Merchant services: Merchant accounts for small businesses: a quick market review

Opening a merchant account is a necessary prerequisite in order to start accepting debit or credit card payments. The good news is, merchant accounts are no longer restricted to big businesses processing hundreds of transactions on a daily basis. Indeed, more and more banks and financial services providers now offer merchant accounts for small businesses. But as small business owners usually don’t know everything about this service or the technology used, it’s often hard to see clearly which ones really do propose small-business friendly products... at reasonable prices.

In order to find top merchant services, small business managers first need to understand how merchant accounts do work, and what types of merchant accounts for small businesses are available in Ireland.

The best merchant services can then be identified, based on a clear understanding of the specific needs of each business, of the fees applied by merchant account providers, and of what documents are needed so that the application will be processed and accepted in the smoothest fashion.

Merchant account basics

Merchant accounts are separate bank accounts used solely for credit card transactions. These accounts are necessary to accept such transactions.

What is a merchant account?

A merchant account is an absolute necessity in order for a shop to accept credit card or debit card payments, either online card payments, in-shop card payments or on-the-phone card payments.

Funds derived from credit card or debit card transactions absolutely have to first land on a dedicated account before they can be forwarded to the regular business account of the shop.

The reasons for this are related to the clearing of the payment, and to the fact that sometimes (but it is now very rare), merchant account providers need to have a corresponding rolling credit present on the account to balance the risk incurred by card payments.

In Ireland, credit card services for small businesses and their related merchant accounts are usually provided by their high-street banks. This makes it very simple as these familiar points of contact also provide all necessary financial services, software, hardware, PDQ terminals (machines used to read credit cards) and merchant accounts for small businesses as a comprehensive package.

But other specialised providers are available. These credit card processing companies for small businesses sometimes come from the finance industry, sometimes from the e-commerce software industry, sometimes from the point-of-sale hardware industry.

How does a merchant account work?

Merchant accounts are at the receiving end of the credit or debit card payment cycle:

-  Retailer enters transaction details in the Point of Sale system or directly on the card terminal,

- Shopper enters card information,

-  Payment gateway receives encrypted card information and transaction information,

-  Payment gateway sends authorisation request to payment processing server,

-  Processing server requests authorisation from the shopper’s bank,

- Transaction is accepted and funds are sent by the gateway to the shopper’s merchant account,

-  After 1 to 5 business days, funds are transferred from the merchant account to the business account and available for any use.

Types of merchant account

In order to bring costs lower, or even to simply allow some of these small businesses to open a merchant account, there are now various types of merchant accounts for small businesses available in Ireland.

Basic merchant account for small business

Typical merchant accounts for small businesses don’t differ much from merchant accounts for large businesses. They offer the same services, usually in a more comprehensive bundle so as to be as hassle-free as possible for novices, with point of sale hardware, software, payment gateway, credit card terminals... Actually, the bigger the business, the more control the customer wants to have over the choice of the individual components of the merchant solution.

The mains difference is that fees related to merchant services for small business are just higher than for big businesses with hundreds of thousands of pounds worth of transactions per month.

Aggregate merchant account

Aggregate merchant accounts are provided by “payment facilitators” who pool a number of merchants together in order to propose merchant account facilities with lower rates to these small businesses. In fact, the merchant services provider is considered by the processing bank as a single merchant, and small businesses inside the pool are just some sort of sub-merchants.

This kind of system is less likely to be considered weird or exotic when one realises that it’s precisely how PayPal and several new players like Stripe work.

ISO merchant account

An ISO merchant account is a type of sponsored merchant account allowing total freedom in the choice of perks and services by the customer. These accounts are provided by Independent Sales Organisation (ISOs), also called Member Services Providers (MSPs). These providers have special deals with card issuers such as Visa or Mastercard. Because the accounts are “sponsored”, these ISOs are not actual banks, and transactions are processed by their sponsor, who must be affiliated with one of the main credit/debit card issuers or “member bank”. Typically, an ISO merchant account works the same as a normal merchant account; it’s just cheaper because it’s sold by a specialised independent broker.

High-risk merchant account

In the phrase “high-risk merchant account”, the risk is either related to the nature of business conducted, or to the credit history of the prospective business customer. But it is always a risk perceived from the perspective of the merchant account provider.

Small businesses with little or poor credit history may be flatly denied the opening of a merchant account by major banks. Other banks might be reluctant to accept opening a merchant account to companies active in the gambling business, liquor business, pharmaceuticals businesses or even travel businesses or subscription services.

Merchant needs of these businesses are catered to by high-risk merchant account providers, often located in countries with looser regulatory frameworks, and applying higher fees than local banks dealing with low-risk enterprises. Such accounts are therefore also referred to as offshore merchant accounts.

Getting the right merchant account for small business

Getting the best merchant services requires doing a bit of homework before ever getting into touch with merchant account providers, and when going through their value propositions. Reviewing needs, understanding the fee breakdowns and preparing the application material are essential steps.

Reviewing needs

Merchant accounts for online payments often come out of a box with most, when not all, options checked and included. Many of these features are just there to bring prices up and will never be used by small businesses.

Small businesses managers should therefore make an analysis of their customer base and of the preferences of these customers, to list their actual needs and cast out what may be only marginally required.

The first step is to know which types of transactions will be needed:

-  in-shop,

-  online,

-  on the phone,

-  on the go with mobile devices,

-  international transactions…

Accepted payment methods should then be reviewed:

- Debit card payments,

-  Credit card payments,

- Contactless payments,

-  Swipe payments,

-  Chip and PIN payments,

-  Recurring payments,

- Payments in foreign currencies,

-  E-Wallet payments,

-  M-commerce payments such as Apple Pay or Google Pay...

Accepted credit card types should also be listed:

-  Visa,

-  Mastercard,

-  Amex,

-  Diners Club,

-  Foreign credit card like JCB, China Union Pay...

About the equipment, it’s important to know whether the shop needs:

- A till, or Point of Sale system,

- A mobile credit card machine,

- A wireless card machine,

-  A receipt printer,

-  A virtual terminal.

Finally, retailers should carefully review needs in terms of:

- Guaranteed security level,

-  Customer service availability,

- Hardware and software integration, especially in the case of e-commerce with shopping cart software and payment gateways.

Understanding fees

Various fees are applied, or may be applied by merchant account providers:

- Setup fees,

- Transaction fees, usually as a percentage of transaction value, or of monthly values,

- Processing fees, usually flat,

-  Chargeback fees,

- Monthly fees,

-  Termination fees…

The amount of these fees, especially transaction fees, varies depending on several factors including:

- Payment method used,

- Card issuer,

-  Business profile.

It’s important to understand that merchant accounts for small businesses usually carry higher fees than merchant accounts for larger businesses, as fewer transactions are processed. In fact, in order to make sure the service gets paid for, merchant banks often apply minimum monthly rates, which are charged even when no transactions have been processed in a given month.

Preparing the application

As these transaction fees vary largely depending on the business profile of the applicant, it is required to be as transparent as possible about financial data related to the actual or planned card transactions.

Together with their application, prospective retailers should therefore:

- Provide credit history,

-  Provide tax filings,

- Provide transaction history with transaction volume and average value,

-  If unavailable, provide credible forecasts and a business plan for e-commerce,

-  More generally, provide any elements which may help evaluate transaction risks.

It is therefore highly recommended to compare as many offers as you can before selecting a merchant account provider. Take a few minutes to request  quotes in merchant services on Companeo.it and receive quotes from the providers most suited to your needs