What is a merchant account, and why does my business need one?

December 17, 2020

As a successful business owner that accepts credit and debit cards, you probably have a general understanding of how payment processing works and some of the actors involved in the "performance," if you will. It all starts at the point of sale with the customer and culminates with the funds going into the merchant's bank account, hopefully happily ever after. But in between is where all the payment processing action happens, with the card issuer, payment gateway, payment processor and acquiring bank all playing supporting roles.

But there is one somewhat lesser-known character that is pivotal to the plot: the merchant account. What is a merchant account, you ask? In some ways, it's central to the payment processing story. Later, we'll explain how T1 Payments fills this merchant account role and many more.

"Merchant account serves as a temporary landing spot for when a customer makes a payment electronically."

What is a merchant account?
A merchant account serves as a temporary landing spot for when a customer makes a payment by electronic means. Similar to a traditional bank account, a merchant account can be considered a resting place that facilitates credit card transactions by allowing for the transferral of funds so the settlement process can be completed and protected. Once everything checks out, the money moves from the merchant account to the business owner's actual bank account. Even though you're the merchant, a merchant account is owned by another party, which usually carries a monthly fee. How long the money stays in the merchant account tends to vary, but it typically takes between three and five business days. Sometimes it can be shorter, other times slightly longer.

Do you need a merchant account?
To run a business and accept cash only, then the answer is no. But if your aim is to give customers more payment options, the answer is an unequivocal yes. For businesses to accept credit cards, debit cards, online payments and those done by mobile device, a merchant account is required so the appropriate vetting and verification can take place.

How does a merchant account work?
Perhaps the best way to illustrate how one works is to take you through the payment lifecycle of credit and debit cards. It can be summed up in about six steps:

1. Customer provides their payment information, whether online or in a card reader.
2. Payment gateway routes these details to the payment processor, meaning the credit card issuer.
3. Issuer transmits the request to the payment card network.
4. The network acknowledges and identifies the issuing bank, then routes the transaction for verification and approval.
5. Decision on approval gets routed to the payment processor through the payment gateway.
6. Sale is completed.

All of this happens in mere seconds, which is pretty amazing to think about. Where the merchant account falls in this cycle is near to the end. Once a sale is processed — again, presuming approval — the funds go there for settlement and then finally to the primary bank account.

How do you go about getting one?
Now that you know exactly what a merchant account is and how they work, you may be wondering how you obtain one. As with any other service that involves buying, you have to submit an application to a merchant services provider. Each merchant services provider has its own rules as to what you need to provide proof of for eligibility, but here are a few of the general requirements:

  • Completed application
  • Your business license
  • Employer identification number (EIN)
  • Physical address
  • Other supporting documents

Those other supporting documents may include details on your monthly processing volume, inventory reports or forecasts on your sales expectations. Your merchant services provider will be able to let you know the materials you need to apply for one. This may include information that corroborates you abide by security protocols established by the Payment Card Industry. In other words, you may need to establish PCI compliance.

"T1 Payments own the majority of the payment cycle."

Why you should choose T1 Payments
As you can see, there are many roles and responsibilities when it comes to credit card processing. Frequently, it involves third-parties that may only do one or two merchant services. That's what makes T1 Payments special. Aside from the fact that we serve high-risk businesses in high-risk industries, we own the majority of the payment cycle. So in addition to serving as a gateway and payment processor, we also provide you with a merchant account for a simple, flat monthly fee. Our transaction fee for credit card processing is also flat.

With real-time online reporting, active account monitoring, complete payment card industry compliance and state-of-the-art e-commerce shopping cart solutions, T1 Payments is your end-to-end solution for merchant services done right and done fast. Contact us or apply today and see why T1 Payments has more to offer than you realize, including chargeback prevention, hassle-free integrations, fraud scrubbing and dedicated customer support you can turn to whenever you need to.