If you’ve got an idea for a startup or have the framework for one in place, you might have some questions about things like paying your bills, depositing cash, and processing credit card payments. You don’t want to make an error and have to answer to the IRS for it later.
What some businesses choose to do is have two kinds of distinct accounts. One might be a traditional bank account that you can use for operational expenses and cash deposits. The other will be a merchant bank account, through which you can handle credit card transactions.
What Exactly is a Merchant Bank Account?
A merchant bank account is a particular type of business bank account. It lets you securely accept:
- Credit card payments
- Debit card payments
- Other electronic payments
The way you can think of a merchant bank account is like an intermediary. It is the step between your business and any individual card-seeking banks that let your customers have debit or credit cards that they use to purchase things.
Why Do You Need One?
You might be wondering at this point why you can’t simply link a business bank account with the payment processor to receive credit card sale deposits. It’s because there would be long delays.
The customer-card issuing bank and your bank have to verify each transaction before authorizing the sale. This is a time-consuming process, and you don’t want to wait that long for customers to pay you.
Special Features of the Merchant Account
You shouldn’t regard a merchant bank account like a traditional business bank account where you’re always moving money in and out. It is more of a relationship with a member bank that advances you, the merchant, funds from the credit card transactions they accept, minus the transaction fees.
Because of this:
- You can’t access your merchant account
- Funds acquired from the issuing bank get automatically transferred to your regular business bank account within 1-2 business days
This authorization process speed is part of what makes these sorts of accounts so appealing. You get your money quicker, and what business owner wouldn’t be happy about that?
What’s a Business Bank Account?
If you need to know the difference between a business and a merchant bank account, unlike the features of a merchant account that we just described, the traditional business bank account is a repository for company funds. You deduct payroll and bills from it. The merchant account funds from credit card sales go into it.
There is nothing to say that your business bank account needs to be with a local bank. However, there are some compelling reasons to do business with a nearby financial entity.
Local banks might be willing to give you some better incentives than their national counterparts. For instance, they might offer you a better fee structure, better perks, or a loan or line of credit if you decide that you need one.
You can always find a well-regarded online bank like Ally that has no brick-and-mortar locations. You can’t talk to someone in-person if you go that route. However, because they have no physical locations, such banks typically give you better interest rates than national powerhouses like Chase or Wells Fargo.
Do You Need Both a Business and Merchant Bank Account?
You are not being forced by anything to get both types of bank accounts for your startup. However, keep this in mind. If you want to accept gift card, credit card, or debit card payments, you’ll have to get both of these account types.
Are There Any Alternatives?
Services exist where you don’t need to get a merchant bank account, but you can still process electronic card payments. The name for this is a payment facilitator, sometimes called a Payfac.
You have probably heard of some of the ones that are out there. Stripe, PayPal, and Square are examples.
The signup process for these is simpler and quicker than what you’d go through to get a merchant bank account. There are some potential issues, though. You may have to deal with:
- Inferior customer service
- Longer funding times, like 4-8 days vs. 1-2 days with merchant bank accounts
- Higher transaction fees
The reality is that most businesses if they want customers to take them seriously, use merchant bank accounts in conjunction with regular business bank accounts. The merchant account gives you the hardware you need, the support, and the payment processing all in the same place.