What is a merchant account and why it’s important when owning an ecommerce business?
By: Catherine Perry
There are many things you need to do when you start an ecommerce business—set up your business license, get products to offer, write content, optimize for the search engines, market through social media, and so on. Some of these tasks are on the administrative side of the business like getting your business license. It can be a bit overwhelming, especially if you have never owned a business before, much less an ecommerce store.
One very important aspect of your ecommerce business is handling payments when customers purchase items from your store. Since your business is an ecommerce store and not brick-and-mortar, you will be receiving payments from credit cards and there is a system that handles these transactions called a Merchant Account and Payment Gateway. This article explains the basics for these components.
What is a Merchant Account?
You will have a merchant account for your ecommerce site. It is the merchant account that allows you to accept customers’ payments by credit cards, debit cards, gift cards, or other electronic payments.
Wikipedia has this definition for Merchant Account:
This definition may sound somewhat technical, however it is complete. Let’s break it down more simply in real English.
How does a Merchant Account Work?
A merchant account works by connecting the shopping cart on your website to your bank or a clearing house like PayPal. This is accomplished by you partnering through an agreement with the bank (or clearing house) that allows you to accept electronic payments into your merchant account. You set up a merchant account with a payment processor or merchant acquirer who has the ability to process your electronic payments. Every payment made for a purchase involves the transfer of funds to a merchant account that you hold directly with a bank.
The merchant account is the first component in accepting and processing payment. The second component is a payment gateway. The payment gateway allows funds to move from a purchaser to your bank and/or clearing house. So, the payment gateway is like a point-of-sale terminal in a retail store. It verifies and approves the payment method to ensure that the payment is valid and that it hasn’t been stolen or expired.
The Step-by-Step Process
Here is a step-by-step description from the point of purchase to actually depositing the money into your bank account for the sale of a product:
When a customer purchases an item from your online store, he/she enters their purchasing card information in the shopping cart.
After the customer enters the purchasing card information into the shopping cart, the payment method is verified and approved by the payment gateway.
The payment gateway takes the information provided by the shopping cart and securely transmits it electronically for payment authorization.
Once the payment is authorized the payment gateway sends it on to the merchant account which accepts and deducts the payments via ACH (Automated Clearing House).
The customer’s payment is deducted from their card and your payment is deposited to your account.
Regulations for the Security of a Merchant Account
As you might suspect, there are rules and regulations by which any merchant account must comply. There are strict guidelines for a merchant account because you are taking “money” for purchased goods. And, because it is transferred electronically, the security of your system is of utmost importance. Here is where it’s going to sound technical.
The Payment Card Industry Data Security Standard (PCI DSS) is a set of regulations designed to ensure that all companies who process, store or transmit credit card information maintain a secure environment. The regulations were formed by the major payment card brands (Visa, MasterCard, American Express, Discover and JCB). These rules help protect their cardholders from fraudulent credit card use, loss, and theft.
The rules the card brands have established are managed by the Payment Card Industry Security Standards Council (PCI SSC). These rules affect any merchant who stores, processes, or transmits cardholder data, and each card brand has its own rules for how to assess compliance, submit validation information, and remediate errors.
This may sound scary to you, but don’t worry. When you buy an ready-made internet business from a company like Pure-Ecommerce, we walk you through the setup. Pure-Ecommerce has a step in its 10-step training course that is on the merchant account and payment gateway exclusively. This step helps you understand your shopping cart and makes sure everything is set up correctly with your bank and/or clearing house. Our training and education process contains more detailed information than is in this article–information about the PCI SSC and who to contact if you have questions or issues that need to be handled.
[RELATED ARTICLE: STEP-BY-STEP TRAINING IS THE MOST IMPORTANT NEED A NEW ECOMMERCE BUSINESS OWNER HAS]
So, as you can see, the merchant account and payment gateway are critical components of your ecommerce business. These 2 pieces of your ecommerce business have to work properly for your customers to be happy with the process of buying from you. And, you have to be happy with it, so you don’t have issues with disgruntled customers! Buying your website from Pure-Ecommerce makes it easy for you to set everything up and have it work in compliance. And, most importantly, everything will work smoothly for you and your customers!