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What is a Merchant Account?
Simply put, a merchant account is a type of bank account that allows a business to accept card payments from its customers. Similar to how a checking account allows one person to deposit another person’s check into his or her checking account, a merchant account allows a business to deposit a card payment from a person’s credit or debit card. However, a merchant account doesn’t hold money like a checking account. Instead, the credit card payments pass through the merchant account and then are deposited into a checking account after the funds have been cleared through the merchant account. From the time of the sale, credit card transactions usually take 48 hours to clear a merchant account and deposit into a checking account. Instead of getting several deposits for each transaction, all the card payments from a single day are grouped together into one deposit called a “batch.”
An interesting fact about the credit card processing industry is that VISA and MasterCard do not directly provide merchant accounts to businesses. Instead, they rely on banks, Independent Sales Organizations (ISOs), financial service providers and independent agents to supply the merchant accounts. American Express is different from VISA and MasterCard because it provides its own merchant accounts directly to merchants and does not use any 3rd party sales organizations. If a business owner wishes to accept American Express Cards, s/he must set up a separate American Express merchant account. Discover Card acceptance can be set up with a VISA and MasterCard reseller. Despite all this, the different card types can be transacted through the same payment equipment and payment gateways.
In order for a 3rd party sales organization to legally supply VISA and/or Discover credit card processing services to businesses, it must be registered as an “Independent Sales Organization” (ISO) and backed by an FDIC insured bank (AKA: Acquiring Bank). The same holds true with MasterCard except the certification is called a “MasterCard Service Provider” (MSP). Since American Express does not use 3rd party resellers, it has no such certification.
Banks consider merchant accounts as a line of credit because the business gets paid before any actual money is collected from the customer. This means that a business owner who wishes to open a merchant account must undergo a personal credit check and may need to supply financial data to get approved. Many providers also require a copy of the business license, incorporation papers, and/or other financial documents during the underwriting process. Once approved, a business will have restrictions on the maximum dollar amount allowed in a single transaction and in total card sales for a single day. However, business owners can request increases to their transaction limits once a transaction history has been established with the merchant account provider.