Merchant Account

What is a merchant account? It is a type of bank account granted by an acquiring bank to online retail business owners to collect payments for goods or services. A merchant account will allow merchants to process the credit card and billing information to complete an online transaction. The bank accepts the responsibility of processing the card transaction, transferring the funds from the cardholder’s account into the merchant’s account. The merchant on the other hand is trusted to provide the goods or services in a timely and professional manner.

Merchant account providers, Payment Service Providers (PSP), or ISOs often provide merchant account services for online retailers. They resell the products or payment services of multiple acquirers. However, they must follow strict industry guidelines when allowing businesses to accept credit card payments. Essentially, the merchant account providers act as middle-men between the merchant’s business and the acquirers to ensure businesses comply with those industry requirements and regulations.

The risks and liabilities in a Card-Not-Present transaction are substantially higher when customers are transacting via the internet. Merchant account provides must continually assess their merchants to ensure that the business continues to provide excellent goods and services to their customers.

There are a few types of merchant accounts available;


Types of Merchant Accounts

Aggregated Merchant Account

The Aggregated Merchant account, also known as Third Party Payments Aggregation (TPPA), is an account for merchants who are selling product and services that they do not own. A holiday and travel booking site would be a good example. This type of sites usually charges a fee for the product or services they do not own with an additional fee for their services. However, if they only apply charges for their services, then they would not fall under the TPPA category.

Sponsored Merchant Account

This account is designed for small business. Merchant who are using this merchant account will have their payment processors name (descriptor) displayed in the customers billing statement. The merchant can connect and disconnect the services that are provided by the Independent Sales Organization (ISO).

Direct Merchant Account

This account is specifically assigned to the merchant by a Merchant Acquiring Bank. Merchants will obtain a private Merchant Identification number (MID). They are also able to provide their own customer service and their own private descriptor, which can lower their percentage of chargebacks. Merchants will have full control of online credit card transactions and fraud management. Merchants with this account are more likely to enjoy lower Merchant Discount Rate (MDR).

3D Merchant Account

3D Secure is a technical standard created by Visa and MasterCard to further combat online fraud. When an online transaction takes place, an online security screen will appear. The customer will be required to enter a passphrase which are only known by them. Visa or MasterCard will then return the customer to the online store after authentication. Visa branded their system as “Verified by Visa” whilst MasterCard branded theirs as “MasterCard Secure Code”. 3D Secure shifts the liability for fraud from the merchant to the cardholder under a range of conditions. The merchant’s website has to be 3D Secure enabled whilst the customer must have a credit/debit card enrolled in a 3D Secure scheme. Customers can enrol in these schemes via online banking, Visa or MasterCard websites. MO/TO transactions are not supported by 3D Secure.

Mail Order and Telephone Order Merchant Account (MO/TO)

MO/TO merchant accounts are typically designed for merchants who accept purchases through mail or telephone. The merchant will take their customer’s credit card details and manually enter them in a Virtual Terminal to process the payment. The merchant only needs to log into a secured site and enter the customer’s card details to collect payments.


How does a Merchant Account work?

There are a few parties involved in the authorization and settlement process when a transaction is made. Figure 1 below shows an example of how the authorization process of a transaction is and Figure 2 shows the settlement process;


The authorization phase verifies the card as active and that the cardholder has sufficient credit to make the transaction.



Figure 1

  1. Customer purchases a product(s) or service(s) at the merchants website
  2. The merchant receives customer information and forwards it to the Merchant Bank through a Payment Gateway
  3. Merchant Bank then sends the information to the Processor (Acquirer)
  4. Processor sends the transaction information to the Issuing Bank for verification
  5. Issuing Bank sends the transaction results (authorized or declined) back to the Processor
  6. Processor routes the results to the Merchant Bank
  7. Merchant Bank passes the results to the merchant
  8. Merchant receives authorization results and completes the transaction accordingly



The settlement phase involves transferring the funds from the customer’s account to the merchant’s account.



