Basics of payment processing: what is a merchant account?

Are you a business that is ready to begin accepting credit card payments? Do you need a way for your business to offer more ways to pay online? Let’s start by talking about merchant accounts.?

A merchant account is a type of business bank account used for accepting and processing electronic payments including credit cards, debit cards, and ACH. For any business looking to accept electronic forms of payment, a merchant account is a necessity for your business.?

Merchant accounts contain a unique number, called a merchant identification number (“MID” for short), that is specific to each merchant. This would be similar to a checking account number.?

Unlike a bank account where funds are deposited and held, money flows directly through the merchant account into the business’s bank account of choice.?

Where do you get a merchant account?

There are two main ways for a business to obtain a merchant account. The first option is a merchant acquiring bank, also known as an acquirer. Some examples of well-known acquirers that you have probably heard of are Bank of America and Wells Fargo.?

However, there are many lesser-known acquirers that might better serve your business. These are often found through working with a registered payment processor, called Independent Sales Organizations (ISOs). ISOs focus primarily on payment processing, rather than other banking services.?

A quick note on PayFacs

There are newer types of merchant account providers called Payment Facilitators, or PayFacs, such as Stripe and Square. Although they issue merchant accounts just like acquirers and ISOs, their structure is different.?

Make sure to subscribe to my newsletter, as I have an upcoming article that will cover PayFacs in more detail.?

Is a merchant account the same thing as a payment gateway?

This question comes up often with newer eCommerce businesses, and the answer is no. A payment gateway is a software that securely transmits card payment data from a shopping cart or payment application to the merchant account and payment processor. For example, a popular and well-known gateway is Authorize.net.?

However, acquirers, ISOs, and PayFacs can be both payment processors and payment gateways. For example, Stripe is both the payment processor and gateway.?

Now that you know what a merchant account is and where to get one, the next step is getting approved in the underwriting process. I will discuss the underwriting process and how to increase your chances of approval in my next article. Stay tuned!