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What is a Merchant Account?

Don't expect your customers to have cash on hand to make a payment. You'll lose business. You want to offer them the option to pay with a credit or debit card. To do so, you need a merchant account.

A merchant account allows a business to accept debit and credit card payments in person and online. This is separate from a typical bank account. The merchant account acts as the middleman between the swiping of the card and the deposit of the money into a business account.

In order to get a merchant account, you must apply and be approved.  During the review process, a merchant bank may consider:

  • How long the business has been established
  • History of bankruptcy
  • Past credit issues and any previous merchant accounts.

Merchant banks might also analyze if your business is susceptible to credit card fraud. If a business is deemed high risk, the vendor might initially set higher transaction fees to offset that risk.

A merchant account or payment processing provider will help businesses set up their own merchant account.  Some businesses, especially start-ups, prefer to work with a payment service provider or PSP (think Square, Stripe, Paypal) as they do not have to apply for their own merchant account.

A PSP combines a variety of different merchants under a single umbrella account. So, instead of getting a specific merchant ID number through a processing bank with a merchant account, you get a license to process payments through the PSP merchant account. You become what’s known as a “sub-merchant.”

Read this article for the pros and cons.