Merchant Accounts, Payment Gateways, and Banks…Oh My!
When browsing for credit card processing solutions for your business you will often come across terms like merchant accounts and payment gateway systems that won’t mean a whole lot to you. I’m going to quickly cover exactly what these are and give you a little bit of history on the matter so you can fully understand what’s going on and make the best informed decisions you can.
A merchant account is necessary in order to process credit cards. These are normally provided by a bank or an ISO (Independent Sales Operator) and they allow you to deal with Visa, MasterCard, Discover, American Express, and more.
The merchant account provider is who you will negotiate your transaction rates with. They will typically offer some sort an Interchange Plus or Flat Rate merchant account and you will pay fees to the merchant to essentially act as a “middle man” between your business and the credit agencies. They will add a small percentage to the actual rate provided by the credit agencies in exchange for making it very easy to accept credit cards.
If you’d like to try and skip the middle man, you certainly can, but you’ll need to become an ISO yourself. This costs tens of thousands of dollars and is not generally something that will be plausible.
Having a merchant account is not enough. Now you need some sort of method for passing transaction data to the actual card issuing banks in order to validate the transaction and move the money accordingly.
Most payment gateways these days are provided through internet web services that allow software developers to easily communicate with the banks to process payments from a point of sale device, a website, a key terminal, etc. These services generally come with fees of their own, whether monthly, per transaction, or both.
The payment gateway is essentially responsible for informing all parties involved when a transaction occurs and whether or not the transaction was successful or not. Upon a successful transaction the card issuing bank will be notified to move the requested amount to the merchant account, and eventually on to the business owner’s bank account.
Quick History and Evolution
Merchant accounts and payment gateways used to always be separate. Some companies would specialize in merchant account services while others would handle payment gateways. Business owners were forced to find one of each and get all of the pieces working together with their bank account.
As mentioned above, this generally created additional costs for the business owner and made it difficult for some small businesses to consider accepting credit cards at all.
Today, companies like PayLeap, PayPal, Authorize.Net, OptimalPayments, and many more are combining both the merchant account service and the payment way into a single account. As such, they are able to reduce costs because a 3rd party gateway is no longer necessary and you are able to deal with a single organization to handle everything. Traditional merchant account and separate gateway systems still exist, but if you’re starting with a new system I would definitely recommend going with a combined account of some sort.
Merchant accounts and payment gateways have been a confusing piece of the credit card processing pie for quite some time. I hope this short review of exactly what they are and how they’ve evolved can help you with your credit card processing decisions.Tags: credit card processing, merchant account, payment gateway