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What is a Merchant Account and do I need one?

Merchant Accounts are a form of bank account that is set up specifically to collect debit/credit card payments through your business. Usually the money will be held in the Merchant Account for a certain period of time before being transferred into another account of your choosing. There can be a small fee for using services such as these, but the provider you choose should specify these upon opening the account. Usually it's a certain percentage of the transaction amount.

How do I set one up?

Merchant Accounts are usually provided by banks, you will have to specifically apply for one. The banks that provide services such as these are often referred to as acquiring banks.

The merchant service provider will require a range of information to enable them to make a decision as to whether they can provide you with a merchant account, and the terms under which this account will be operated. You may be asked to provide any of the following information when completing your application:

  • Your current or projected turnover.
  • Business accounts.
  • Average transaction value.
  • Frequency of transactions.
  • The type of product or service you are selling.
  • The time taken between the point at which the payment is taken and the point when you complete the order or service.
  • The percentage of transactions taken by card.
  • How your product or service is delivered to the customer.
  • A reference from a current supplier.

It takes around one to four weeks to open a merchant account. Each business will be considered on a risk basis, The terms that are offered will reflect the risk involved in supplying your business with a merchant account.

Are there any alternatives?

There are alternatives being used. Such as GoCardless who provides a solution that allows a payment to be made directly through the banking system. They also offer two different pricing strategies, more information on these here. Their prices are very reasonable so it's well worth checking them out. GoCardless also allows full integration into other systems too, including our sister company Quick File which allows you to raise one-off payments and Direct Debits with ease.

You may also consider using a service like PayPal or Stripe. Both PayPal and Stripe are ideal for occasional use. They're quick and easy to setup but the rates may not always be favourable for higher volume transactions.

What terms can you expect when opening a new account?

Remember: every business is considered on its individual circumstances. Many new companies looking to acquire merchant services do not have any trading history so these are deemed as a higher risk to those that have been trading for some time. Below are a number of factors that may result in less favourable terms:

  • Online payments. Payments made online may be subject to a higher risk of fraud as they are more anonymous than a card payment made over the phone or in a shop.
  • Turnover. The higher your current or estimated turnover the higher the risk involved in supplying merchant services. Unfortunately it has been known for individuals to collect payments through a business and disappear without fulfilling any orders.
  • Time to completion. Companies that have an above average amount of time from when they take the payment to when the order is fulfilled are deemed as higher risk.

Once you have been risk assessed by the provider they will issue you with a set of terms. For many new companies this means having an extended deferred settlement period, most established companies receive funds from their merchant account within 3 days from when the card payments were processed; for new companies that are deemed a high risk this may be extended to 30 days. Also the individual transaction costs may be higher for new companies.

Your terms are not set in stone. So If you think you'll fall into a high risk category then don't worry. Nearly every business looking to set-up a Merchant Account will be deemed as high risk. Your provider should allow you to re-negotiate the terms once you have acquired a trading history. Also many merchant service providers allow you to deposit a security amount that they retain for a certain period of time to enable them to provide more favourable terms. You can even earn interest on this amount while it is in their possession.

What are Chargebacks?

Chargebacks come about when an individual has purchased a product or service from your business and later raises a dispute with their bank relating to the fulfilment of the order. This can be because the customer has not received what they have paid for or what they have received does not match the description that was available at the point of sale. Chargebacks can also occur when your business has been used to fraudulently purchase goods with a stolen credit card.

How are Chargebacks processed?

The following steps will happen before a chargeback is processed in the event of a customer grievance:

  1. The customer takes up the dispute with the business that they made the original purchase with, in order to recover part or all of a funds they have paid to the company.
  2. If the company fail to satisfy the customer's request, then the customer may then take up the dispute with their card issuing bank. At this point the bank will not take the dispute further unless the customer has tried to resolve the situation amicably with the company, such as completing step 1.
  3. If the issuing bank is satisfied that the customer has carried out all reasonable steps to attempt to recover the funds amicably then they may raise a request for further information (RFI) with the company's acquiring bank.
  4. The acquiring bank then advises the company that they have received an RFI giving details of the transaction and the nature of the claim being made.
  5. The company must defend its case by providing supporting documentation in defence of the company's actions.
  6. Ultimately the banks will make a decision based on the information provided from both sides and either initiate or cancel the chargeback.
  7. If the chargeback is initiated the company's acquiring bank will take the money from the company's merchant account reserves and send it back to the card issuer who will in turn credit the customer's card.

The process would be similar in the event that the dispute relates to a fraudulent transaction, the difference being that it is usually a more definitive case and the company will not be in a position to defend the claim.

Useful links

You may find the following links useful in answering any further questions you may have about opening a merchant account.

Financial Fraud Action UK - the UK banking industry's body that works with police, retailers and organisations including Crimestoppers to fight plastic card fraud.
Expert Merchant Accounts - A guide to taking card payments through your business from Expert Market
Barclaycard Merchant Services - Barclays merchant services division
The Company Wizard Support Article - Support Article detailing what Merchant Accounts are as well as how to protect your business from Credit Card Fraud
Streamline - Popular Merchant Service provider part of the Worldpay group of companies.

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