Merchant account, as simple as this term seems to be, it is not at all that simple. If you own a business and want to accept online payments, this is one of the most important things you would need. Because if you don’t have a merchant account, you cannot accept online payments.
So whether you are an upcoming business owner or an already established one, you should know what are the basics of a merchant account and how it works.
To start from basics, a merchant account is an account dedicated to the merchant that accepts online payments. Simply put, when a customer pays for the services or goods via online method, be it by any means, credit card, debit card, internet banking, UPI, etc. the said amount gets deposited in the merchant account after the transaction gets processed.
Though the name contains ‘merchant’ in it, the merchant account is not directly accessible by the merchant. After the settlement process, the funds get transferred to the business account set up by the merchant.
So, needless to say, a merchant account leads to much more than it seems.
How does a merchant account work?
Now that you are clear on what a merchant account is let’s move to the next step. How a merchant account works.
When a customer initiates a payment by any digital means, let’s say via debit card. This is either done by the card reader or entering card information on the payment page. After this initiation, the customer’s card details are transferred over to the acquiring bank. This is where the merchant account is held. Acquiring bank forwards these details to the card network. And the card network sends them to the issuing bank. The issuing bank is the bank of the customer. Here the balance check takes place(i.e. the check to make sure that the customer has enough funds for making the payment). After the essential checks are done, issuing back responds to the transaction request and forwards the response to the card network to the acquiring bank. This information (whether the transaction is successful or failed) is then sent to the card reader or PSP.
So, While all the authentication and authorization are taking place, the merchant account holds the transaction amount for the merchant.
But even after the transaction is done successfully, the actual amount of money gets transferred to the business account from the merchant account after the ‘settlement period’. The settlement period typically takes a time of T+3* business days for domestic transactions, T being the date of capture of payment. The settlement cycle often varies depending on your bank approval, business vertical, risk factor, etc.
How to get a merchant account for your business?
Many payment solution providers mainly payment gateway service providers in India provide merchant accounts, though it is not the case for all of them. But to avoid technical difficulties and any further hassles, it is always recommended to go with a payment solution provider that offers a merchant account amongst other services.
Different types of merchant accounts-
Basically there are 2 types of merchant accounts, aggregate merchant account, and dedicated merchant account.
In the case of a direct merchant account, the merchant has a contract with the acquiring bank directly. Whereas, for an aggregated merchant account, the business has a contract with a payment facilitator who does the contract on behalf of the acquiring bank. In the case of an aggregator merchant account, the business gets added with a large number of other businesses in a single larger merchant account. Many of the small businesses prefer aggregated merchant account.
With these two main types, there is also a ‘high-risk merchant account’. There is a criterion for a business to pass to apply for a merchant account. Some businesses fail these criteria and hence end up being in the high-risk category. This criterion generally assesses risk checkpoints such as industry sector, the stability of business, etc.
How much does a merchant account costs?
The rates, fees, and charges are vary based on the payment service provider and volume of payments processed. These rates are categorized into two basic types, charges per month/annum and charges per transaction. Along with the card processing charges, many other charges like joining, monthly service, payment gateway, chargeback (https://www.lyra.com/in/base/chargeback-guide/), interchange, authorization, terminal charges are also included in the package.
What are the essential things you would need to apply for a merchant account?
To apply and successfully get a merchant account, you need to have,
a business account and a business license. If you want to open a merchant account you can either contact the bank or the payment facilitator.
A merchant account provider needs to know the following things,
- Industry your business belongs to
- What your business sells
- Average transaction amount
- Turnover of your business
After the information is given, the service provides presents to you with the quote that includes the services they are providing along with the rates and charges. After carefully comparing the quotes from different service providers and taking into consideration rates and addons they are providing a merchant can go ahead with a service provider and get a merchant account opened.