Updated: May 12
If you’ve started to grow your business, or if you’re sick of paper invoices and snail mail to collect payments—you might be ready to open a merchant account to accept credit cards.
Before you get started, it’s good to know what to expect when applying for a merchant account. You’re probably wondering…
How long will it take?
What type of paperwork is involved?
What do the underwriters want to see? (Wait, I have to be underwritten?)
In this post, we’ll cover the 10 Things You Need to Know About Opening a Merchant Account.
Follow These Tips to Start Accepting Credit Card Payments:
1. Underwriting is necessary and with some guidance it’s pretty straightforward:
Payment processors and their partnering banks take on a certain level of risk by providing merchant accounts for businesses. Every dollar transacted through their system could be charged back, potentially leaving the bank responsible for the funds.
Example: Say a business processes a transaction through their merchant account but can’t deliver the product or service, (because they closed, can’t afford payroll, etc.). The customer, in turn, issues a chargeback, the bank is then typically responsible for issuing a refund to the customer, often before they have recouped those funds from the merchant.
How are you accepting payments?
When assessing the risk associated with new accounts, banks look at the possibility of chargebacks, as well as the legitimacy of the business (they don’t want to give someone with fraudulent intentions the ability to debit credit cards).
To ensure a smooth underwriting process, we encourage you to work with an experienced partner, much like you would use a loan expert to help with a mortgage. Some merchant account providers have a department dedicated to helping new merchants set up their accounts.
2. You need a business bank account:
Even if you’re a sole proprietorship, you’ll need a business bank account before opening a merchant account. You can open one in about 15 minutes at your local branch and they only require that you have a business license and EIN (employer identification number, which can be your social security number if you’re a sole prop with zero employees). You can also apply for an EIN and receive it instantly by visiting the IRS website.
Your business bank account will be the default destination for the funds you transact, as well as the account where transaction fees will be debited (you can sometimes separate credits and debits into separate accounts, but you must request it). It’s important to keep a balance in this account that is large enough to cover any processing fees, as well as monthly software fees, if applicable.
3. A business license is almost always required:
Unless you’re a sole proprietorship operating in certain counties, you probably already have a business license of some sort. This can be anything from a fictitious name statement to articles of incorporation. You’ll need the license for reasons outside of opening a merchant account, so if you haven’t already registered, visit your Secretary of State’s website to do so. Merchant account underwriters review and file a copy of your license to validate your business’s standing.
4. It all starts with an application, which you can sometimes complete online:
The merchant account underwriting requires an application. Many providers use an online version of the application so you don’t have to hassle with FAX or mail. Diversified Payments, for example, only takes about 10 minutes to complete, and allows the business owner to sign online, eliminating the need for printing, scanning, or faxing.
The application will request information about the business as well as the authorized signer on the account. You’ll need your bank account and routing numbers, tax ID (EIN), and processing volumes (or estimates) before you start. Other information collected on the application may include (but is not limited to): business start date, contact information, and authorized signer information.
5. Different types of payment acceptance may require separate merchant accounts:
If you’re looking to accept credit card and ACH payments, you may actually go through separate underwriting procedures with two separate processors. While the various credit cards you offer may be transacted through one processor, your ACH/eCheck transactions typically go through another. It usually doesn’t require an extra application if you go through a software provider or independent sales organization (“ISO”).
On your application, you will select the types of payments you would like to accept. If you have someone helping you submit your application, they will compile the submission along with a copy of a voided check, and securely send it to the applicable processors. Details about the various parties involved with your account are available in your application’s Terms and Conditions.
6. Supporting documents are required, and they depend on processing volume
The greater the amount you intend to transact, the more documentation the underwriter will want to see with your application. If your business is only looking to process a couple thousand dollars a month, you may only need to provide a voided check and marketing material (proving that you’re actively conducting business) to get started.
If you want/need to apply to process larger amounts, be prepared to provide more financial information, such as several months’ bank statements. In some cases you may be asked to provide up to two years’ financial statements in the form of profit and loss statements along with balance sheets.
Keep in mind: After you’re approved, the processor will monitor account activity, so it’s important to be as accurate as possible when listing processing volumes. You do not want to get in the habit of exceeding your processing limits, especially early on in the life of your account.
7. You can be up and running in as little as one business day:
After completing your merchant account application, depending on how quickly you submit the required documents, your account can be set up in as little as one business day (sometimes within hours).
Underwriters operate under normal banking hours, so keep that in mind when submitting your application. Applications submitted later in the day will probably not be reviewed until the following business day.
If you choose to use a software provider like DiversaPay to help guide you through underwriting, they can sync your merchant account to your software, and you can start processing transactions immediately following the approval from underwriting.
8. You can use the same merchant account from your storefront as you use online:
One cool thing about merchant accounts is that they are transferrable between your physical storefront and your online operation. As long as the platform at the two locations is the same, such as a TYSYS platform, you can use the same accounts. If you already have a merchant account for storefront or office, ask the representative assisting you with your application if it’s transferrable.
This is beneficial for two reasons:
You may not have to go through another round of underwriting
Your electronic payment processing will be consolidated
9. Processing fees and funding times may vary:
Depending on the type of payments you’re processing and through which methods, processing fees may vary. Your ACH/echeck processor may charge a flat transaction rate up to a certain amount, while your credit card processor may charge a flat rate plus an additional percentage fee. Credit card fees can also vary, depending on the card and payment method (card present vs. not present, etc). Be sure to study the Terms and Conditions on your application to fully understand the differences.
The varying fees are important to keep in mind when you have multiple payment options. If your customer is willing to pay via ACH by providing their bank account information, you’re better off using this payment type for large transactions because you will just be charged a flat transaction rate, as opposed to a flat rate plus a percentage of the charge.
Funding times are also dependent on payment type. ACH transactions may take 3-5 business days to fund, while credit card payments can land in your account as soon as 48 hours after your transaction.
10. PCI Compliance should be on your radar:
Prior to 2008, PCI DSS Compliance was considered a “best practice” for businesses with merchant accounts. Today, whether people realize it or not, it’s a requirement. So what is it? The PCI Data Security Standard (DDS) is a set of rules and regulations established by the credit card companies to ensure merchants are securely processing their customers’ payments. While you are not required to achieve PCI Compliance prior to opening a merchant account, you will need to soon after, so it’s a good idea to start thinking about it now.
While going through the underwriting process for your merchant account, take a hard look at your business environment, and make certain you are operating in a secure manner. Simple steps like shredding all documents containing credit card numbers, installing virus protection and anti-phishing software on all computers, and implementing strong policies regarding passwords and user IDs can go a long way towards protecting against a security breach.
Like the underwriting process itself, many software providers will walk you through PCI DSS compliance.
Takeaways to Keep in Mind:
Underwriting assistance is out there, and it’s sometimes free with through software companies, so seek help if you need it!
Make sure you have any necessary business licenses, tax IDs (EINs), or bank accounts set up prior to starting the process.
Be prepared to provide a good chunk of information about your business, including estimated sales volumes.
Study the Terms and Conditions on your merchant account application, including processing fees.
The underwriting process is fairly quick, but plan ahead so you’re not scrambling right before you need to transact electronically.
If you have a merchant account for your storefront, see if its platform is compatible with the online software you choose, or vice versa.
Start thinking about the PCI Data Security Standard (DSS) so you are prepared to comply upon approval of your account