If you want to accept credit and debit cards, you need some kind of arrangement with a bank that is allowed to accept card payments on your behalf. For many years that arrangement was always a merchant account. Today there are more options, including all-in-one payment apps that let you start taking cards within minutes. Understanding the difference helps you choose the right setup now and know when it might be time to change.

The short definition

A merchant account is an agreement between your business and an acquiring bank, usually arranged through a payment processor, that allows you to accept card payments. When a customer pays by card, the money moves through the card networks to the acquiring bank, and then, after fees, into your regular business checking account. Despite the name, a merchant account is not a bank account you write checks from. It is the relationship that makes card acceptance possible and determines how and when you get paid.

Who is involved in a card payment

It helps to know the parties behind a single tap or swipe:

  • The cardholder, your customer.
  • The issuing bank, which issued the customer's card and approves or declines the transaction.
  • The card networks, such as Visa, Mastercard, Discover and American Express, which set the rules and move transaction data between banks.
  • The acquiring bank, which sponsors your merchant account and receives funds on your behalf.
  • The processor, which handles the technical work of routing transactions and settling funds.
  • The gateway, which connects online stores, invoices and software to the processor.
  • The merchant services provider, such as BrightStar, which sets up your account, pricing, equipment and support.

How money moves from a sale to your bank

A card sale happens in two stages. First comes authorization: when the card is tapped, dipped or entered, the request travels through the processor and card network to the issuing bank, which checks the account and approves or declines it, usually in a few seconds. An approval is a promise to pay, not money in your account yet.

Second comes settlement. At the end of the day, your terminal or software closes the batch, sending all approved sales for payment. The acquiring bank collects the funds through the card networks and deposits them into your business bank account, typically within a few business days, depending on your provider and your account setup. Fees are either deducted from each deposit or billed once a month, which is why your deposits and your sales totals do not always match.

Dedicated merchant accounts vs aggregated accounts

Many popular payment apps use what is called a payment facilitator, or aggregator, model. Instead of each business getting its own merchant account, the provider holds one master account and adds businesses underneath it as sub-merchants. A dedicated merchant account, by contrast, is set up specifically for your business after an underwriting review.

Aggregated accounts are fast to open and simple to use. Because the provider is approving businesses with very little upfront review, it manages risk after the fact, which can mean funds are held or accounts are paused if activity looks unusual. Pricing is usually flat-rate and not negotiable.

A dedicated merchant account takes a little longer to open because the business is reviewed upfront. In return, you generally get pricing tailored to your volume and card mix, more predictable funding once approved, and a provider who knows your business.

What underwriting looks like

Opening a dedicated merchant account involves an application and review. The exact requirements vary by provider and acquiring bank, but expect to share:

  • Your business legal name, address, tax identification number and type of entity.
  • Information about the owners, which the bank uses to verify identity.
  • A description of what you sell and how you sell it: in person, online, by phone, by invoice or on a recurring basis.
  • Expected monthly card volume and average transaction size.
  • A voided check or bank letter for the account where deposits should go.
  • Recent processing statements, if you already accept cards.

Businesses with longer delivery times, prepaid services or higher dispute rates may see additional review or a reserve, where a portion of funds is held for a period as protection against chargebacks. A good provider will explain any such terms clearly before you sign.

Signs you may need a dedicated merchant account

  • Your monthly card volume has grown to the point where flat-rate pricing feels expensive.
  • You have had funds held or an account paused unexpectedly.
  • You sell to other businesses and want to pass Level 2 or Level 3 data on commercial cards.
  • You need specific hardware, software integrations or multiple locations on one relationship.
  • You want a named person to call when something goes wrong.

Questions to ask before you apply

  1. How long does approval usually take for a business like mine?
  2. When will deposits arrive after I close each day's batch?
  3. What pricing model will I be on, and is the rate guaranteed in writing?
  4. Is there a contract term, monthly minimum or early termination fee?
  5. Can I keep my current equipment and software?

Getting set up with BrightStar

BrightStar sets up dedicated merchant accounts for businesses of all sizes, with processing through our partner NetSimple and hardware from Clover, Square and Valor PayTech. We walk you through the application, explain every term, and match or beat your current rate in writing if you already accept cards. Every account can also be part of the BrightStar Impact Network, where a share of our profit on your account is donated every month to a nonprofit you designate, at no extra cost to you.

Published · BrightStar Merchant Services