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An Introduction to Merchant Accounts, Online Credit Card Processing, and Paypal

An Introduction to Merchant Accounts, Online Credit Card Processing, and Paypal

The ability to accept credit card payments online is vital to an ecommerce website. In order to be able to process credit card payments, the first step is to set up a merchant account, simply an agreement with a bank that allows the business to accept proceeds from credit card transactions. A merchant account is different than a regular bank account in that the bank charges the account a set percentage per transaction (usually around 2-2.5% for transactions with low risk). A specific internet merchant account is required for ecommerce because not all merchant accounts are set to accommodate online business. One also must subscribe to an online payment gateway that will provide encrypted transmission of information for credit card authorization.

How do I get a merchant account?

There are several ways to obtain a merchant account. The most common options are through a local bank, a broker or intermediary company, or a third party provider. Setting up a merchant account through a local bank may not be the best option for small businesses although the most direct. Often banks are reluctant to authorize merchant accounts for small and growing online businesses, because of the high financial risks involved. A broker or intermediary company that works on behalf of the bank may be a better solution provider for faster and better priced authorization. The key to acceptance for a merchant account is minimizing risk. From the perspective of the financial institutions, ideal business candidates are low-risk, financially stable businesses. The costs of a starting up a merchant account are also related to risk. A business that seems like a risky investment will likely pay more if even accepted for a merchant account.

What is Paypal?

The third option for processing credit cards is via a third party provider. Rather than setting up one's own merchant account, accessing a third party provider means utilizing their merchant account to do business. Paypal is an well-known example of a third party merchant account provider. Paypal allows individuals and small businesses to receive credit card payments through their Paypal merchant account in return for a per-transaction fee.

There are benefits to opting to use a third party provider like Paypal. Almost anyone can get accepted and setup is quick, generally cheap, and easy. However, using a third party provider also has many drawbacks. Because the merchant account is not owned by one's own business, customers are directed to another website to make purchases. Third party providers also charge fees on transactions, which can add up, particularly if the items sold on the website are low quantity low cost products with significant shipping costs.