angle graphic

January 10, 2024

How to Get a Merchant Account: A Step-by-Step Guide

Jocelyn Guardado

Written by:

Jocelyn Guardado

How to Get a Merchant Account: A Step-by-Step Guide

Modern consumers expect businesses to provide credit card payment options in-store and online. More than 70% of consumers prefer credit and debit card payments over other payment methods, such as cash. Getting a merchant account lets you offer stable and affordable credit and debit card transactions.

The internet has made applying for a merchant account much simpler. Gone are the days of business owners walking into local bank branches to apply for merchant services — the entire process now takes place online from the comfort of your office. However, this doesn't mean the process isn't confusing for those who've never undertaken it. Understanding the ins and outs of obtaining a merchant account is essential to avoid any hiccups during your merchant account application. This guide explores merchant accounts, how to set one up for your business, factors to consider before opening one up, and various related topics.

Introduction to Merchant Accounts

A merchant account is a bank account designed explicitly for accepting credit and debit card transactions. It is a liaison between a merchant, the customer's card-issuing bank, and the payment processor. When a customer makes a card payment, the funds are initially deposited into the merchant account before being transferred to the merchant's commercial bank account. This account facilitates secure and efficient transaction processing by verifying the legitimacy of card transactions and ensuring a smooth flow of funds. Merchant accounts play a pivotal role in enabling businesses to embrace digital payments and broaden their customer payment options.

However, it's essential to understand the difference between a merchant account and a traditional business bank account. A merchant account is specialized for electronic transactions and managing card payments. A business bank account is a general account for overall financial operations, including deposits, withdrawals, and expenses. You cannot use a merchant account to conduct normal business activities — it's simply for accepting credit card payment funds and transferring them to your business bank account.

Unfortunately, obtaining a merchant account can be challenging due to the risk associated with electronic transactions. Providers scrutinize business history, financial stability, and industry type to assess risk levels. New businesses, those in high-risk industries, or those with low credit may face difficulty as providers seek to mitigate potential losses and maintain the security of the payment ecosystem.

Setting Up a Merchant Account for Your Business

Setting up a new merchant account doesn't need to cause headaches. If you approach the process correctly, your business will gain quick access to a reliable payment platform. The best approach for setting up a new merchant account for your business begins with business registration. 

Register Your Business

Before applying for a merchant account, your business must be officially registered. Merchant account providers take on significant risks when providing merchant identification numbers (MIDs) to new businesses, so they only partner with registered entities. There are various business structures available to entrepreneurs in the United States, ranging from sole proprietorships to Limited Liability Companies (LLCs) and corporations. The best business structure for your new enterprise will vary depending on your needs, ownership structure, and future plans. However, if you don't choose an LLC or another business structure that limits liability for the ownership group, you may be liable for losses, legal action, and other issues.

Each state has its business registration process and associated costs. Many will require you to file your new business registration with the Secretary of State, within the state you're registering the business. If you want help in choosing a business structure or registering your new business, speaking with a professional accountant is the best course of action.

Get an EIN

Once you register your new business with state authorities, it's time to apply for an Employer Identification Number (EIN). An EIN is a numerical identifier for businesses in the United States provided by the IRS — it's a type of tax ID number. Your business can apply for its EIN directly on the IRS website

Not only is this a requirement for obtaining a merchant account, but it will also help your business access funding. An EIN is an essential requirement for any loan or business bank account application.

Get a Business License

Once you register your business and obtain an EIN, it's time to research which business licenses your state and local authorities require. For example, if you operate a CBD business, some states will require your business to apply for a CBD retail license. Business licenses vary significantly depending on the state and region. In some states, you won't need any licenses at all to operate a business, while other states may require a range of costly licenses to start selling goods and services. The more regulated your industry is (i.e., adult entertainment, CBD, cannabis, etc.), the more likely you will need to obtain a business license before you begin operating.

Open a Business Bank Account

After you register your business, obtain an EIN, and request the relevant business licenses, it's time to open up a business bank account. While some entrepreneurs continue to pay business expenses out of their personal bank accounts, this can make tracking business expenses and income difficult. Fortunately, there are many traditional banks and online banking providers offering business bank accounts to new enterprises. Once you obtain a merchant account, a business bank account will be useful, as funds from customer payments will transfer directly from your merchant account to your business bank account.

Research Merchant Account Providers

Next, it's time to explore all the merchant account providers on the market. Fortunately, there are plenty of options to choose from. First, start by considering your business, its industry, and its needs. For example, if you are a brand-new business with no transaction history, only considering merchant account providers that accept startups and new businesses is vital. 

Comparing Costs: Understanding Fees and Rates

Carefully considering pricing and fees when selecting a merchant account provider is crucial in controlling operational costs. Hidden fees, transaction charges, and monthly expenses impact profit margins. Choosing a provider with transparent, competitive pricing ensures cost efficiency and helps businesses optimize their financial resources.