Figure 2

  1. Merchant sends a request to their Merchant Bank to settle the transaction
  2. Merchant Bank electronically submits the transaction to the Processor (Acquirer)
  3. Processor charges the Issuing Bank for the transaction
  4. Issuing Bank pays the transaction and send a monthly statement to the customer
  5. Processor pays the Merchant Bank
  6. Merchant Bank deposits the transaction funds into the merchant account


Underwriting Process

Obtaining a merchant account is almost similar to getting a business license. Merchants have to go through an application process to be approved and be granted a merchant account. They are required to submit supporting documents for approval. Below are some examples of the documents usually required;

  • Completed application form
  • Certificate of Incorporation
  • Articles / Memorandum of Association
  • Business operating license
  • 6 months Company Bank Statements
  • 6 months Merchant Processing Statements / History
  • Owner’s Passport copy
  • Utility bills

Payment Service Providers and acquirers will determine if a business application is appropriate and the risk involved is manageable. Merchants may be required to submit more documents and clarify certain issues to further assist in the acquirer’s assessment.


Merchant Discount Rates (MDR) & Fees

Merchant Discount Rate or commonly known by its abbreviation MDR, is a percentage of the total monthly sales charged by the acquirer for its services. For example, in the month of January, Jerry’s total sales volume is $100,000 and his merchant account is set at 5% MDR. Once this amount is settled in the merchant account, the acquirer will deduct $5,000 as charges for the merchant account services. Other rates and fees will also be deducted according to the agreement before the final sum is wired to the merchant’s company bank account.

There are many acquirers in the payments world that have the ability to provide merchants with a merchant account, however all acquirers offer different discount rates and fees. The rates and terms of a merchant account will vary between acquirers and is largely dependent on the merchant’s business type. General e-commerce merchants genuinely enjoy lower discount rates as there are lower risks involved. Higher risked businesses such as Pharmacy, Travel, Gaming, and Adult will require experience and a minimum monthly volume in order to get lower discount rates.

Some acquirers may also impose some additional fees for merchant accounts. These fees commonly include Set up Fees, Annual or Monthly Fees, and Administration Fees. Just like the standard rates, they also vary between acquirers.


Avoiding Fraudulent Transactions

Fraud prevention is the most important aspect in maintaining a good merchant account. Card-Not-Present or internet merchants must take extra precaution because they are financially responsible for any fraudulent transaction that takes place. If a merchant is caught processing fraudulent transactions, they could be fined with a hefty penalty, not forgetting the loss of the stolen goods. Scammers or fraudsters today are savvy to the security features, however, there are a few steps that can help prevent fraud from happening:

Phone Verification

This is one of the most effective ways to prevent fraud. Once an order is placed, the merchant should call the merchant to obtain verification. This will provide a voice trail that the cardholder was verified through their phone number and can be used if disputes occur.

Address Verification Service (AVS)

All transations should use the AVS to verify the cardholder’s address to the address on file with the card issuer. Address should be a match before the transaction can be approved.

3D Secure

This protocol, known to VISA as ‘Verified by Visa’ and to MasterCard as ‘MasterCard Secure Code’, ensures that cardholders enter a PIN or password (which they have previously applied with their Issuing Banks) to certify that the credit card belongs to them.

Blocked Countries

Fraudulent transactions usually come from a few of the same countries. It is ideal that the merchant knows his target market and block transactions coming in from certain countries. Most payment gateways have this feature and the merchant can decide to put a few countries on that list so safeguard the business.


