What is a merchant account?

A merchant account is a special kind of bank account used to process a company’s credit and debit card payments. Merchant accounts are the way you, as a merchant, can use the funds from a credit or debit card sale almost immediately, rather than wait for your customers to pay off their credit card bills.

Here is how a merchant account works: When a credit or debit card sale is made, your payment processor digitally sends the details of the transaction to the merchant account, and then to the card issuer, which is a bank or other type of financial institution. When the card issuer validates the sale and makes sure sufficient funds are available to cover the cost, the sale is approved and the card issuer deposits the funds into your merchant account. These funds are then automatically transferred to your company’s bank account.

As already mentioned, the big advantage of a merchant account is that it gives your business access to the cash generated by a credit or debit card sale (minus the fees) usually within 24-48 hours, rather than having to wait up to 30 days (and possibly longer) for your customer to pay the bill. Thus a merchant account, from your point of view, makes a credit card sale almost as good as a cash sale — and in some ways better, since with cash you have security and transportation risks that are absent or minimized with digital transactions.

Because the card issuer fronts your business the money from a credit card sale, chargebacks are a big danger that can jeopardize your merchant account. A chargeback occurs when one of your customers disputes the transaction he or she made. When this happens, the bank is on the hook for the full amount of the sale unless your company covers it. Chargebacks eat into the card issuer’s profit. If your business incurs too many chargebacks, the card issuer may put restrictions on your merchant account or terminate it altogether. Once a company has been terminated, opening another merchant account becomes extremely difficult. The consequences of being terminated (put on the MATCH list) can be dire.

In addition to chargebacks, fraud is the other big problem area that creates difficulties for merchant accounts. Certain industries are deemed high risk by card issuers — that is, especially vulnerable to chargebacks and/or fraud — making merchant accounts hard to obtain even if your particular business has a spotless credit history. High risk industries tend to be highly regulated, do the majority or all of their business online, and/or are vulnerable to high numbers of cancellations or returns.

Performance Card Service (PCS) works with all types of businesses and specializes in helping high risk businesses apply for, secure, set up and maintain merchant accounts. Whether your business is in a high risk industry or has company-specific high risk factors, obtaining a merchant account is usually possible. High risk merchant accounts may carry higher than average fees and have certain restrictions such as requiring a cash reserve. Nevertheless, a high risk merchant account enables the merchant to accept credit and debit card payments, which is clearly important for maintaining and expanding sales.

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