All ecommerce businesses must get a merchant account to accept credit cards and enable online shoppers to transact on their website. In this article, we’ll break down what a merchant account is, why you need one to operate, and how to obtain one.
Any business that wants to allow customers to make purchases with a credit card needs to create a merchant account, which is of particular importance for online businesses that don’t have the ability to accept cash payments or other alternatives.
While this is likely common knowledge for most companies that are breaking into the ecommerce business realm, the details behind what a merchant account is, how to set one up, and what goes into managing it are likely a little murkier. With that in mind, we’ll answer these questions and provide you with some additional insight on all the things you should be thinking about when you find yourself wondering how to get a merchant account to accept credit cards.
A merchant account is a special type of bank account that’s set up between a business and an acquiring bank which allows the acceptance of electronic payment types (primarily credit cards but this can also include other forms of digital payments).
To get a merchant account, businesses have two options: they can either form an agreement with a member bank that has a processing relationship with the major credit card companies like Visa and Mastercard, or they can form an agreement with an authorized third-party agent of the member bank. These are known as independent sales organizations (ISO) or payment service providers (PSP).
It’s worth noting that merchant accounts don’t all operate the same way. The terms of the agreement depend entirely on the type of business you’re running, the size, and what your specific payment processing needs are. Therefore, it is important to know what you’re getting yourself into before making a choice to create an account from scratch or to partner with a third-party agent.
If you’re interested in creating a merchant account without using an ISO or PSP, you must first understand that it is a long and resource-intensive process, and something that is typically recommended for businesses that are generating a high volume of monthly revenue (you can take a closer look at the optimal revenue you should be generating to justify this procedure here). But, by choosing to do this yourself, you’ll also be saving money on fees that can quickly add up if you’re selling a high enough volume of products.
Now that you have a basic understanding of a merchant account, here are the steps to follow if you’re interested in creating one:
Step 1: Select the Credit Card Brands. While most businesses will want to accept Visa and Mastercard, you may also want to accept other brands as well. Consider what market you’re selling in, and what the preferred credit card of choice is. For example, US businesses will likely want to include American Express as a large portion of the country uses that brand.
Step 2: Determine the Payment Structure. What type of payment model will you be implementing with your business? Whether you’re accepting one-time payments or leveraging a recurring billing structure, this will need to be determined before moving forward with a merchant account. It’s also worth noting that depending on the payment structure, there may be varying fees and costs.
Step 3: Choose a Bank. It’s highly recommended that the bank you choose is located in the same geographic area that you’re selling your products and services in, due to the fact that they typically offer the lowest fees and follow the same jurisdictional regulations that your business will need to follow. If you’re an online business that’s selling to international markets, you may want to partner with banks in all of the areas where you’re selling in. This can be a very lengthy process if you’re doing this from scratch, whereas an ISO or a PSP may have already formed these partnerships.
Step 4: Prepare all the Documentation. Once you’ve selected the bank you’ll be partnering with, the next step is to start gathering all the documentation that you’ll be required to submit for review and approval. This includes a list of all business activities you’re currently deploying or planning on deploying, tax returns, turnover information, business license, ownership information, processing history, website compliance, and more. The type of business you have will depend on what other forms of documentation you need to provide. Be prepared for it to be a lengthy process.
Step 5: Complete the Application Form. The last step is to fill out the official merchant account application form. This is typically sent with your documentation in the step listed above and will require you to enter important information about your owners for the acquiring bank to review.
While there are cost benefits to creating a merchant account (which you can review here), it’s important to understand that there will still be varying forms of fees that go into managing your relationship with the acquiring bank.
These fees can include an initial merchant application fee, initial setup fee, cross-border fees, and other forms of monthly and transactional fees. As mentioned earlier, these fees will be different based on how many transactions you’re generating and what type of business you have (for example, businesses deemed to be higher risk will likely have higher fees).
Note that once your account has been opened you will still need the technology and integrations all set up before you can start processing transactions.
Now that you have a basic understanding of how to get a merchant account to accept credit cards, the next question you should be asking yourself is whether or not you want to go through this process or simply outsource it to an ISO or an PSP.
Generally, it’s recommended that smaller and medium businesses take an outsourced approach, primarily due to the fact that the cost of initial setup will likely be too heavy to shoulder. For businesses that are growing and are achieving a certain scale of monthly revenue, however, the benefits of creating your own merchant account may outweigh that of a third-party.
At the end of the day, perform a cost analysis to see where your business fits. If you do find yourself on the search for an ISO or a PSP to enable your ecommerce business, find out how the Origins Ecommerce team can make your search much simpler. If you have any questions about payment processing or merchant accounts and management, we will be happy to help provide you with the context you need to make an informed decision.