Businesses must be able to accept credit card payments to attract customers, as it is the most commonly used payment method in the U.S. However, organizations should understand the differences in collecting the customer's funds with or without a merchant account.
A credit card transaction is fulfilled through in-person or online payment processing that handles several verification steps in a matter of seconds. Once the customer's information is authenticated, the funds are transferred from their bank to the business's account. However, this process may look slightly different depending on whether the company uses a merchant service or other payment solutions.
A business must determine whether it should utilize a merchant account or payment service provider to collect the revenue based on their needs and budget.
What are Merchant Accounts?
A merchant account is a specific type of business bank account linked with the merchant service that accepts payments from a credit or debit card.
A credit card transaction using a merchant service and account follows the same necessary steps of payment service providers, except for the money transferal.
Businesses that use this service are usually set up with a corresponding account by the same provider. Therefore, when a customer makes a payment, the funds are securely placed into the merchant account and later transferred into the business's bank account. However, this transfer can take up to 14 days until the capital is available to the company.
Besides the long wait time, merchant accounts can be confusing and costly. For a business to open an account, they need to provide several documents, including-
- Certificate of incorporation
- Certificate of incumbency
- Jurisdiction documents that clearly state company ownership
- Documents that verify the company - utility bills, bank statements, rental contract
- Identification for company owners
Once the business is approved, they should understand the provider's pricing method before implementing the payment system. Merchant services range from hundreds to thousands of dollars, including the set-up, monthly, money conversion, and transaction fees. While many institutions also charge an application fee, some waive this expense if the business is approved.
Transaction fees are charged per purchase and can cost up to 5% of an order's total. On the other hand, monthly fees tend to vary according to contract length and terms. Therefore, business owners should outline a rubric to help determine what provider offers a payment plan that meets their needs and remains within their budget.
Organizations should weigh the pros and cons of using a merchant account service provider before going through the trouble of the application process.
The advantages of using a merchant account provider include-
- PCI compliance
- Great customer support
- Recurring payments
- Extensive application process
- Long wait time to receive funds
What are Payment Service Providers?
A payment service provider is a third-party transaction facilitator that processes credit card payments without the need for an individual merchant account. These providers have a built-in merchant service that combines and transfers all funds to their client's business bank account.
The transaction fulfillment procedure remains relatively the same except for the payment collection process. Payment service providers aggregate payments from all purchases fulfilled by them into one open merchant account. This eliminates the need to dedicate personal accounts to each client and all risks associated with using a merchant service. Once the sale is finalized, the provider transfers the capital to their client's bank, which usually requires one to two days to process.
While merchant services require complex contracts, third-party payment systems reduce the paperwork and resources needed to implement payment processing. As payment services only use their merchant account, the client qualification process is simplified and expedited. Once the facilitator is set-up, businesses are able to accept card payments almost immediately.
Third-party facilitators allow businesses to accept card payments online and in-store depending on their needs. The providers often include software and hardware to streamline check-out and monitor transactions. Companies can even integrate these processes with their established point-of-sale (POS) systems to consolidate sales data.
Different providers offer advanced features and therefore, can vary in cost and pricing strategies. While some services charge a flat-rate fee per transaction, others have additional fees for functions outside of the payment processing. Although, compared to merchant services, payment processors offer transparency and comprehensive pricing. Typically, the services do not charge businesses for early contract termination, set-up, or PCI compliance fees.
By using payment service providers, businesses can accept credit card payments with relatively low costs and risks. However, companies should also research merchant accounts to determine which service better meets their requirements.
Payment Service Providers vs. Merchant Accounts
From a small business to a large enterprise, credit card processing is essential for efficient transaction fulfillment. However, depending on the industry and size, some companies may benefit from processing payments without a merchant account, while others may need their service.
Merchant accounts can handle high levels of transactions with their extensive customer support team and robust payment processors. These characteristics make the service an excellent option for businesses that receive high traffic and sales and offer a variety of goods.
On the other hand, small businesses may find a payment service provider is best for them because they do not wish to go through the lengthy merchant service application process. Instead, they can quickly begin fulfilling card transactions and focus on expanding their business.