How to Setup a Merchant Account

Posted: August 6, 2018 | Updated: August 6, 2018

A merchant account is essentially a special bank account that allows you to accept credit and debit card payments. This account will hold funds from these transactions before they are transferred to your bank account. Setting up a merchant account isn’t as complicated as it may seem and it’s the first step toward credit card processing and growth for your business.

Choose a Merchant Services Provider
To set up your merchant account, you will need to choose a payment processing provider who will handle transactions for you. The processor communicates with the issuing bank and relays information from the customer’s credit card to the customer’s bank and your bank. The processor allows you to receive credit and debit card payments by ensuring transactions are valid, using anti-fraud measures, and communicating all of this information in a matter of seconds.

When choosing a processor, it can be easy to get overwhelmed by the fees, confusing pricing models, and terms. As a general rule, you should avoid merchant account providers who want to lock you into a term commitment. Month-to-month services are best to avoid high early termination fees that can be hundreds. You should also watch out for hidden fees such as:

  • Termination lease fees for POS equipment
  • Monthly minimum processing fees. This fee is the difference between your monthly minimum and how much you paid in credit card processing fees.
  • IRS fees.
  • Batch fees.
  • PCI compliance fees.
  • Statement fees.
  • Monthly or annual fees to keep your merchant account open.
  • Application fees.
  • Set-up fees.

Finally, don’t be fooled by processors that advertise a low rate but have a confusing pricing model. Fixed rate processing may seem like a good deal and it’s offered by companies like Paypal. The problem is the fee is usually much higher than you would pay with a different pricing model. That 2.75% rate may sound great but most of your transactions could qualify for 0.50%! Tiered pricing is also common. The rate for the lowest tier will be advertised but most of your transactions fall into much higher tiers. We recommend Interchange Plus pricing because it’s transparent, easy to understand, and you will always know what you are going to pay for every transaction.

Applying for a Merchant Account
Once you choose the right merchant services, it’s time to apply. This process is a lot like applying for a loan because you will need to provide a cover letter, financial statements, and processing history for your business. The more history you have, the greater your chances of being approved. The payment processing company will want to know about the volume and number of your transactions, refunds, and chargebacks each month as well as your average transactions and total annual sales.

There are also some factors that can make your business “high risk” such as your type of business, a high chargeback rate, bad personal credit, and high average ticket sales. This can affect your chances of being approved. Every processor has their own standards for what they consider high risk. Don’t lose hope if your business falls into the high-risk category; it just means you should choose a merchant services provider that specializes in high-risk merchants, understands your business, and can provide the best rates.

The Final Steps
Once you’re approved for a merchant account, you can integrate it with your online shopping cart through a payment gateway if you accept e-commerce payments. For a brick-and-mortar store, you can set up your credit card terminal to get started.

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