Setting Up A Merchant Account Its Advantages And Disadvantages

A merchant account is a type of bank account that allows businesses to accept and process credit card and electronic check payments. Merchant accounts are established through banks or other financial institutions, and they typically come with a number of fees attached. There are both advantages and disadvantages to having a merchant account, so it’s important to weigh your options carefully before deciding whether or not to open one.

Advantages of a Merchant Account

1. Increased Sales: One of the biggest advantages of a merchant account is that it can help increase your sales. When you offer customers the ability to pay by credit card, you make it more convenient for them to do business with you. This can lead to more sales, both from existing customers who are now able to use their credit cards and from new customers who might not have done business with you otherwise.
2. Increased Customer Satisfaction: Offering credit card payments can also lead to increased customer satisfaction. Customers who can pay by credit card tend to be more satisfied with their overall experience, and they’re also more likely to return in the future.
3. Lower Risk of Fraud: When you process credit card payments, you’re protected from fraud in a way that you wouldn’t be if you were accepting cash or check payments. If a customer tries to dispute a charge, for example, you can usually resolve the issue by providing documentation that the purchase was made. This can help you avoid costly chargebacks.
4. More Professional Appearance: Having a merchant account can also make your business appear more professional. Customers may perceive businesses that accept credit cards as being more established and trustworthy than those that don’t.

Disadvantages of a Merchant Account

1. Upfront Costs: One of the biggest disadvantages of a merchant account is the upfront costs associated with opening one. In addition to any fees charged by the bank or financial institution, you may also be responsible for purchasing equipment, such as a credit card terminal, and paying for set-up and installation.
2. Monthly Fees: Most merchant accounts come with monthly fees, which can add up over time. These fees may be charged by the bank or financial institution, and they may also include charges for things like statement processing and customer service.
3. Transaction Fees: In addition to monthly fees, you’ll also typically be charged transaction fees each time a customer pays with a credit card. These fees can vary depending on the type of card being used, but they usually range from a few cents to a few dollars.
4. Risk of Fraud: Although credit card payments are generally more secure than other types of payments, there is still a risk of fraud. If you’re not careful, it’s possible for someone to steal your credit card information and use it to make unauthorized purchases.
5. Chargebacks: If a customer is dissatisfied with a purchase, they may file a chargeback with their credit card company. This essentially reverses the transaction, and you’ll be responsible for paying any associated fees. Chargebacks can be costly, so it’s important to take steps to prevent them.
6. Requires a Credit Check: In order to open a merchant account, you’ll typically need to undergo a credit check. This is because the account is considered a type of loan, and the bank or financial institution will want to ensure that you’re able to repay any money you borrow. If you have poor credit, you may be denied a merchant account.
7. May Require a Security Deposit: In some cases, the bank or financial institution may require you to make a security deposit when you open a merchant account. This deposit is typically equal to your estimated monthly credit card sales, and it’s used to cover any fees associated with chargebacks or other disputes. If you don’t have the money to make a deposit, you may be denied a merchant account.
8. Long-Term Commitment: Once you open a merchant account, you typically need to keep it open for at least a year or two. This is because most contracts include an early termination fee, which can be hundreds of dollars. If you decide to close your account before the end of your contract, you’ll be responsible for paying this fee.
9. Requires a Business Checking Account: In order to process credit card payments, you’ll need to have a business checking account. This account is separate from your personal checking account, and it’s used to deposit credit card sales and pay any associated fees. If you don’t have a business checking account, you may be denied a merchant account.
10. Limited to Certain Types of Businesses: Not all businesses are eligible for a merchant account. For example, businesses that sell tobacco or alcohol may be denied due to the high risk of fraud associated with these products. In addition, businesses that operate solely online may also be ineligible for a merchant account.

If you’re thinking about setting up a merchant account, it’s important to weigh the pros and cons carefully. Merchant accounts can be beneficial for businesses that accept credit card payments, but they also come with a number of costs and risks. Be sure to do your research and speak with a financial advisor before making a decision.