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Do you really need a merchant account?

When you set up your payment gateway to receive online payments, you may be required to open a separate merchant account, or it may be optional, depending on various parameters relating to your business and banking setup. If you’re wondering whether this is something you actually need or want, we’ve got some helpful guidelines.

Hold up – what exactly is a merchant account?

In short, payment processing gateways allow you to get paid online. Customers or clients pay you through a service such as Paypal, Stripe or Authorize.Net. The payment arrives in your account but is not transferred to your bank account immediately. In the case of Paypal, you have to transfer funds manually, but other payment gateways will transfer funds on a fixed schedule (every two to three business days or every week, for example).

Between the time the funds are sent by the client until they reach your bank account, they sit in a merchant account. Essentially, credit cards are called that because the issuing banks are essentially agreeing to front payments to merchants on behalf of credit card-carrying customers. But fronting payments involves risk to the issuing banks and risk to the payment processor alike, and one of the ways that the industry minimizes its risks is by building this lag time into the cash flow.

In this sense, merchant account providers act as escrow, just to have as few incidences of recalling payments as possible. This is why a key part of opening a merchant account is getting approved by the merchant account provider’s underwriting department – your merchant account issuer is essentially performing a risk analysis based on the likelihood that money you get paid will cause problems for them.

No such thing as not having a merchant account

Every payment gateway has some type of merchant account attached to it, but some of these operate behind the scenes. Many are actually “aggregated” merchant accounts, which you don’t need to set up separately. This is how Stripe and PayPal operate, for example. With aggregated merchant accounts, your funds are part of a larger pool of payments that belong to several merchants.

When it is time to transfer the money out of the aggregated merchant account, the payment gateway platform takes care of that process for you. This type of account is not controlled by you, and the provider may change its rules, so if you have one of these, pay attention to the contract terms and any changes made to them.

Cases that call for a dedicated merchant account

Businesses that want to accept credit cards directly without using a payment gateway that has behind-the-scenes merchant services are required to open dedicated merchant accounts. The payment gateways that offer the shortest money transfer lag times and the fee structures that are friendliest to high volumes of transactions generally require that you open your own merchant account – either with them or with an approved merchant account provider.

Even when not required, you can choose to open a dedicated account in order to be able to negotiate custom commission rates and transfer schedules for your sales. If you have a high volume of sales, you should be able to negotiate better rates with the institution that issues your merchant account. And if cash flow is a major issue for your company or freelance career, then the time increments according to which your billings actually appear in your bank balance are crucial.

In the process of applying for a dedicated merchant account, you and your company will have to undergo an in-depth credit card check and underwriting process. This process will take some time and involve faxing bank records and other information. For many, especially people who are just getting started with online billing and aren’t necessarily committed to it as a payment mechanism, the complex process of getting approved as a merchant is enough of a deterrent – if this is you, then an aggregated account may be a better option.

Cases that call for an aggregated merchant account

For most businesses accepting payments online, a dedicated merchant account is not necessary. The small savings are not worth the time and effort involved with going through the approval process. And the rates they give you are so complicated and confusing that it’s hard to calculate how much you are actually paying. You may end up paying more than you thought you would.

Also, keep in mind that a new business with little credit history, or a struggling business with a poor credit history, may not even qualify for a dedicated merchant account. Non-U.S. companies will also have a harder time qualifying. You can easily start with an aggregated account and switch to a dedicated account when your business grows and your sales volume justifies the change.

Online invoicing with an aggregated merchant account

Setting yourself up with a payment gateway like 2Checkout, PayPal or Stripe with an automatic aggregated merchant account is the simplest way to go. The process is so easy that you can be ready to accept credit card payments within ten minutes. And these gateways come with their own shopping carts and customer support. They easily accept various credit cards and multiple currencies. PayPal also allows users to pay with funds they have stored in their aggregated merchant account.

Using a payment gateway with a free aggregated account is even simpler when you use Invoice Ninja for your invoicing. We support many payment gateways, so you can seamlessly integrate your billing with payment collection. And if you get stuck for some reason, we offer support to help you through it. We firmly believe that there are enough expenses small businesses can’t avoid and recommend saving time and money by going with the easier route and signing up with one of the free payment gateways.