When you establish a merchant account for your business, you’ll need a merchant identification number (MID). Depending on the type of business you operate, you may even need multiple merchant IDs. Because there are millions of merchants processing billions of transactions per day, an MID is essential for ensuring that your payments are properly routed at all times.
What Is a Merchant ID Number?
A merchant ID number is a unique identification number for your merchant account. It makes it possible to track where credit card payments are going and where they came from.
Although many businesses only have one MID, the ID number isn’t intended to identify your business specifically. It’s only intended to identify the merchant account. This is an important distinction because a business can have several merchant identification numbers, especially if it has different revenue streams or profit centers.
For example, merchant services providers will classify businesses by type, with classifications that include:
- Food & Beverage
- Mail Order
Each of these business types is subject to its own guidelines, qualifying transactions, and base discount rate (the per-transaction rate charged to merchants). If you manage a hotel that also sells food and beverages, you’ll want to establish separate merchant IDs for these two revenue streams. The discount rate for lodging is typically much higher than the rate for food and beverages, and if you use the same MID for both, you may end up paying more than your profit margin for the food items. Mixing your transaction types might also violate the terms of your merchant account. It’s important to establish a separate MID for each profit center.
Some businesses will also establish multiple MIDs for practical purposes. For example, a retail chain may opt to create a separate merchant account for each brick-and-mortar location as a way of distinguishing each property and more easily tracking sales trends for each one. Each MID affords you a unique accounting entity, which can be analysed individually and in accordance with your other merchant accounts.
How a Merchant ID Works
Your MID is used to identify your merchant account when financial transactions are being routed through a computer network. When a merchant processes a credit card payment, the payment is transmitted between a front-end credit card processing center and a back-end settlement network via a secure payment gateway.
In order for financial transactions to be routed through the proper channels, three types of ID numbers are needed:
- Merchant identification number (MID): This identifies the merchant, or the merchant’s profit center assigned to the transaction (hotel, food, ecommerce, etc…)
- Terminal identification numbers (TIDs): This identifies the payment terminal through which the transaction was processed. A merchant may have several payment terminals all tied to the same merchant ID.
- Gateway identification number: (GID): This refers to the network gateway through which transactions are routed. All orders are transmitted through the same gateway, which is responsible for encrypting, processing, and fulfilling the transaction. Think of it as a virtual cash register.
Without the merchant identification number, processing secure payments through the network wouldn’t be possible.
Why MID Numbers Are Important
With millions of online retailers, a MID is critical for both convenience and security. Your MID makes it possible to securely transact business through the payment gateway. It serves as a digital fingerprint as transactions pass through network security. It also helps to ensure accurate financial records and reports.
In cases of fraud, MID numbers allow merchant providers to easily identify and take action against dishonest businesses. Not only does this help the merchant provider to minimize its losses, but it also helps to ensure fair rates for all of the honest businesses that work with the provider. Rampant fraud costs businesses billions of dollars per year, and if it isn’t controlled, the cost often gets passed down to the consumer (or, in this case, the merchant account holder).
Do All Businesses Need an MID Number?
A merchant ID number is typically required for any business that has a merchant account. The ID number is shared between the merchant provider and the account holder, and it’s only valid for as long as the account holder remains with that credit card processing company.
There are certain instances when a merchant account holder might not have an MID. Most notably, you won’t have an MID if you work with an aggregate merchant account provider, as these companies operate under a different business model. Aggregated providers use a single MID to process all of their clients’ transactions, and they instead identify their clients by name or e-mail address only.
Examples of third-party processors include Stripe, Block (formerly Square), and PayPal. If you make or accept a payment through PayPal, for example, the transaction is identified as a PayPal payment. The company processes the exchange of funds and collects a fee, acting as the merchant on your behalf. While PayPal does assign each user an account number that it calls a merchant ID, this number isn’t the same type of MID that you would use as a merchant processing payments independently.
Third-party processors are commonly used by hobbyists and small-scale online operations. If your business conducts high-volume transactions, it’s important to establish your own merchant account. It allows you to offer more payment options, more secure transactions, lower fees, and maximum credibility.
Why You Should Know Your Merchant ID Number
If you don’t know your MID, you should. Your merchant services provider, the processing bank, and the payment gateway provider all use this number to identify you. If you ever need to dispute a transaction or obtain more information from one of these sources, the first thing they’ll ask you for is your MID.
If you’re not sure where to find your existing merchant ID number, start by checking your monthly merchant statement or bank statement. You can usually find it alongside your business name, address, and other identifying information. If you have online access to your merchant account, log in and check your dashboard. If you don’t see your MID on the front page, click on your “Account” page for more information. If all else fails, call your merchant services provider. They may ask you a few security questions, and then they can assist you with your MID.
Can You Lose Your MID?
In rare cases, your merchant account may be suspended or revoked, in which case you’ll lose your MID. This usually only happens in instances of negligence or fraud. If your business is subject to excess chargebacks or your provider suspects that you’re engaging in suspicious activity, they may place a temporary hold on your funds and launch an investigation. If the provider then determines that your account is too high-risk, they may cancel your merchant ID and close your account.
Again, this is a rare occurrence, but if it happens, you’ll usually have to establish a new account with a high-risk payment processor. These types of providers impose greater restrictions to account for the elevated risk, but they also provide payment processing options to merchants that have been turned away elsewhere.
How to Protect Your MID
Excess chargebacks are the most common reason why MIDs get canceled. Each payment processor imposes a maximum chargeback ratio. If you exceed that threshold too many times, your account is subject to suspension or termination. To protect your MID, you need to minimise chargebacks.
A chargeback occurs when a customer forces a refund through their bank, usually in response to an unauthorised payment or false advertising on the part of the merchant. Chargebacks are intended to protect consumers from unscrupulous businesses, but most chargebacks are actually the result of credit card theft or friendly fraud.
- Friendly fraud occurs when a customer uses their own credit card but then requests a refund from their credit card company after they receive the goods. They may claim never to have made the transaction or dispute the quality of the item received, but usually the goal is to get something for nothing.
- Credit card theft can take on several forms. A thief may use stolen card information, they may make a copy of a legitimate credit card, or they might steal a card outright and use it for online transactions (as PIN numbers aren’t required).
In order to keep chargebacks to a minimum, you’ll need to be proactive about fraud prevention:
- Be diligent about customer service and ensure that all products are as advertised
- Require address verification for customers
- Use secure payment processing tools like fraud filters and geolocation
- Require CVV verification
- Don’t accept manual credit or debit card payments in person (for instance, if a customer asks to give you their card number instead of the physical card)
- Always dispute chargebacks with the help of your merchant account provider if you suspect friendly fraud
Establish and Protect Your Virtual Merchant Signature
What is a merchant ID (MID)? In short, it’s your virtual merchant signature. Learn it, take steps to protect it, and ensure that you’re always equipped to manage payments for the maximum benefit of your business.
If you don’t yet have a merchant ID and a dedicated merchant account, consider the benefits a separate merchant bank account could offer your business. You’ll not only look more professional but will also gain access to more payment options and greater control over your in-person and online transactions.