In a previous article, entitled Mobile Payments: How Do They Work?, we explained how to handle mobile payments or credit card payments. In order to help you make the best choice for your customers, it’s important to understand the process behind these types of payments and how the money flows from your customers’ accounts to your business’ account.
There are two main concepts involved in these types of payments: the merchant account and the payment gateway. After reading this article, which will describe these concepts, you’ll be able to determine what’s best for you or what you need to do to be able to accept credit cards and electronic payments.
A merchant account is the bank account through which your business will receive the money received from a customer payment by card. Wikipedia defines a merchant account as “a type of bank account that allows businesses to accept payments in multiple ways, typically debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions.”
A merchant account is mandatory to accept payments by debit or credit cards.1
The merchant account is a type of business bank account that is the link between consumers accounts and yours. This is where the payments are going to be verified before being transferred to your business bank account. When your customer pays with a bank card, the card processor sends transaction details to your merchant account. Your merchant account provider sends the details of the transaction, through the card processor, to your customer’s card issuer. The latter confirms that there are sufficient funds to cover the transaction and sends the operation’s authorization to the merchant account, again through the card processor.
Almost any bank is able to give you a merchant account. You can also use payment processors or payment gateways that already have a merchant account linked and included.
The main differentiator between different merchant accounts is the price of the transaction costs, including credit card rates. Merchant accounts come with associated fees. Some fees vary depending on the type and number of transaction amount. Most merchant account providers also change for set up and maintenance.
Make sure you carefully compare the fees charged by merchant account providers you are considering before selecting one.
A payment gateway is a third-party that debits customers’ accounts and sends money securely to a merchant’s account.
“A payment gateway is a merchant service provided by an e-commerce application service provider that authorizes credit card or direct payments processing for e-businesses, online retailers, brick-and-click companies, or traditional brick and mortar businesses.”2 A payment gateway can be connected to businesses of all kinds.
The role of the payment gateway is to process and authorize the transaction between the customer and a merchant. It gives any business the ability to integrate with multiple payment solutions.
We often refer to payment gateways for online businesses; however, it’s also possible to have card-reading devices in physical shops that are connected to a payment gateway in order to accept credit cards and NFC payments.
As is the case with merchant accounts, there are many differences between payment gateways. Here are some of them:
In order to choose the right setup for your business, you have to define your needs and which payment method(s) you want to accept. Think about the experience you want to offer your customers and decide if you want to let them pay with their e-wallets, phones or only credit cards. Almost every solution connected to a cell phone is linked to a payment gateway.
Multiple solutions can be linked to your merchant account, which means that you can use a payment gateway for your physical store and another to send payment requests by text.
If you’re not already handling credit card transactions for your business, it’s worth noting that some payment gateways can provide you (at no cost for some of them) a physical card reader. Note that SMS payment solutions can be linked either to a payment gateway or a merchant account, which may be a good way to expand your accepted payment methods. In the case of the payment gateway, you pay the payment gateway fees for every transaction and you’ll have to wait a couple of days before receiving the funds. In the case of merchant accounts, each transaction is already linked to your merchant account and you’ll receive the money directly in your account based on your merchant account agreement. You can learn more about all the different options available for your business by reading our post, Leading Payment Solutions for Mobile Vendors.
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