How it Works. When a merchant accepts a cardholder's payment information, it is transmitted to the merchant bank. The merchant bank then pays the merchant the transaction amount, minus the interchange fees and the processing costs, and submits a payment request to the bank that issued the card used to make the purchase. The issuing bank then pays the merchant bank the transaction amount, minus the interchange fees, and posts the transaction on the cardholder's monthly statement. The cardholder then pays the issuing bank to close the cycle.
Types of Merchant Accounts. There are a number of different merchant account types but the most widely used are:
- Card-Present Merchant Accounts. This type of merchant account service includes all payment processing solutions that use payment terminals to read the account information from the magnetic stripe of a card that is swiped through. Because the merchant is in actual possession of the card (hence, card-present) as the payment is being made, these merchant accounts are considered less likely to generate fraudulent transactions and enjoy lower processing rates.
- Card-not-Present Merchant Accounts. Included in this group are all card payment processing services where the card account information is manually entered into the merchant bank's system, using a web browser or a telephone keypad. The card itself is absent (hence, card-not-present). Because the merchant is never in possession of the card and the information is given to him or her, card-not-present transactions are considered more likely to generate fraudulent activity or processing errors and are processed at higher rates. There are two distinct sub-groups here:
- ECommerce Merchant Accounts. These merchant accounts are used by web-based merchants and enable consumers to enter their payment card information into a payment form on the merchant's website. Once submitted, the payment details are automatically transmitted, via a payment gateway, to the merchant bank.
- Mail Order and Telephone Order Merchant Accounts. Also known as MO/TO merchant accounts, these payment acceptance solutions enable merchants to enter the payment information, provided to them by their customers into a form on the merchant bank's payment system's website or, using a telephone keypad, to call it into the merchant bank's system.