12 Potential Signs of Fraud

Although the Issuing Bank has verified a transaction, the merchant still has the right to demand for additional information from the customer. Merchants should know their customers well and continuously look out for fraud indicators like these;

  1. First-time shoppers
  2. Larger than normal orders
  3. Orders with several of the same item
  4. Orders made up of high ticket size items
  5. Orders that has been placed on a rush or overnight shipping
  6. Transactions with similar account numbers
  7. Transactions placed with multiple cards shipping to a single address
  8. Multiple transactions on one card over a very short period of time
  9. Multiple transactions on one card or a similar card with a single billing address, but multiple shipping addresses
  10. Multiple cards used from a single IP (Internet Protocol) address
  11. Orders from free e-mail address providers
  12. Orders with different billing and shipping addresses


Preventing Chargeback Disputes

A chargeback is the return of funds, which has been credited to the merchant’s account, to a consumer forcibly initiated by the consumer’s Issuing Bank. This happens when a consumer is not satisfied with the quality product, damaged goods, wrong product, or to simply perform fraud. Merchants must always be prepared to prevent chargeback disputes to avoid being charged with penalties or having their merchant account frozen. Here are some useful tips that can help you prevent disputes:

  1. Clearly state all Terms & Conditions and other policies on your website and in all correspondence with the customers
  2. Customers must be aware of the descriptor you use for your business. It is best to include your company name and phone number.
  3. Confirmation through customer’s e-mail or telephone should be made for every transaction so that they can verify their order.
  4. Use a courier service company that has a good tracking service so that you and your customers can keep track of the delivery status. Some courier companies will require the recipient to leave a signature and identification details as proof.
  5. Customer service contact information must be clearly stated so that the customers can contact you if they are facing any problems or concerns, rather than calling the issuing bank to issue a dispute.


Applying for a Merchant Account

There are two parties that can provide merchants with a merchant account; Banks and Payment Service Providers (PSP). It is logical that merchants tend to approach a bank directly for advice when expanding a business into the online market. Although merchant accounts are approved by banks, they often have stricter requirements and are reluctant to provide services to smaller merchants and higher risked businesses.

An independent PSP or ISO has the expertise to provide merchants with merchant accounts as well. PSPs are generally more focused on the needs of the merchants and provide them the best payment solution. Smaller merchants have a greater chance of successfully obtaining a merchant account when they apply through a PSP. An experienced PSP can not only provide merchants with lower and better rates, but may also have some fees waived.


Advantages of a Merchant Account

1. Convenient

Convenience includes the overall ease of finding a product, time spent on shopping, and minimization of overall shopping effort. Online shopping allows consumers to shop at the convenience of their own home and to save travelling time to retail stores while spending their time on other important tasks and hobbies. Some 72% of online shoppers claim that they would rather surf online than go to retail store to attain information about a product. According to a study, 72% of online shoppers chose convenience over privacy. In addition to the convenience of finding products online and shopping time reduction, consumers can shop without time limitation with 24 hour access to online retailers.

2. No Pressure to Buy

Consumers help themselves by browsing the products and services freely online instead of asking for assistance from vendors. In addition, consumers are freed from the pressure to buy from the vendors and can spend more time to make wise purchase decisions. But it is important that online stores have good product descriptions because it is one of the significant conditions that satisfy consumers.

3.       Variety / “Infinite shelfspace” available

Consumers desire a variety of products and services because they look for the right product that will fully satisfy them. There is infinite variety of products available online because online shopping allows consumers to browse through products and services from all around the world.

 4. Worldwide Consumers

Merchants will highly benefit in sales because they have consumers browsing through their website from all over the world.

 5. Comparison

Consumers can compare products and services, prices, and features to make a better decision with less effort. Consumers can also exchange information online through chatting and discussion forums to help them make wise consumer decisions.

 6. Availability

Consumers can find products and services of all makes and models at their fingertips. If they can’t find something they are looking for at a certain website, they can just browse through another website without having to drive around in search of a particular product or service.

 7. Price

Online retailers generally offer lower prices for products and services because they don’t have the overhead of renting a shop, high utility bills, and employees. Some websites even offer further discounts.

 8. Security

Many consumers now trust online payment methods because of their latest security features. All card information are encrypted and moved around the web securely and responsibly.