It's crucial to understand the various pricing models on the market. Below, let's explore the most popular pricing models available and how they impact the fees you pay as a merchant:

  • Flat-Rate Pricing: A payment processing model with a fixed percentage and/or a fixed dollar amount per transaction, providing simplicity and predictability for merchants regardless of card type or transaction specifics. While being able to predict payment processing costs is a benefit, flat-rate pricing normally hides huge markups. In many cases, it's the least affordable pricing model for merchants.
  • Tiered Pricing: A payment processing model that categorizes transactions into tiers with different rates. Qualified transactions or standard, receive lower rates, while mid-qualified and non-qualified transactions incur higher fees based on various factors like card type and payment setting. Tiered pricing ensures merchants benefit from savings on low-cost payments, such as in-person debit card payments.
  • Interchange Plus Pricing: A payment processing model where merchants pay the actual interchange fees set by card networks plus a transparent, fixed markup by the payment processor. While this pricing model makes it impossible to predict your average payment processing costs, it's usually the most cost-effective and transparent. There are no hidden fees or charges in this pricing model.

Complete & Submit the Online Application

Once you select a merchant service provider, it's time to begin the application process. Fortunately, most merchant service providers now have online applications, allowing you to apply from the comfort of your office. Always double-check the information you provide in your application, as details will be cross-referenced with credit reporting bodies and other agencies. Lying or misrepresenting financial information in your application is a surefire way to receive a denial.

As you apply, you should also check the terms and conditions, including the pricing. While merchant service providers may advertise their pricing publicly, it's always critical to check the advertised pricing matches the pricing outlined in any legal agreements. Seek clarification if you're unsure regarding the merchant account provider's official pricing.

Provide Required Documentation and Details

Next, a merchant account provider will contact your team to discuss additional documentation and details. The documents required will vary depending on the merchant account provider. In most cases, you must have the following details ready to submit:

  • An EIN or Tax ID number
  • Business bank account statements
  • Previous processing statements
  • A valid government-issued photo ID
  • A voided check with your legal business name

Be Prepared for the Underwriting Process

An extensive underwriting process is part of all traditional merchant account applications. Merchant account providers must be comfortable with your business's legitimacy, revenue, and industry before opening an account in your business's name. Unfortunately, this means it usually takes 30 to 45 days to receive approval for a new merchant account. During this time, your merchant account provider may contact you to request additional documentation. Always respond promptly to ensure there are no hiccups during the underwriting process.

Set Up Your Hardware and Software

Lastly, it's time to begin accepting payments! This means your business must set up new hardware and software to facilitate transactions. Many merchant service providers will have dedicated account managers available to complete the setup and onboarding process. If you run an online-only business, this process will involve setting up payment gateways and integrating them with your existing digital infrastructure, such as your business's website. If you run a brick-and-mortar business, this setup process includes setting up new POS terminals, downloading apps for mobile payments, and syncing your hardware with card readers. 

It's also imperative that you set up security tools to reduce exposure to credit card scammers. While credit cards have made online commerce possible, they come with an increased risk of fraud. Many merchant service providers provide fraud and chargeback prevention tools to help spot scammers before they complete transactions. Don't overlook the importance of optimizing your security platforms before you begin accepting payments from customers.

What to Consider When Opening a Merchant Account

Your business's ability to accept payments is one of its most critical functions. It's essential to consider various payment factors when deciding on a merchant account provider. 

Understand Your Business Needs

Every business has unique needs. Whether you're starting a new mobile food truck or expanding a large retail clothing chain, it's essential to find payment tools suitable to your customers and staff. Some businesses may only require a single payment channel, while others may require omnichannel support.

In-person Payments

For brick-and-mortar businesses, it's important to offer quick and convenient in-person payments. In recent years, in-person payments have grown to encompass a wide range of payment options, including chip and pin, contactless, QR code payments, and more. Ensuring there's variety in your in-person payment options keeps customers happy. While it's helpful to work with a merchant service provider with a range of hardware options, including mobile card readers, POS systems, product scanners, and more, some payment processors will also let you download their software on your own devices, such as iPhones and tablets.

Mobile Payments

Offering mobile payments enhances customer convenience, allowing quick and secure transactions via smartphones. It attracts tech-savvy consumers, streamlines the checkout process, and facilitates contactless payments, aligning with modern preferences. Mobile payments also enable targeted marketing and loyalty programs through integrated apps, fostering customer engagement. Embracing this technology meets evolving consumer expectations and positions merchants at the forefront of payment innovation. Make sure to work with a merchant service provider offering contactless mobile payments— it's becoming an industry standard.

Online Payments

Estimates suggest digital payments will account for over $2 trillion in 2023. If your business wants to take advantage of the online economy, it's essential to have a merchant service provider with advanced online payment tools, such as payment gateways. Payment gateways facilitate secure transactions by communicating encrypted customer payment details to payment processors. By hosting a payment gateway on your website, your business can authenticate transactions in real-time, making the customer's shopping experience seamless. However, as with other card-not-present or CNP transactions, online payments are prone to fraud. It's critical that your merchant service provider has strong security protocols in place to prevent fraudulent charges.

