Merchant Accounts

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Merchant accounts are an essential component of credit card transaction processing. Each time a consumer makes a purchase using a credit card, two types of banks are involved: a card-issuing bank and an acquiring, or merchant, bank. A card-issuing bank is one that issues credit cards to consumers. When a consumer uses a credit card to purchase a product or service, an acquiring bank, also known as a merchant bank, obtains approval from the card-issuing bank at the time of the transaction. To accept credit cards as a method of payment, you must first establish a merchant account by forming a relationship with an acquiring financial institution. This relationship enables you to process transactions and obtain cash from credit card purchases via a merchant identification number.

For several decades, credit card transactions have taken place either in retail outlets or by mail or telephone order. The rise of e-commerce in the late 1990s created a new medium for credit card payments: the Internet. A basic online credit card transaction begins when a consumer selects for purchase goods or services offered on a Web site and completes a merchant commerce application. Once a commerce application is complete, the site sends it to the acquiring bank by way of real-time online processing software, which allows for real-time transactions. (Real-time transactions are either accepted or declined immediately after the commerce application is completed.) After receiving the commerce application, the acquiring bank sends a request for credit card authorization to the acquiring processor—a company that provides credit card processing, billing, reporting, and settlement services. The acquiring processor sends the request to the card-issuing bank, which responds with an approval or denial code that is forwarded to the acquiring bank and then to the merchant. This entire process usually takes 10 to 15 seconds.

While approval is nearly instantaneous, consumers' cards are not charged at the time of purchase. Rather, the card-issuing bank puts a hold on the card for the transaction amount. A merchant's batch—all the credit card transactions processed during a specified time frame—is typically settled at the end of the business day. At this time the acquiring bank processes the charges. It typically takes an additional day or two for the bank to deposit credit card sales into your merchant account.

Although this process sounds complex, for most business owners, accepting credit card payments via the Internet is simply a matter of establishing a merchant account and purchasing online credit card processing software to facilitate the process. To ease consumer fears regarding the risks involved in using credit cards online, most software companies have incorporated secure electronic transaction (SET) specifications, which support credit card payments over the Web, into their processing software. Many programs also use address verification service (AVS) technology, which checks the first four numbers of the street address and zip code given by a consumer at the time of purchase. Unless the billing address given by the consumer matches the billing address on file with the card-issuing bank, the transaction is not processed.

To obtain a merchant account for your online business, contact your financial institution of choice. Most acquiring banks will ask for an explanation of your operations, such as what types of products and services you offer and how you deliver them to customers. Communicating about how you conduct business will help you and your financial institution determine which transaction processing model to use. If you have already established a merchant account for traditional credit card transactions, you will need to obtain a separate identification number, known as a terminal ID, for Internet transactions.

The fees charged and services offered by merchant account providers vary widely. Some providers charge one-time application fees, while others do not. Nearly all providers charge a small fee per transaction as well as a merchant discount fee. A merchant discount fee, or discount rate, is the percentage of sales that a merchant pays to credit card companies to process transactions. Typically, merchant discount rates—which are based on factors such as sales volume, average receipt size, industry, and risk—range from 1 to 4 percent. For online transactions, you should expect to pay a higher merchant discount rate than for traditional retail transactions due to a perceived higher level of risk. In a traditional retail transaction, the retail merchant typically makes contact with both the credit card and the consumer and is not held responsible for potential fraud. An online transaction, however, is completed without the customer and credit card present, leaving you accountable for any wrongdoing. This makes you more vulnerable to chargebacks, which happen when a consumer disputes a credit card transaction. If a card-issuing bank issues a chargeback to a consumer, you will be charged the cost of the transaction. A high level of chargebacks might prompt an acquiring bank to suspend your merchant account, eliminating your ability to process credit cards.

By the early 2000s, most merchant account providers allowed clients to either rent or purchase a comprehensive merchant account "solution" for credit card transaction processing. Many of these solutions include all of the software and support necessary to allow a business owner to begin accepting credit card payments within a few days. While the vast number of these merchant account solution providers can prove overwhelming, researching various options is your best bet for finding the right merchant account for your business. For starters, you might consider paying a visit to a site like, which provides a current listing of the lowest-priced merchant account providers as well as information about what types of services each provider offers.


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