If you’re a small business or start-up, chances are that you’ve either looked into opening an aggregate merchant account or may use this payment processing option already. For online business owners who are looking to start accepting credit cards and debit cards, it’s important to understand exactly how an aggregate merchant account works and other merchant services options to consider.
What Is a Merchant Account?
In order to understand how an aggregate merchant account works, let’s first look at merchant accounts in general—what they are, how they work, and who is involved in the process.
Merchant Account Basics
A merchant account facilitates card transactions in conjunction with an acquiring bank. The account at the acquiring bank is the place where funds from credit and debit card transactions are held until they are transferred to your regular business account. You need a merchant account in order to accept credit and debit cards through a physical terminal or global payment gateway.
Whereas your business bank account acts on your behalf and the customer’s bank account (the card-issuing bank) acts on the customer’s behalf, the acquiring bank acts as a payment facilitator between all of the parties involved in the transaction process. To obtain a merchant account at an acquiring bank, the merchant needs to be formally approved and is then given a unique merchant identification number for all matters pertaining to the account.
How the Card Transaction Process Works
Card transactions are much less direct than cash transactions because they involve electronic rather than physical funds. When a customer arrives at the checkout with their card, the payment request needs to be sent to the issuing bank and an answer (approved or declined) returned to complete the transaction. The entire process looks something like this:
- The customer swipes, inserts or enters their card number into the payment terminal.
- The merchant account/payment gateway forwards the request to the acquiring bank.
- The acquiring bank forwards the request to the card association.
- The card association forwards the request to the issuing bank.
- If there are enough funds and the card is not blocked, the issuing bank approves the transaction.
- The issuing bank forwards approval to the card association, minus an interchange fee.
- The card association forwards the approval to the acquiring bank, minus assessment fees.
- The acquiring bank forwards the approval to the payment gateway/merchant account provider, who takes out the agreed-upon merchant service fee.
- The payment gateway notifies the merchant that the transaction has been approved.
- The funds are transferred to the merchant’s bank account and the customer repays the issuing bank (if a credit card was used).
Dedicated Merchant Accounts
If you want to accept debit and credit card payments at your physical or online business, the most direct way to handle payments is to use a merchant account provider like Unicorn Group. Also known as traditional merchant account providers, these companies set you up with your own merchant account and merchant ID number and handle card transactions on your behalf. In addition to facilitating payments, direct merchant accounts typically offer a suite of merchant services, including:
- A secure, PCI-compliant payment gateway
- Fraud protection
- Chargeback mitigation
- Sales reports and analytics
- Customer database
- 24/7 customer service
Rather than charge a set fee for its services, a dedicated merchant account provider works with each merchant to agree on the fee structure that best suits their business model. You’ll have full control over your money and receive your pay-out quickly.
Aggregate Merchant Accounts
A slightly different model is available to merchants in the form of an aggregated merchant account. In contrast to a dedicated merchant account, an aggregate merchant account provider simplifies the process for new and small businesses by “aggregating” several merchants into one. Rather than assigning each merchant their own unique merchant ID, the payment aggregator has its own merchant ID and account with an acquiring bank and combines several businesses under this ID. PayPal, Stripe and Square are examples of payment aggregators.
Transaction Process with an Aggregated Account
When a merchant processes a card payment through an aggregate account, the transaction process is the same as it is with a dedicated merchant account except that the funds are released from the acquiring bank account into the payment processor’s digital account rather than their business banking account. From the virtual dashboard in your account, you can either spend the funds directly or withdraw them into your bank account—a step that could take up to one week (or instantly for an additional fee).
How Fees Are Calculated in Aggregated Accounts
Merchant aggregators typically charge a fixed fee plus a percentage fee for credit card processing services. To make these fees as simple as possible, they will either charge a flat rate for all transactions or have a simplified tiered pricing structure that differentiates between:
- Card-present transactions (swiped or inserted)
- Card-present transactions (card number entered manually)
- Card-not-present transactions (internet and telephone sales)
The reason that the rates for each of these transaction categories are different is that each carries a different level of risk. The greater the risk, the more the payment processor needs to hedge itself financially against a loss. Card associations may also charge higher assessment fees for certain types of transactions, a fact which is also reflected in the pricing structures that payment aggregators use.
