What is a Merchant Account? How to Get a Merchant Account?

What is a Merchant Account?

A merchant account is a specialized business bank account used to accept and process electronic payments, including credit and debit card transactions. It acts as an intermediary between the customer’s payment and the business’s bank, ensuring secure and seamless transactions. 

Unlike a standard business bank account, a merchant account temporarily holds funds from customer payments before transferring them to the business’s main account.

Merchant Account Example

Let’s say a local clothing store wants to accept credit card payments. To do this, the store sets up a merchant account with a payment service provider. When a customer purchases a INR 2800/- dress using their credit card, the funds from the transaction are first held in the store’s merchant account.

After the payment is processed, the funds—minus transaction fees—are transferred from the merchant account to the store’s primary business bank account within a few days. This process ensures secure payment handling and allows the store to offer multiple payment options to its customers.

Related Read: What Is a High-Risk Merchant Account?

How Do Merchant Accounts Work?

A merchant account acts as a middleman, allowing businesses to accept debit and credit card payments, both in person and online. Once your merchant account is set up, you can start accepting payments with ease. Here’s how the process works:

1. Application

You apply for a merchant account, which is reviewed based on your business’s risk profile.

2. Approval

Once approved, the merchant account is assigned a unique ID for your business.

3. Payment Integration

Merchants integrate the payment gateway or POS system with their sales channels.

4. Customer Purchase

When a customer makes a purchase, the payment details are sent to merchant’s payment processor.

5. Authorization

The payment processor requests authorization from the card network (e.g., Visa, Mastercard).

6. Funds Reserved

If authorized, the customer’s funds are reserved for settlement.

7. Settlement

At regular intervals (daily or weekly), the funds—minus transaction fees—are transferred to merchant’s business bank account.

8. Fraud Monitoring

The merchant account provider continuously monitors for fraudulent activity and may flag suspicious transactions.

9. Handling Chargebacks

If a customer disputes a transaction, the provider manages the chargeback process.

10. Fees Charged

Fees are charged for processing transactions, settling funds, and other services provided by the merchant account provider.

Related Read: How to Make Credit Card Payments Through NEFT?

Types of Merchant Accounts

Several types of existing merchant accounts are available to cater to different business needs. Understanding each one can assist you in choosing the right one for your online business. Here are some common merchant account examples:

Retail merchant accounts

These accounts are suitable for physical brick-and-mortar stores. They allow companies to accept card payments through a point-of-sale (POS) system.

E-commerce merchant accounts

 Designed specifically for online businesses, e-commerce merchant accounts enable your business to accept payments through your website or mobile app.

MOTO (Mail or Telephone Order) merchant accounts

MOTO merchant accounts are designed for businesses that primarily handle orders via mail or telephone. They provide a secure way to process card payments remotely.

High-risk merchant accounts

These accounts are intended for industries with elevated risk factors, such as gaming or adult entertainment.

International merchant accounts

International merchant accounts support businesses with global operations, enabling them to accept international payments and conduct transactions in different currencies.

Mobile merchant accounts

They are ideal for businesses needing mobile payment processing solutions, such as food trucks or event vendors. They enable your business to accept payments instantly using a mobile device.

Aggregated merchant accounts

These accounts are shared among multiple businesses, often through payment service providers. These accounts are suitable for small businesses or merchants with low transaction volumes.

Benefits of a Merchant Account 

Merchant accounts are an essential component for businesses operating in the digital era. They offer numerous advantages to enhance your business operations and boost your revenue. Here are some key ones:

Accepting electronic payments

With a merchant account, you can easily accept various electronic payment methods, like debit and credit cards, as well as UPI and mobile wallets. This flexibility allows you to cater to a wider range of customer preferences.

Increased sales

By accepting electronic payments, you open up new avenues for customers to make purchases. This convenience leads to higher conversion rates and ultimately increases your sales volume.

Improved cash flow

The merchant payment gateway expedites the payment process by enabling swift transactions between the customer’s bank account and your business account. This streamlined process ensures that funds are quickly deposited into your account, thus improving your cash flow management.

Global reach

A merchant account is crucial to expand your business internationally. It lets you accept payments from customers worldwide, facilitating seamless cross-border transactions and broadening your customer base.

Credibility and trust

Having a merchant account adds credibility to your business as it signals that you have met stringent requirements for secure transactions. Customers are more likely to count on businesses with secure payment options, which enhances their confidence in purchasing from you.

