A merchant account is basically an online bank account that holds money for an online website temporarily. The amounts will finally end up in the websites owner after some period of time. In many cases this period is about 2 to seven days.
How a merchant account works
When one thinks about it, the merchant account works just like an actual bank account. Money is transferred to this account first when they make sales in the website. A merchant account can receive amounts from different accounts since the online shop’s owner doesn’t want to limit its consumers. These forms of payment may include credit or debit cards, wire transfers, ACH, etc.
There are two kind of merchant accounts.
- Dedicated merchant account
- Aggregate merchant account.
Dedicated merchant account
A dedicated merchant account is set up purely for a specific online shop. Since the online shop owner has to pay for the account whether dedicated or aggregate, they have an advantage when using the dedicated account since it offers more control of the money. This control is offered in terms of how long one can wait before withdrawing the money and the percentage rate one has to pay. The rate paid is normally based on the level of sales and type of products in the online shop. The idea here is to ensure that even small online shops are enticed to open dedicated account since the less the volume in sales the less the rate paid to the dedicated account. The opposite also applies. This therefore means that the shop owner has a number of logistics issues to deal with which may be a bit tedious. Whether or not this is worth it depends solely on the online shop owner.
Aggregate merchant account
This is the complete opposite of the dedicated account. Here, the merchant uses an account platform that is shared by other multiple users. However, the merchant has a specific merchant id from which they can access their money. This means that from the merchant id the shop’s owner has full control over any transactions that take place in the account. They therefore can transfer the money to another account on the same platform or withdraw the money to their bank accounts. However, using an aggregate account has its share of shortcomings. One of which is that the rate at which the merchant has to pay for any amounts going into the account is fixed. This normally averages at 2% – 4%. In addition to this, the time it takes to withdraw the money to the personal bank account is fixed which may be weekly, monthly, etc. A good example of a third party merchant account is PayPal.
Paying for goods online has always been a tricky issue as one is always concerned on the legitimacy of the website and if or not they are simply being scammed. A payment gateway works to prevent customers from precisely that. Online shops are not allowed to send the consumers credit card information when processing payments. This is a measure to ensure that the consumer’s details are protected.
How the payment gateway works
A payment gateway works right from when the consumer submits their order or inputs their credit card details. At this point the browser encrypts this information using secure socket layers (SSL) and the information is sent to the cards association in this case such as visa, American Express MasterCard etc. which then sends the information to the customer’s bank account.
The bank verifies or fails to verify the transactions depending on the state of the consumers account. If the transaction is verified the information is sent to the payment gateway and if the verification process fails information on the reason for failure is sent i.e. insufficient amount of money in the consumer’s account.
Once the payment gateway gets this response information, it then sends it to the browser where both the consumer and merchant have access. This may seem like a long process but it usually takes only 2 to 3 seconds. At this point, the shop freely releases the order to the consumer. However, the shop does not get the amount instantly, it takes about 3 days before the authorization process is complete.
Payment gateways are not limited to funds authorization and consumer credit details protection. The tool is also critical in the protection and verification of the consumer’s delivery location, consumer verification, and fraud protection.