Payment Security, Chargebacks and Fraud
Merchant aggregators, by law, must provide a secure payment gateway. This means that they encrypt customers’ payment information and follow all of the other requirements for PCI-DSS compliance. In addition, aggregate merchant accounts typically protect against fraud by blocking any potential suspicious transactions, i.e. those that:
- Come from a high-risk country
- Are a repeat transaction
- Are unusually large
- Show that the card’s country of origin and the location of the IP address don’t match
To protect the merchant and their customers, a merchant account aggregator can freeze the account completely if suspicious activity is detected in the form of unusual transactions or chargebacks to the merchant. This may happen without warning and can last until the matter is resolved.
Additional Merchant Services
When the aggregator model first came out, payment aggregators provided a secure payment gateway and not much else. However, many aggregators today offer some basic merchant services as well. The most common service is the generation of a report that details transactions between certain dates. You can also pay a monthly fee for services such as checkout customisation and detailed analytics. What you won’t get with an aggregate account is a formal monthly merchant statement. Those kinds of statements are only available with a dedicated merchant account.
Factors to Consider when Choosing a Merchant Account
Whether an aggregate merchant account or dedicated merchant account would be more advantageous for your business depends on several factors. Understanding some of the major differences will help you make an informed choice.
Ease of Opening an Account
Gaining approval and getting set up with a dedicated merchant account can take time. The merchant account provider will ask for detailed documentation, including your business history, payment history, certificate of incorporation, personal identity documents, proof of address and more. After the underwriting process is complete, their software will be integrated into your e-commerce platform so you can start accepting credit card payments.
In contrast, a third-party processor that’s built on an aggregate model won’t usually ask for much in the way of documentation. You’ll typically be asked for an ID and proof of address, create your own unique username and password, and within minutes, you’re ready to start processing payments! Some aggregators also offer point of sale (POS) terminals that merchants can order to process card payments in person.
While ease of setup is a point in favour of aggregators, dedicated merchant accounts really shine when it comes to fees. With a dedicated merchant account, merchants can discuss custom rates that are uniquely tailored to their business model, monthly sales volume, average ticket, seasonal variations and more. While you are likely to pay a monthly fee, the per-transaction fees are likely to be much, much lower—potentially saving you thousands.
Control of Your Funds
A dedicated merchant account gives you the greatest control over your funds because your provider will communicate with you about a suspicious transaction rather than immediately freezing your account. Moreover, you will usually receive the settlement for your transactions sooner—often in a few hours as opposed to a few days.
With an aggregate merchant account, you have less control over your funds. While this may be acceptable for someone who only does business once in a while, it could cause serious businesses to lose a significant number of sales if they process payments around the clock.
A dedicated merchant account typically offers more features than an aggregate merchant account, thanks to the more detailed underwriting process and hence a lower potential risk to the merchant account provider. Special features include:
- Recurring billing
- Customer database
- Custom reporting
- Chargeback mitigation
- Multi-currency settlements
- Integration support
The other special feature that you’ll get with a dedicated merchant account is round-the-clock customer service. If anything goes wrong at 2 am, you’ll know that your account provider has your back!
Risk of Collapse
Finally, having your own merchant account protects you from the failures of others. In an aggregate merchant account—especially a small one—a high number of chargebacks to other businesses may bring the entire operation down (and your money along with it). If you do choose the aggregate merchant account option, be sure to choose a provider that is large enough to absorb the costs of a few problematic merchants in the mix.
What About High-Risk Merchants?
For high-risk merchants, being approved for a dedicated merchant account can be a little more difficult. This applies to businesses that:
- Deal with high-risk countries
- Deal in a high-risk industry
While they might not be able to open a merchant account with a particular bank, high-risk merchants should still be able to find a high-risk merchant account provider that will work with them to mitigate their particular risks and offer the best possible rates.
Generally, high-risk merchant account providers will charge higher fees and perhaps maintain a rolling reserve to cover their losses in case the merchant becomes insolvent. However, depending on the value of their goods, higher fees may still be worth it if they know they can still turn a decent profit.
Aggregate Merchant Accounts Are a Temporary Solution
While aggregate merchant accounts are perfect for beginners, serious businesses need a dedicated merchant account. Not only will you pay less in fees, but you will have greater control over your funds and be able to resolve a problem in minutes rather than losing access to your account.
If your business is still small but could potentially grow in the future, a dedicated merchant account is also a good idea. As your business grows, your merchant account can scale with you and help to propel your brand to international success.