Understanding the Merchant Account for Business: Payment Processing 101

In order for your business to process credit cards (THE web currency), either you or your third party service must have two things:

• a merchant account for business
  
• access to a payment gateway

Let's take a closer look at each.

Part 1:
THE MERCHANT ACCOUNT

Any merchant that wants to take credit card orders must have access to a merchant account for business, which is a special account established with a payment processor for the settlement of credit card transactions.

The good news is, you don't need a new bank account to go along with a merchant account.

All of the funds you collect from credit card transactions are deposited directly into the bank account of your choice. You can even have the funds deposited directly into your personal checking account if you wish.

 
At the barest minimum, your merchant account for business must accept payments from Visa and Mastercard.

It is almost unheard of for a merchant account not to, so this should be no big deal (emphasis on should).

If they can also accept American Express, Discover, and other, smaller card services, (and, again, they should) so much the better.

There are several places to go for a merchant account. I believe the three most important providers of merchant accounts are:

• Banks.
  I almost always suggest starting with your local bank if you are looking into a merchant account for your business.
• Independent sales organizations.
  This is the best bet if the local bank rejects you or is simply asking too much in fees.
• Third-party processors. (online only)
  If you are just starting out or just testing the waters, using a third-party processor can be a good way to access a merchant account without the crushing fees.

Figuring out which of these three options is best for your business is the first step to getting an inexpensive merchant account.

Regardless of where your merchant account comes from, there is a dizzying array of fees associated with payment processing and any internet merchant account.


With your merchant account in place, you are almost ready to begin accepting credit cards in that magical world known as "real-time."

Real-time payment processing literally means your customers credit card is either authorized or declined, in a matter of seconds, while your customer waits.

The great value of real-time payment processing to you, the merchant, is speed and efficiency. you touch nothing and problems are resolved (or at least caught) immediately.

Part 2:
The merchant account for business and ...
THE PAYMENT GATEWAY

To accomplish payment processing in real-time, you will need to use a payment gateway.

Your (offline) hardware or (online) site links to the provider of the payment gateway through a secure (encrypted) server.

The best way to think of the payment gateways is as plumbing (now there's a statement you can't make too often!). They are secure pipelines (literally off-the-internet land lines) that link to the banking network.

What importance should a payment gateway be given in your decision-making process? It depends.

Obviously, this network must be kept extremely secure and be accessed extremely quickly--thus the special land lines.

You will use a payment gateway for two critical payment processing actions - authorization and settlement.

• AUTHORIZATION is simply checking that everything gels. Is the account in good standing? Is the card reported stolen? etc.

If it all looks good, a portion of the customers credit line is set aside and an approval is sent back through the payment gateway.

Please note that nothing is deducted from the customers account at this time. You CANNOT capture funds before the product is shipped.

Also note that payment processing authorization does not ensure that the card is not stolen (see the article Avoiding Chargebacks for more information).

Once you've received the authorization, you're ready to ship the product.

• SETTLEMENT is the actual act of capturing funds and transferring them to your bank account. 

Typically, this will be done once a day (usually toward the end of the day) for all orders filled that day.

Once you have settled accounts, you have completed payment processing.

Simple, right?

Right.

This brief overview of payment processing is not meant to be a complete "edumacation" on the subject.

It is hoped, however, that it helps give you a big picture view of what can be a very complicated and misunderstood topic.

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Next step: Before you shop for payment processing, understand the five mistakes merchants make.

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