other businesses will not impact your business in any way.

 The primary benefit of an aggregate merchant account for small businesses is lower fees. This is a result of the small businesses being grouped together. It allows them to pay lower fees and increases the chance of being accepted for a merchant account when starting out.

High-risk Merchant Accounts

A high-risk merchant account is exactly as it sounds. It’s for those businesses that are likely to be high-risk for the provider. This can include various industries such as alcohol, gambling, insurance, and legal drugs. There are many businesses in industries that are considered high-risk, but thankfully this type of merchant account is available for them.

The thing to remember with a high-risk merchant account is that you will likely end up paying higher fees. If the business is susceptible to chargebacks then these fees might be higher or the actual card processing fee may be higher than other accounts. Before signing up for the account, check through the contract to understand your fees.

ISO Merchant Accounts

ISO or Independent Sales Organisation isa merchant account that allows more flexibility in your contract. With this account, your business is the only merchant and is treated independently, rather than a general payment service provider that has the same terms and requirements for all. This allows for more customization in the contract and creating an account that can suit your business plan.

This type of merchant account is generally suited to those businesses that are hitting high sales figures and are well established. That is due to the payment service providers requiring a certain revenue threshold to apply for the account. Most ISO merchant account shave monthly charges and high initial set-up fees.

Why Do You Need a Merchant Account?

If you want to accept credit or debit card payments for your business then you will need a merchant account. Not only does having a merchant account allow you to take card payments, but it also provides an extra level of security for transactions.

When acquiring a merchant account for your business, you will receive a card machine to accept card payments. This allows transactions to be processed with Amex & Visa for example. You cannot accept card payments without a card reader unless you wanted to ask each customer to send a bank transfer with every purchase (unprofessional and unsafe).

How Does a Merchant Account Work?

A merchant account works by acting as the intermediary between payments and your account. There are a number of factors involved with a merchant account. Some of these include POS machines, transaction fees, account checks, and information processing. These complex processes usually happen instantly and would not be noticeable.

Once a customer makes a payment through your card machine (known as a POS - point of sale machine) the transaction is sent to a payment gateway to establish if the customer has funds available.Card payments taken in person on a POS machine are referred to as ‘card-present transactions’ which means that the physical card is being used for the payment. Many businesses prefer this method as fees are lower and payments have a lower risk of fraud.

Once the payment information has processed and cleared, the funds would be released from holding into your business account. This process can usually take up to 5 days but varies depending on your payment service provider. Having a merchant account will incur fees and there are a number of different types of merchant accounts that are accounting for the digital trends in the UK.

Merchant Account Fees

Most payment service providers charge transaction fees with a merchant account. Unfortunately, there are no free options in this instance. It is important to shop around for different merchant account providers as they will offer different fees. Always remember to check the contract too, as some have hidden fees.

Merchant account fees are not as straightforward as a regular bank account where you pay a fixed sum every month. In fact, there are a range of different merchant account fees including:

  • Early termination fees.
  • PCI compliance fees.
  • Minimum merchant service charge.
  • Authorisation fees.
  • Chargeback fees.
  • Credit card transaction fees.
  • Debit card transaction fees.
  • Transaction authorisation fees.
  • Card machine price.
  • Set up cost.

As you can see there are many different types of fees involved with a merchant account. It can be difficult to provide a general range of fees as each provider will charge a different amount and different fees. You can read more about UK merchant account fees here.

How Do You Open a Merchant Account

Like any bank account, the owner of the business must apply to a bank in order to open a merchant account. However, opening a merchant account is not a straightforward process and there are strict criteria that must be met in order to be approved.

The first step of opening a merchant account is to shop around for providers. You want to ensure that you research the fees and criteria involved with each provider, then make a list of your top5 merchant account providers. You will then need to make an appointment or submit an application for your merchant account.

Some of the criteria that are checked when opening a merchant account include:

  • How long your business has been established.
  • The history of your business.
  • Credit history of the business, including bankruptcies.
  • Credit history of the owner.
  • Any previous merchant accounts that have been held.
  • What the business is.
  • The risk level of fraud with that business.

It is important to consider that if your business risk is higher, you might end up paying higher fees on your merchant account. It is also recommended that you consider applying with your personal bank as you are more likely to be approved.

How Long Does It Take to Get a Merchant Account?

Opening a merchant account in the UK can take between 5-10 days on average. Each application is dependent on the provider and any problems that may occur with paperwork when applying. Overall the process of applying for a merchant account is relatively fast.

Do You Really Need a Merchant Account?

The answer is yes. As a business, you do need a merchant account in order to accept card payments, payments online, and payments over the phone. If you are thinking about sticking to cash payments only, consider how much business you will lose from those who never carry cash. It is becoming increasingly common, and a trend to use cards or contactless payments instead of carrying cash.

If you are considering getting a merchant account then it is always worth speaking to experts in the field that can guide you in the right direction and get the best accounts for you and your business.

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