Merchant Accounts - The Real Story

Previously, we explained how a typical merchant account sets up different tiers of rates or interchange depending on how the merchant is primarily taking transactions (swiped, keyed, online, etc).   What we neglected to explain was the even more fundamental issue of what a merchant account actually is and the process behind getting set up with one, how payments are issued, etc.  After doing our own searches of recent blog posts, we have found a number of false or misleading information about merchant accounts that we will clear up here as well as discuss a number of other points that often get over looked.

So what is a merchant account?

A merchant account is a specialized account established between a merchant and a financial institution in order to process credit card purchases.   By establishing a merchant account, the financial institution agrees to pay the merchant for valid credit card purchases in exchange for the right to collect on the debt owed by the consumer.  These financial institutions can be any bank, large or small.  A checking or business account is needed by the merchant to receive these funds from the merchant account bank.  Some banks will set up their merchant accounts directly with merchants while others use a merchant account provider or ISO.

What is a merchant account provider or ISO?

A merchant account provider or ISO (independent sales organization) is a third party company providing merchant accounts to merchants.  The merchant account is still backed by the overseeing bank but the provider handles all sales and most of the risk assessment/underwriting for the account.   Since many banks don't have the ability to sell and maintain merchant accounts in house they use these providers to do it for them.  Usually the providers have either a processing system to process and validate transactions, or act as a reseller for third party processing systems (ISO).  An example of the former would be First Data who are both a processor and merchant account provider.  Examples of the latter are ISO's like Card Payment Solutions, United Bank Card, etc. who simply do the sales and underwriting of the accounts and use a separate processor to process the transactions.  ISO's are typically what most people see when searching for rates and fees online under 'merchant account'.

So what is the best way to get set up with a merchant account?

It really comes down to what your business is looking for in terms of product, customer service and cost.  Like any product in a particular market their are bargains that come with a less quality product and reliability as are there more expensive options that hold product and customer service at a premium.   Just like with buying a car or TV, it is always recommended to do your homework.  Reading this article shows you are on the right path.  Be as informed about the company, products they offer, cost and fees, customer support, etc before signing something solely because of rate.  As we have mentioned in previous blog posts, low quoted rates aren't always the end all be all for making your decision about who to process with.

Can anyone get set up with a merchant account and if so, what is the process?

Any business owner, whether they are a sole proprietor, LLC, incorporated or even a non profit can be potentially set up with a merchant account depending on a few requirements.  Since the merchant bank is taking the risk of collecting the debt from the card holder, their is a general underwriting process that the bank must go through.  Depending on how the merchants signs off (personal guarantee or as the company) the bank typically takes into consideration the signee's credit, business type and monthly/ticket volume.  If the bank feels that the risk is too great, they will decline the account.  Different banks have different underwriting policies and thus it is very possible to be declined by one bank and approved by another.  For example, some banks specialize in 'high risk' accounts who subsidize the increase in risk with higher rates.  This is another reason why it is important to pick a quality merchant account provider who is knowledgeable about the industry and who will do what it takes to get you the proper merchant account without wasting your time.

Why even bother with a merchant account when I can use someone like PayPal?

The benefit of  using a merchant account vs. getting set up with a 3rd party processor like a PayPal is that once the underwriting is approved, the merchant has far more security in regards to deposits, chargeback protection and dispute resolution.  After the initial underwriting, the bank will be familiar with what to expect from the merchant business and shouldn't hold up any funds unless there is some unusual activity like a major spike in processing or an exceptional amount of chargebacks.  However, unlike with PayPal a merchant with a merchant account has his own MID (merchant identification number) on the Visa/MC network which gives him more basic rights in regards to disputing chargebacks if they do arise (we will devote an entire post to this issue in the near future).  Also, merchant accounts are protected under FDIC.


Merchant accounts are the backbone of the processing industry.  They provide merchants with the ability to securely take credit cards without the personal risk of defaulting payments or fraudulent activity because the banks assume that risk.  No matter what type of business you run, there should be a merchant account out there for you and unlike PayPal they will be customized for your business's degree of risk.

When shopping around, we always recommend you ask these important 15 questions and research your answers:

  1. Who is the merchant/acquiring bank?
  2. Who is the processor?
  3. Are there any other companies involved?
  4. What is the swiped/keyed in rate?
  5. What is the rate for rewards cards?
  6. What is the rate for corp/foreign cards?
  7. What are the monthly fees?
  8. Is there a monthly minimum?
  9. What are all of the other fees? (batch, AVS, chargeback, etc)
  10. How long does it take to get funds after batch?
  11. Are fees taken out at batch or billed at the end of the month?
  12. Is there a contract and if so is there a termination fee?
  13. What is their customer/tech support?
  14. Is their support free?
  15. Can I have some references?

We hope this article was informative and helpful.  Please feel free to comment or contact us with any further questions about merchant accounts or the credit card processing industry in general.