Merchant Account Basic Facts

What Is a Merchant Account?

Merchant account is a type of financial service that a processing bank provides to an organization that needs to accept credit cards for payments. It represents a form of line of credit that the bank extends to the card acceptor enabling the latter to accept the card brands that are specified in the processing agreement.

Typically, merchants are enabled to accept Visa, MasterCard, Discover, American Express credit and debit cards and at least the major European and Japanese card brands.

How Merchant Accounts Work

When a merchant accepts a card for payment, either through a point-of-sale (POS) terminal or on an e-commerce website, it is transmitted to the processing bank. The bank then pays the merchant the transaction amount, minus the interchange fees and the processing costs, and submits a payment request to the card issuer. The issuer then pays the processing 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 transaction 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 credit card processing service includes all payment acceptance solutions that use POS terminals to read the account information from the magnetic stripe of a card. 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 processing 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:
  
• E-Commerce Merchant Accounts. These credit card processing services are used by web-based merchants and enable cardholders 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 processing 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 processing bank's system.

Your business may of course need a combination of the above types, which your processor should be able to accommodate.