Merchant Accounts Explained:

What is a Merchant Account? Put simply, a merchant account is a line of credit account that allows a business to accept card payments from its customers. Similar to how a checking account allows you to deposit another person’s check into your checking account, a merchant account allows you to accept a card payment from a customer. Unlike a checking account, a merchant account doesn’t hold money. Instead, a card payment passes through the merchant account and is deposited into a checking account after the funds have been cleared through the merchant account. From the time of the sale, a card transaction is deposited into a merchant’s checking account usually within 48 hours. Instead of getting several deposits for each transaction, all the card payments from a single business day are grouped together into one deposit called a “batch.”

An interesting fact about the credit card processing industry is that VISA, MasterCard and Discover 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 accounts. American Express is different from the other three because it provides its own merchant accounts directly and does not use any third-party sales organizations. If you wish to accept American Express Cards, you must set up a separate American Express merchant account. Discover Card acceptance can be set up with a VISA and MasterCard provider. Despite all this, the different card types can be transacted through the same payment equipment and payment gateways.

In order for a third-party sales organization to legally supply VISA and 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), or be a sub-ISO of a registered ISO. The same holds true with MasterCard except the certification is called a “MasterCard Service Provider” (MSP). American Express does not use third party resellers, so it has no such certification.

Banks consider merchant accounts to be lines of credit account because the business gets paid before any actual money is collected from the customer. This means that you may be required to undergo a personal credit check, sign a personal guaranty, and supply financial data to get approved with some providers. If you have a well-established business, you can often bypass the personal credit check and guaranty by supplying additional documentation about the business. Most 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 for a single day. However, business owners can request increases to their transaction limits on a case-by-case basis, and permanently once a history has been established.

Merchant Account Video Explanation

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