Enhanced security

Merchant or sub-merchant accounts often have advanced security measures in their payment solutions, like encryption and fraud detection tools. These safeguards protect businesses and customers from fraudulent activities, ensuring secure transactions.

Who Can Apply for a Merchant Account?

Individuals

Individual entrepreneurs and sole proprietors can apply for a merchant account. This includes consultants, freelancers, and small business owners operating as individuals.

Hindu Undivided Family (HUF)

HUFs, which consist of a family unit governed by Hindu law, are eligible to apply for a merchant account. This allows HUFs to accept online payments for their businesses or ventures.

Partnership and sole proprietorship

Partnerships and sole proprietorships are common types of businesses in India. They can apply for merchant accounts and process electronic payments from customers.

Limited company and limited liability partnership

Both limited companies and limited liability partnerships (LLPs) can apply for merchant accounts. These legal entities can benefit from accepting online payments through various payment solutions.

Clubs, societies, trusts and associations

Organizations such as clubs, societies, trusts, and associations can collect membership fees or accept donations electronically once they apply for a merchant account.

Requirements for a Merchant Account

To open a merchant account, you generally need to meet the following requirements:

Business Information

• Company Name: The official name under which your business operates.
• Company Tax ID: Also known as the Employer Identification Number (EIN), this is used for tax purposes.

Contact Details

• Address and Phone Number: Providing accurate contact information is crucial for communication and verification.

Business Overview

• You may need to describe the nature of your business, including the products or services you offer. This helps the bank assess the risk associated with your industry.

Personal Identification

• Depending on the bank’s policies, you may need to submit your own Social Security number along with personal identification.

Supporting Documentation

• Many banks require proof of business registration and may ask for additional financial documentation, such as transaction records or tax returns, to assess your business’s financial health.

Credit Check

• Be prepared for a credit check as part of the underwriting process. This helps the bank evaluate your creditworthiness and the potential risks involved.

How to Open a Merchant Account?

1. Get a Business License

To open a merchant account, it is important to prove that your business is legitimate. Therefore, the first step toward opening a merchant account is to get a business license.  

2. Open a Business Account 

After getting a valid business license, the next step is to obtain a business bank account. Your business bank account will be where your merchant account provider will deposit the funds from your credit and debit card sales and withdraw their fees.  

3. Assess Your Needs 

Before thinking of opening a merchant account, it is important to evaluate your business needs. For instance, you need to decide which credit and debit cards you’ll have to process. Do you want to accept American Express, or will Visa and Mastercard do? Before getting a merchant account, map out everything you need for your business. 

4. Compare Merchant Account Providers 

Now that you are thorough with your needs, you can start researching different merchant account providers to find the one best suited for your business. Let’s look at a few features to keep in mind while looking for a merchant account provider.

• Strong security: As a merchant, it is your responsibility to protect your customers’ sensitive credit and debit card information. You can do so by choosing a PCI-compliant merchant account provider.

• Flexible customer service: Look for a provider that offers 24/7 in-house customer service free of cost to solve your issues.

• Instant funding: Some merchant account providers like Razorpay provide next-day funding services so you can get the funds in your account faster. 

• Transparent pricing models: Credit card processing fees can be confusing. So, if your merchant account provider is unclear about the fee, it might be a sign to shift to another provider.

5. Fill Out the Application 

After selecting a provider, you need to fill out an application form that will require detailed information about your business. You might need to provide the following documents –  

• Contact information 

• Authorized signer information 

• Bank account number 

• Tax ID

6. Start Payment Processing Once Your Merchant Account is Approved 

Opening a merchant account can take somewhere between one business day and a week, depending on your provider. Once approved, you can start accepting credit and debit card payments right away. 

How to Choose the Right Merchant Service Provider?

Choosing the right merchant service provider depends on your business needs and priorities. Consider these key questions to guide your decision:

• Cost Considerations: Evaluate fees like transaction, setup, and monthly charges. Balance cost savings with the value of the services offered to find the best fit.
• Range of Services: Look for features beyond basic processing, such as fraud protection and multi-currency support. Choose services that align with your business needs.
• Industry Specialization: Some providers focus on specific industries. If you’re in e-commerce, consider providers that offer solutions tailored to online businesses.
• Scalability: Ensure the provider can grow with your business, offering advanced features as needed. Choose one that supports flexible and scalable payment options.
• Ease of Integration: Check if the provider integrates easily with your systems like accounting software or e-commerce platforms for smoother operations.
• Technology & Support: Consider whether you need advanced tools or simplicity. Also, check the level of customer support, especially if 24/7 assistance is essential.
• Contract Flexibility: Review contract terms and cancellation policies. Some providers offer month-to-month plans, while others may lock you into long-term agreements.
• Custom Features: Choose a provider that allows for customization, such as tailored fraud filters or unique reporting, to better suit your business needs.
• Reputation & Reliability: Research the provider’s reputation through reviews and testimonials. A reliable provider ensures smooth operations and minimal downtime.

