What Is a Merchant Account? How Accounts and Processing Works

What Is a Merchant Account?

A merchant account is a type of business bank account that allows a business to accept and process electronic payment card transactions. Merchant accounts require a business to partner with a merchant acquiring bank who facilitates all communications in an electronic payment transaction.

Merchant account relationships are essential for online businesses. These account relationships involve added costs which some brick and mortar establishments may choose not to pay by accepting only cash for deposits in a standard business deposit account. Merchant accounts are a type of commercial bank account.

Key Takeaways

  • A merchant account is a bank account specifically established for business purposes where companies can make and accept payments.
  • Merchant accounts allow, for instance, a business to accept credit cards or other forms of electronic payment.
  • Merchant account services often come with added fees, but also an array of services.

How Merchant Accounts Work

Merchant accounts are a key aspect of business operations for most merchants. Merchants have a variety of options when choosing a merchant account service provider with transaction costs being a key component in the decision. Merchant accounts are provided by merchant acquiring banks which partner with merchants to facilitate electronic payments.

If a brick and mortar business chooses not to accept electronic payments and only allows for cash, then they would not necessarily need to establish a merchant account and could rely on just a basic deposit account at any bank. Online businesses, however, are required to establish merchant account partnerships as part of their business operations since electronic payments are the only option for customers in making purchases.

Merchant Acquiring Bank Services

A merchant must establish a merchant account with a merchant acquiring bank if they plan to offer electronic payment options for their goods or services. Merchant acquiring banks play a key role in the electronic payment process and are essential for efficient processing and settlement of payment transactions.

Merchant acquiring banks and businesses establish merchant accounts through a detailed merchant account agreement that outlines all of the terms involved with the relationship. Key terms include the per-transaction costs the bank will charge, the bank’s card processing network, established fee structures with the network of card processors, and any monthly or annual fees the bank charges for various services.

Transaction Processing

In an electronic payment transaction, a business sends card communications through an electronic terminal to the merchant acquiring bank. The merchant acquiring bank then contacts the branded card processor who contacts the card issuer. The card issuer authenticates the transaction through various approvals that include fund availability checks and security checks. Once authenticated the approval is sent to the merchant acquiring bank through the network processor. If approved, the merchant acquiring bank authorizes the transaction and begins settlement of the funds in the merchant’s account.

All of the card communications occur within a matter of minutes and incur various fees for the merchant which are deducted from the merchant account. The merchant acquiring bank charges the merchant a per-transaction fee. The network processor also charges the merchant a per-transaction fee. These fees can range from 0.5% to 5.0% of the transaction amount plus $0.20 to $0.30 per transaction.

Merchant acquiring banks also charge merchants monthly fees as well as any special situation fees. The monthly fee on a merchant account is paid to the merchant acquiring bank for covering certain electronic payment card risks that might arise from a transaction as well as for the service of settling transaction funds.