Over-the-phone Payments

Virtual terminals make over-the-phone payments possible. When a customer calls to complete a transaction, the merchant requests their card details over the phone and inputs them into a virtual terminal on a web browser. It's never been easier to accept card-not-present transactions from customers.

Accepting over-the-phone payments can be helpful for businesses by providing a convenient alternative for customers who prefer or need assistance with remote transactions. It expands accessibility, enhances customer service, and accommodates individuals who may not have access to online payment methods. 

PCI Compliance

PCI compliance is vital when selecting a merchant service provider because it ensures the security of customer payment data. Payment Card Industry Data Security Standard or PCI DSS compliance signifies adherence to stringent security measures, safeguarding against data breaches and fraud. Non-compliance can lead to severe penalties, loss of customer trust, and financial liabilities.

Choosing a PCI-compliant provider demonstrates a commitment to protecting sensitive information, reducing the risk of legal consequences, and preserving the reputation of your business. It reassures customers that their payment data is handled with the highest security standards, fostering confidence and loyalty. Prioritizing PCI compliance is not only a regulatory requirement but a strategic investment in maintaining a trustworthy and secure payment processing environment.

Customer Support

Customer support is one of the most critical factors to consider when choosing a merchant account provider. Unfortunately, the payment industry is riddled with payment providers with poor customer support records. This means many merchants can go hours or days without being able to contact customer care, making payment outages extremely costly. This is particularly prevalent with Payment Service Providers (PSPs), who aggregate multiple merchants onto single merchant accounts.

However, many traditional merchant account providers offer dedicated account managers to their merchants. With a dedicated account manager, your business has reliable access to a payment expert. Likewise, many merchant account providers offer 24/7 support. A dedicated account manager and around-the-clock support will make your life much easier, so ensure these tools are available at your merchant account provider.

Integration Capabilities

Third-party integrations have the power to supercharge your payment systems. By integrating your payment stack with third-party software, your business can benefit from automated communication between its payment infrastructure and other systems. For example, many businesses integrate payment systems with accounting software, resulting in automated data transfers and streamlined performance tracking. Likewise, customer relationship managers (CRMs), eCommerce platforms, and shipping providers are also popular candidates for payment integration.

Always assess the third-party integration options available with your prospective merchant account providers. If there is already an extensive database of compatible apps and platforms, it will make integration much simpler. Manually integrating merchant accounts with third-party software can be expensive and tedious.

How to Get a Merchant Account: Closing Remarks

A merchant account is the key to controlling your business's payment infrastructure. Whether you need a virtual terminal to accept over-the-phone payments from clients or mobile card readers to process transactions from your restaurant's seating area, a merchant account is the perfect solution. Merchant service providers offer a range of unique benefits, including dedicated merchant accounts, enhanced security tools, account managers, and a range of other payment resources. 

Follow the steps outlined in this guide to apply for your business's merchant account. As suggested, always compare multiple merchant account providers, assess merchant account features, and review PCI compliance protocols before selecting a service provider. So, what are you waiting for? There's never been a better time to upgrade your business's payment processing!

New call-to-action

Frequently Asked Questions

The length of time it takes to open a merchant account varies depending on your merchant account provider, industry, time in business, and other factors. However, all merchants undergo a significant underwriting process when applying for a merchant account, so approval will not occur overnight. Many businesses wait between 30 and 45 days before receiving approval for a dedicated merchant account.

Yes. Most merchant account providers will require an Employer Identification Number (EIN) during the application process. An EIN acts as a numerical identifier for your business, much like Social Security Numbers (SSNs) act as a numerical identifier for individuals. Merchant account providers require this number to ensure they're working with a legitimate business. You can apply for an EIN directly on the IRS website.

The cost of opening a merchant account varies depending on your merchant account provider. While some merchant account providers may require an upfront bond or subscription payment, others will only charge transaction commissions. 

Requirements for a merchant account vary depending on the merchant account provider, but most will request the following information:
  • An EIN or Tax ID number
  • Business bank account statements
  • Previous processing statements
  • A valid government-issued photo ID
  • A voided check with your legal business name

A merchant account is specifically designed to process credit and debit card transactions, enabling businesses to accept electronic payments. It acts as an intermediary between the business, the customer's card issuer, and the payment processor. On the other hand, a business bank account serves as a general account for managing various financial aspects of a business, such as deposits, withdrawals, and overall funds management.

While a merchant account focuses on facilitating card transactions, a business bank account serves broader financial functions, including payroll, expenses, and general financial operations. When a business receives money in its merchant account from customer payments, it transfers the funds to its business bank account (the merchant account itself cannot be used for normal business payments and transfers). Both are essential for successful businesses!



Ready to Start Your Business?

We can help with the payment side of things!

Get Started!

angle graphic

Ready to Start Your Business?

We can help with the payment side of things!

Get Started!