Merchant Account Fees and Pricing Models

There are three main pricing models for merchant account fees –

• Flat-rate pricing: This model charges a fixed percentage for each transaction, regardless of card type or amount. It’s ideal for businesses with low to medium sales volume, particularly those processing many small transactions. 

• Interchange-plus pricing: This cost-effective model combines the interchange fee from the card issuer with a fixed markup from the payment processor. It offers the lowest rates since you only pay the card issuer’s fee plus a small margin.

• Tiered pricing: Common but less transparent, this model assigns different rates based on transaction categories. It’s suitable for businesses with varied transactions, allowing them to optimize rates for different customer types.

In addition to these pricing models, businesses may also encounter some common additional fees when using merchant accounts, such as:

• Monthly fees: These are fixed fees that you pay every month to maintain your merchant account, such as account maintenance fees, statement fees, reporting fees, etc.

• Gateway fees: These are fees that you pay to use a payment gateway service, which connects your website or app to your payment processor and facilitates secure online transactions.

• Monthly minimum fees: These are fees that you pay if your monthly transaction volume does not meet a certain threshold set by your payment processor.

• PCI compliance fees: These are fees that you pay to comply with the Payment Card Industry Data Security Standard (PCI DSS), which is a set of rules and regulations that ensure the security of cardholder data.

• PCI non-compliance fees: These are fees that you pay if you fail to comply with the PCI DSS requirements, which may result in fines or penalties from your payment processor or card networks.

• Batch fees: These are fees that you pay to settle your transactions at the end of each day or period. This involves transferring the funds from your payment processor to your bank account.

• Address Verification Service (AVS) fees: These are fees that you pay to use a service that verifies the billing address of your customers with their card issuers. This helps prevent fraud and chargebacks.

• Retrieval fees: These are fees that you pay when your customers request copies of the transaction receipts or statements from their card issuers, which may indicate a dispute or chargeback.

• Chargeback fees: These are fees that you pay when your customers initiate chargebacks (claims to reverse transactions) with their card issuers, which may result from fraud, dissatisfaction, error, or other reasons.

• Cross-border fees: These are fees that you pay when you accept payments from customers who use cards issued in different countries or regions than theirs.

Conclusion

A merchant account enables businesses to accept credit and debit card payments, crucial for online operations where cash isn’t an option. While the setup may take time due to approval from a merchant-acquiring bank, the advantages include streamlined operations, expanded payment options, and improved security over cash or checks.

Frequently Asked Questions (FAQs)

1. What are merchant acquiring bank services?

Merchant acquiring banks enable businesses to accept electronic payments. They provide merchant accounts essential for processing and settling payment transactions.

2. Can anyone get a merchant account?

Yes, anyone who operates a business or sells products or services online can apply for a merchant account. However, certain eligibility criteria need to be met, such as having a valid business license, a good credit history, and being in compliance with legal requirements.

3. What is a merchant transaction?

A merchant transaction refers to any payment made by a customer to a business or seller. It includes the transfer of funds from the customer’s bank or digital wallet to the merchant’s designated bank account.

4. What is the merchant limit for UPI?

The merchant limit for UPI (Unified Payments Interface) varies depending on different banks and payment service providers. It can range from ₹1 lakh to ₹10 lakhs per transaction, allowing you to accept large payments securely.

5. How are merchant fees calculated?

Merchant fees are typically calculated based on a percentage of the total transaction amount. The exact fee percentage may vary depending on factors like the type of business, volume of sales, and the chosen payment solution provider. Additionally, some providers may charge additional fees such as setup fees or monthly maintenance fees.

6. What documents are required for a merchant account?

To apply for a merchant account, you will typically need to provide documents such as proof of identity (Aadhaar or PAN card), proof of address (utility bills), bank statements, business registration documents (GST registration), and any other relevant legal certifications or licenses.