Understanding the Purpose of a Merchant Account
When a credit card transaction is processed, the money does not instantly appear in your bank account. That takes at least a couple of days. However, the money has to be held by a financial institution while it is in transit from the customer to your bank account. A merchant account receives the payment from your customer’s credit card and holds it temporarily until it is deposited into your bank account.
A merchant account is a bank account – but it is not an account that gives you access to the funds. You can’t withdraw cash from it or write a check against the balance. It is strictly a holding account with a purpose to receive money from a credit card or other electronic payment transaction so that it can be routed to your regular business bank account.
Unlike your regular bank account, a merchant account carries some risk for the financial institution. If your customers dispute payment because they are dissatisfied with or do not receive the goods or services that they paid for, the bank which holds the merchant account must refund their money. They will issue this refund even if the money has already been transferred to your bank account. This is called a “chargeback.” When this occurs, you owe money to the bank that issued the merchant account to cover the chargebacks, usually along with a fee. Essentially, the bank has extended you credit to cover your chargebacks until you bring in additional funds from future transactions.
Because of this credit risk, you must submit an application, go through an underwriting process, and receive credit approval in order to open a merchant account. The underwriter will review your credit history, transaction history, and the nature of your business to determine if the account should be approved and to assign a fee structure that is appropriate to your business’ risk level.