Merchant Account

What is a Merchant Account?

A Merchant Account a special type of bank account used for holding funds that are captured from credit card transactions.

For better or worse, nearly every business on the planet accepts credit cards. In order to accept cards, you need to have a merchant account to convert those credit card sales into actual dollars in your bank account.

When you run a credit card transaction, those funds are held in your merchant account for the day. At the end of each day, those funds are “batched” out of your merchant account and deposited into your business bank account.

A Deeper Definition of Merchant Accounts

As a business owner ("merchant") you do not have direct access to this bank account, it is used simply as a "holding" account allowing you to accept credit card payments from customers. It holds the money until the transaction totally clears, and then the money is released into your business checking account, at whatever bank you use.

A Merchant Account is basically an agreement between the merchant, a merchant bank and a payment processor for the settlement of debit and/or credit card transactions between customers and businesses.

Merchant Accounts allow a business (the "merchant") to accept payments from its customers by debit card or credit card, by acting like a "holding", "escrow" or "clearing" account.

When a credit card transaction is made at a merchant, the Merchant Account essentially "converts" this transaction into cash, through a process called credit authorization.

Essentially, a merchant account acts like a line of credit between the credit card company and the merchant (because credit card transactions do not clear immediately, like a debit card transaction does).

Merchant accounts help reduce risk of chargebacks & fraud.

When a consumer pays for goods using a debit card the funds are immediately taken out of that person's checking account and used to pay the merchant for the goods. However, many consumers like to pay for things using a credit card - this is where a Merchant Account comes into the picture.

Unlike debit card transactions, where the money is immediately taken from the customers checking account and transferred to the merchant (minus a small fee for the bank), when a customer pays for a product or service with a credit card the funds are first deposited into the merchant account, and eventually transferred to the merchant's actual business bank account.

Transfers to the merchant's business bank account are normally done on a daily or weekly basis.

Note: With certain higher risk merchant accounts, funds can be deposited on a weekly or bi-weekly basis instead of daily.

Does my business need a merchant account?

Any business that accepts or wants to accept credit cards as a form of payment needs a merchant account.

The only exceptions to this are businesses that want to “share” a merchant account through an aggregator (like Paypal). This is not a bad solution if you’re selling $500 a month or less, but with any amount of volume, an aggregator account doesn’t offer you the pricing or protection you need as a business owner.

Merchant Account Example