How Merchant Accounts Work

When it comes to accepting credit and debit cards, the process may be more involved than you might think. Rather than having the customer swipe the card and the money landing in your bank account, there is an entire process called merchant services that you need to know about. It only takes seconds for most of it, but there are still different things that happen every step of the way.

1. You receive the customer’s credit card. This can be done with a physical swipe process (or by entering the number manually at the credit card terminal), or it can be entered as a card number through your online payment software provided by your credit card merchant.

2. Electronic request goes to network. There is a processing network set up to handle these requests for your merchant services. This networks handles the business of “requesting” funds from the customers bank or credit card company and then letting the merchant know that it is approved, a very important part of your merchant services. The merchant’s account number (usually expressed as a credit card) is used for authorization.

3. The next part of how your merchant account works is when the credit card company or debit card bank receives the request. The request from the merchant account is directed, electronically, to the proper place through your merchant services. This can be a credit card company or even a specific bank. If you have a debit card that is issued through a credit card company (such as MasterCard or Visa), the request goes there first. Then the request is forwarded from the credit card company to the bank from which the card was issued. Electronically, the bank will check to see if the card is valid and if the account has the money available to fund the purchase.

4. The bank issues its decision about the funds. If everything checks out from the bank’s end, it sends approval through the network. An authorization code is electronically issued through  your mechant services and passed through the network until it reaches your computer or the credit card terminal. If there is something wrong, you will be notified that the transaction has been declined. Amazingly, this whole process, thought it seems long, only takes a few seconds but is crucial to how your merchant account works.

5. Customer receipt. If the funds have been approved, your terminal will print the receipt, or an electronic receipt will appear online for the customer to print out him or herself, if the transaction is completed via the Internet. This merchant service lets the customer know that as far as the customer is concerned, the business has been completed. But for you to actually get the money, there is still more to do. Another reason it is critical to understand how your merchant account works.

6. Batch of transactions for the day is settled. Each transaction – and its authorization code – is saved in what is called a batch. This merchant service is completed at the end of the day, the batch is settled. You need to know how your merchant accounts work so that you know this is something else that requires a request made electronically over the processing network of your merchant services. All the authorization codes are checked against the purchases and other transactions. Then the transactions are sent to the credit card companies and to the banks for final settlement before the cardholders’ accounts are officially debited (although many banks now show this information in real time).

7. Batch funds are deposited into your account. After the settlement, the funds will be directed to your account. However, this is a merchant service that takes two or three days. And the credit card merchant account provider will deduct the transaction fees and the discount rate from your deposit before it is made. This is an important thing to understand about how your merchant account works, especially when it comes to cash flow.

Even though it seems a little involved, the fact of the matter is that accepting cards is more convenient for most customers, and you need to have these merchant account services and understand how they work. Just make sure that you account for the whole merchant account services process when you are making decisions based on cash flow.