Frequently Asked Questions –
Merchant Account Definitions
What is a Merchant Account?
A specific bank account that enables a merchant to accept payments by credit card for goods or services offered through their business. Such credit card payments can only be processed through this type of account by a Processor.
What is a Credit Card Processor?
The entity that has an established relationship with the Card Acquiring Bank (Acquirer). Transactions are processed via the Credit Card Processor, sent to the Acquiring Bank for authorization, and then settled out to the merchant by the Processor…or if a Direct Merchant Account, sometimes settled directly to the merchant by the Acquiring Bank. The Processor collects due diligence documents and then forwards them for compliance to the Acquiring Bank for underwriting and final approval. The Processor then supplies the Online Payment Gateway and provides support for the gateway and MID to the merchant.
What is a Card Acquiring Bank/Acquirer?
Sometimes referred to as the Processing Bank or the Card Acquirer, the bank that has the relationship with Visa/MasterCard on one end and the Credit Card Processor on the other, and at which the merchant account is setup to initially receive funds resulting from the processing of online credit card transactions by the merchant. The Card Issuer (bank that provides credit card to cardholder) ‘issues’ the funds from the credit card for a particular credit card transaction, and the Card Acquirer ‘acquirers’ the funds from that credit card before subtracting rates and fees, including the interchange fee, and passing the rest directly to the merchant if transactions are under a Direct Merchant Account. Note that, in some cases, even with a Direct Merchant Account, the acquiring bank will pay the processor who will then pass the funds on to the merchant. In the case the merchant account is a Third Party or Aggregate Merchant Account, the acquiring bank pays the processor who then passes funds to each of the merchants after charging their rate and fee markups for managing the MID.
What is a Direct Merchant Account?
Sometimes referred to as a Dedicated Account, a merchant account solely dedicated to the merchant by the processing bank. In opening a Direct Merchant Account, a merchant acquires a private merchant identification number (MID), and though still processing via a processor’s payment gateway or some type of terminal, provides their own customer service and is allowed their own private billing descriptor (name and number to appear on customer’s credit card statement…for Third Party or Aggregate Merchant Accounts, the processor’s name and number would appear). Many merchants find this lowers their chargeback percentage because customers are more likely to recognize the charge.
Through a Direct Merchant Account, merchants more likely than not enjoy a lower discount rate with the processing bank and begin to establish their own processing history with the bank. It should also be noted that, even though a Direct Merchant Account is essentially a merchant’s own account directly with the bank, they are still able to take advantage of the processor’s online payment gateway technology and customer service if they’d like while, at the same time, control their own direct merchant account. A Direct Merchant Account acts as a comprehensive platform enabling merchants to perform a multitude of processing functions, including batch uploads/captures, full control of online credit card transactions, and fraud management.
What is a Merchant Identification Number (MID)?
Essentially, this is the actual merchant account assigned to a specific merchant and classified under a certain code that Visa/MasterCard assigns the merchant based on the industry they conduct credit card transactions in. The codes are known as MCC’s (Merchant Category Codes) and consist of a categorized list of codes corresponding to industries published and offered by Visa/MasterCard for processors to follow as a guideline for their merchants when setting up MIDs.
What is a Third Party or Aggregate Merchant Account?
An Internet merchant account used to process the online credit card transactions of many Internet merchants all processing online credit card transactions under, what can be thought of as a multitude of sub-merchant accounts. This type of account is usually owned and operated by a processor, in which case they manage the MID on their payment gateway. This is ideal for Internet merchants that do not qualify for their own Direct Merchant Account and/or Internet merchants not wishing to setup a corporation with a resident director in the country of the acquiring bank, which is required for Direct Merchant Accounts per Visa/MasterCard regulations. However, it is important to note that this is most oftentimes not an allowed practice except in unique circumstances wherein the processor has been given rights from the acquiring bank to manage such accounts on their own. IF it is allowed (many times it’s done without permissions from the acquiring bank), then at the very least, the MID is approved and setup under a specific MCC, and merchant processing transactions on that MID must fall under that category. Although a gray area for the credit card acquiring industry, it is common for Internet merchants to begin processing with this type of account before acquiring a Direct Merchant Account.
With Aggregate Merchant Accounts, the Processor absorbs much of the risk because the merchant is using the Processor’s Merchant Account and the Processor is paying settlements to the merchant’s corporate settlement account, in some cases, prior to receiving settlements from the Acquiring Bank. For this reason, it is common for Processors to impose high Reserves to cover their potential losses. However, in the case of international merchant accounts, acquiring banks still impose at least a 10% Rolling Reserve even with Direct Merchant Accounts since it is oftentimes the case they are dealing with higher risk businesses that warrant backup Reserves.
What is a ‘High Risk’ Merchant Account?
Many card acquiring banks and processors, especially in the US, oftentimes use the term ‘High Risk’ when referring to merchants and/or merchant industries they consider to carry more risk than others because of past experiences with such merchants and/or industries.
The main reasons merchants can be considered to be ‘high risk’ by US banks are that they have a history of producing too many cardholder disputes & chargebacks relative to their number of approvals and/or that they are producing more processing volume per month than the bank is willing to accept relative to past performance by merchants in the same industry and how long the particular merchant has been in business.
The main reasons merchant industries are considered to be ‘high risk’ are that they have potential legal grey areas within US and/or State legislation or merchants in a particular industry simply has not performed well in the recent past.
What is a High Volume Merchant Account?
What is eCommerce?
Short for Electronic Commerce, the buying and selling of goods and services, or the transmitting of funds or data, over an electronic network, primarily the Internet, or as we say, Online. In the credit card processing world, the phrase Straight eCommerce is used very loosely to mean business done by merchants selling a good or service that is considered low risk in a very straightforward way. That is, they aren’t using recurring billing, bit coin usage, selling gift cards used to purchase other products, pyramid schemes where nothing really is being sold, penny auctions, gambling transactions, adult subscriptions, or any other electronic transactions done online that is not considered to be simply trading a good or simple, low risk service in exchange for payment.