Primer on Merchant Accounts, Part 1: Functions and Functions

The payments industry isn’t easy to comprehend, even for professionals. My 3-part show on credit card processing demystified the jargon, pricing models, and fees.

This post will clarify merchant accounts.

It is normal to be confused about payment processing, gateways, and merchant acquiring. The industry possibly relies on confusion to levy charges that may otherwise be contested.

Much like card processing, knowing how merchant account fees are made and charged can help you pick the best merchant account provider for your company.

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Merchant Acquiring

“Acquirer,””merchant acquirer,” and”acquiring bank” refer to the exact same thing: a bank which has been registered and approved by at least one of the card brands (Visa, Mastercard, Discover, American Express) to accept card payments on behalf of a merchant.

Many acquirers are banks, but not necessarily. Some non-banking financial institutions have become acquirers, and a few independent organizations that work on behalf of acquirers call themselves acquirers.

Many acquirers are banks, but not necessarily.

An acquirer can perform numerous functions. Some perform all the following; others just a few.

  • Marketing and sales. Acquirers are companies with clients — merchants, in this situation. Acquirers promote their services and participate in sales activities to sign up merchants.
  • Underwriting. Obtaining banks basically provide loans to their merchant customers. The banks must assess the borrower and execute risk-mitigation strategies, as with any loan.
  • Create and handle merchant accounts. A merchant account isn’t a checking or savings account. Rather, it is a special kind of bank account that temporarily holds the proceeds of credit card and debit card payments.
  • Interact with payment processors. This function generates much confusion. An acquirer isn’t necessarily a payment processor. However, acquirers can provide many services, such as payment processing. By way of instance, Bank of America Merchant Services offers both merchant accounts (acquiring) and payment processing. Some acquirers have partnered with numerous suppliers (e.g., processors, payment gateways, point-of-sale equipment) to provide one solution for merchants.
  • Authorize transactions. Merchant acquirers also take part in authorizing (approving and declining) payment transactions. Though other organizations also approve transactions (chips, card brands, and issuing banks), the acquirer has the last approval. Here is how it works.

When a customer purchases using a credit card, the payment gateway (supplied from the payment processor) sends the transaction to the card manufacturer (e.g., Visa). Before that, however, the processor typically checks for fraud and offers initial approval. The card manufacturer verifies the transaction (again, typically a fraud check) and, if approved, passes to the issuing bank (provided the charge card into the paying client ), which verifies the cardholder’s account has sufficient funds. If so, the issuer approves then informs the merchant acquirer. The acquirer, again, has the last say: deposit funds into the merchant’s account or decrease the transaction.

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The acquirer carries the financial risk. If it approves a transaction that turns out to be invalid (usually, a chargeback), the acquirer must refund the issuing bank, which will then reimburse the cardholder. Deposits to merchant accounts come from the acquirer, not in the issuing bank. Thus deposits to merchant accounts are like short-term loans from the acquirer to the lender.

  • Arbitrate disputes. When a merchant fails to supply the customer with the goods or services as promised, it is the acquirer who’s financially responsible. This is true for chargebacks and for merchants that go out of business (or disappear) without fulfilling orders. For chargebacks, the acquirer will draw money from the merchant’s merchant account, when the merchant hasn’t vanished. But occasionally chargebacks are enforced incorrectly. Clients can be erroneous or fraudulent. Accordingly, acquirers provide dispute management, mediation, and resolution services.

Merchant Accounts

Card brands won’t permit anybody to accept credit card payments without a merchant account.

A merchant account temporarily retains the proceeds of debit and credit card transactions. It’s, again, a form of bank account, but it is not a savings, checking account, or money-market account. A merchant account can’t be used to cover expenses, fund citizenship, etc.

When it approves a credit or debit card payment, the acquirer will deposit the proceeds, minus the processing fees (interchange, evaluations, and markup) to the merchant account. Each obtaining bank has its own deposit program. Some acquirers make deposits in close real-time. Others take up to three days or more.

Merchants can usually assess their accounts within a day of a sale and affirm they are scheduled to get the profits and transfer them in a different business account.

Where do acquirers get the money to make deposits into merchant accounts? It is via a process referred to as”settlement and clearing” — a nightly reconciliation among acquiring and issuing banks which owe each other money. Acquirers owe issuers for chargebacks; issuers owe acquirers that the profits of the day’s sales.

Why can not business owners deposit debit and credit card profits directly to their checking accounts? Without different merchant accounts, it would be hard (and a legal nightmare) for the issuing banks and card brands to draw funds and penalties from a standard bank account in the event of chargebacks or inadequate merchant behavior.

Therefore merchant accounts mainly benefit the acquiring and issuing banks, who will hold a merchant’s money to protect against chargebacks and other dangers.

Kinds of Merchant Accounts

Stripe is a good example of a payment facilitator, which generates one master merchant account and then assigns individual companies to sub-accounts.

While acquirers offer various kinds of merchant accounts based on risk, transaction volume, access to capital, and pricing, there are two key categories: committed and aggregated (shared).

Dedicated merchant accounts serve just 1 company with one account number. Leading suppliers of committed merchant accounts in the U.S. comprise FIS (such as Worldpay, a recent acquisition), Chase Merchant Services, Fiserv (previously First Data), Bank of America Merchant Services, and International Payments (like TSYS, an acquisition).

Aggregated merchant account providers are payment facilitators. Examples include PayPal, Square, and Stripe. Payment facilitators create one master merchant account with an acquirer and assign merchants to sub-accounts. Just like committed merchant accounts, the rules for payment facilitators are made, maintained, and enforced with the card brands.

Payment facilitators have become popular for a couple reasons.

  • Cost savings. Payment facilitators setup and maintain only one merchant account. The proceeds of each merchant’s transactions are deposited into this account. Payment facilitators can pass those savings to their merchant customers.
  • Quicker approval. Clients of payment facilitators experience less scrutiny and underwriting compared to dedicated accounts. Participating merchants get up and running fast with fewer obstacles, less paperwork, and easier contracts.
  • Simple fees. Merchants of payment facilitators are always billed flat-rate transaction fees, which are simple to comprehend and predict. The downside is that flat-rate prices could be more expensive overall. (I addressed processing charges at”Part 2” of my previous series.)
  • Fewer restrictions. Clients of payment facilitators generally avoid long-term contracts and excess early-termination fees. Merchants can take their payment-acceptance business elsewhere (and quickly), if needed.

Given the benefits of payment facilitators, why would any merchant need a dedicated merchant account? The answer has to do with services and fees. Payment facilitators offer merchants an easy, cost-effective way to begin. But for merchants with higher transaction volumes (greater than $4,000 a month, approximately), flat-rate pricing will probably be more costly than other pricing models, for example interchange-plus.

Here are some Benefits of committed merchant accounts:

  • Pricing. Many dedicated merchant account providers encourage the interchange-plus pricing model, which generally gives the very best and most transparent pricing for payment processing.
  • Quicker withdraws. The underwriting and risk-mitigation policies are much stricter for devoted merchant accounts. Thus acquirers usually allow merchants to draw money from committed merchant accounts much earlier than payment facilitators — normally two days for dedicated accounts versus four to seven days (usually) for payment facilitators.
  • Better support and service, possibly. One would anticipate that dedicated merchant accounts get a higher level of support from the acquiring banks. However, I have seen outstanding service from payment facilitators and horrific support from acquirers that offer dedicated accounts.

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