The term “Merchant” means the company or any individual who is involved in the activity of trading or selling of the goods. Merchant Account is basically a type of business bank account which accepts the credit and debit card transaction from the customers. It is an agreement between the merchant and the acquiring bank to allow this transaction to happen with various cards such as Visa, MasterCard, etc. Today most of the customers are using this card for a cashless transaction that’s why it is important for any individual to open a merchant account to increase the sales.
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How does Merchant Account works?
The working of Merchant account can be easily understood with the help of an example
- First of all, say the customer has to purchase something from the shop and he/she is using a card to make their transaction.
- So in this case now when the customer swipes their card i.e. Visa, MasterCard or etc, the detail of a particular customer will be sent to the acquiring bank of the merchant account and will request payment authorization.
- Now once the information has been collected by the merchant bank the processor will forward the information to the issuing bank i.e. of the customer to see that particular customer is having enough money for payment or not.
- Once the issuing bank confirms there is enough money to complete the transaction, the detail will be sent to the acquiring bank of the merchant and the transaction will be successfully completed.
- And finally, the transfer of the money will be done from the issuing bank to the acquiring bank of the merchant.
The process for applying for opening the merchant account
- Decide the payment method
First, the merchant has to decide the payment method that he wants to accept in his business. Like to accept the card transaction through the website or over the phone or email or by swiping the card. And to decide with which card brand he wants to work like Visa or MasterCard whose payment he wants to accept.
- Search for the bank to open a merchant account
The best way is to first ask in your current bank in which we are working and also to find various other banks that provide this facility to compare the fees and charges for the opening a merchant account. There are various agents and firm in the market which provides us full detail information in opening the merchant account. And another important thing is to check that is your bank provides you the payment gateway or not.
- Collect all your documents.
You need to submit the document related to your sales, purchase, tax returns, payment procedure, credit, and cash transaction for at least 6 months and the list of this document varies from bank to bank.
- Submit the application
The next step is to submit the application to the bank. This application contains business and personal information to be filled like the name of the company, name of individual, annual turnover, annual sales, etc. The information in the application also differs from bank to bank.
After going through this entire step the bank will scrutinize your personal and your business profile and then you have to install the software for the working of online card transactions in your business.
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Fees and Charges
Basically, there are two pricing in merchant account:
- Flat Pricing: In this, you have to pay a flat price on every transaction which is mainly between 1.75% to 3% per transaction
- Interchanging Pricing: As the name says in this pricing form the fees depending on the card and manner in which it was run, so in interchange, pricing fees are just charged on the basis of the card type.
The following fees and charges are including in both of the pricing methods:
- Authorization Fees: When a transaction takes place the issuing bank gives authorization to the acquiring bank to accept the payment. Thus, the fees charged for the process is called authorization fees.
- Transaction Fees: These fees are charged to process each individual transaction to know that transaction is approved or declined. On the basis of which the transaction takes place the fees are determined on the same.
- Assessment Fees: This fee is associated which various frauds that happen in the transaction. This rate differs from card to card for example for Visa card its rate is 0.13% for MasterCard its rate is 0.12%.
- Monthly Minimum Fees: Every month you have generated a decided amount for the transaction and if that falls below the minimum amount decided them you have to pay these monthly minimum fees.
- Processing Commitment Fees: If in the contract you have decided a certain amount of transaction to take place in the month and it doesn’t happen you have to pay these charges.
- Statement Fees: If any merchant is using the printing or mailing process then fees are charged to him. To avoid these fees you may use the online statement method.
- Payment Gateway Fees: Some service providers have their own payment gateway so they charge these fees. At the time of searching for the bank in which to open the account, such fees should be analyses to be cost-efficient.
- PIN Debit Transaction Fees: These fees are basically charged when you accept the transaction which needs PIN verification.
- Retrieval Request Fees: This fee is charged when the customer doesn’t find the entry of the transaction in their bank book and so the issuing bank has to collect the receipt for that transaction because these changes occur.
- Daily Batch Fees: These fees are charged when you have to settle the credit transaction in a day. If you don’t have any credit transactions these fees will not be charged to you.
- Discount Rate: The discount rate is the percentage charged on every transaction you process. It differs depending on the type of credit card and the type of transaction.
- Cancellation or Termination Fee: These fees are charged when to cancel our merchant account before the date mentioned in your merchant account agreement. This fee is normally fixed as mentioned in the agreement.
- Voice Authorization Fee: This fee is charged whenever you use telephone services to authorize the transaction. This fee is charged on the number of calls you make for the same.
- Application Fee: This fee is charged for only one time when to setup or a merchant account with the respective bank.
- Surcharge Fee: This fee is related to an additional discount fee that applies to certain types of credit cards.
- Reprogramming Fee: This fee is charged for reprogramming your software and covers the time and effort involved on the part of your processor and software vendors.
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Importance of Merchant Account:
- The most important benefit to keep a merchant account is that it helps in increasing the sales of the firm.
- Because of the merchant account, the merchant can have more options to offer its customer for the payment process.
- Fast and easy way to accept the cash and complete the transaction.
- Card transaction is done with the help of a bank thus it is more secure than the traditional method.
- To accept the credit card in the firm this is the finest way for receiving credit cards.
Limitation of Merchant Account:
- The biggest limitation of maintaining a merchant account is the various fees that the bank for the various transactions and various payment methods.
- As the transaction takes place online the risk involved is high.
- If the monthly or annual credit card transaction rate is low then it becomes much costlier for the merchant to make it profitable.
Thus, we can conclude that in today’s economy credit card transaction has become common means to transfer the fund and to make a purchase of any goods. If the merchant sees that various customers are coming to his place to make card transaction then he should open a merchant account to increase his sales but if few customers are only coming to make card transaction them he must not open the particular account because it also involves high charges of fees with it.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently pursuing an MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.