Essentially, a merchant account is a specialized bank account that holds money charged from customer's cards. It eventually transfers into the business's primary bank over a day or so. However, these merchant services vary greatly between traditional brick-and-mortar shops compared to online entities.
One of the main differences between brick-and-mortar and online shops is the hardware. Physical stores use POS, or point-of-sale, machines to swipe cards. The machine's internal software converts the information into a secure data package, sending it off to the credit card company for verification. If funds are available, the transaction holds that amount in the merchant account. The cashier sees an "approved" display on the machine, effectively completing the transaction. In physical stores, the cashier sees the credit card and is able to match it with an ID, reducing fraud dramatically.
When you set up a merchant account for an online business, it's critical to ask for a secure payment gateway. With virtual purchases, you never see the charge card, only the number, expiration and security code. Merchant services for online businesses use payment gateways as their form of encryption, similar to the POS machine. After a customer submits their purchase through a website, the payment gateway instantly encrypts the information, providing safe passage to the payment processor, merchant account and credit card company. Funds are held in the same manner as the POS machine until they transfer from the customer to the business permanently.
POS machines have the advantage of a human matching a card with an ID, allowing them to decline if the information isn't correct. Online security must be much more involved to reduce fraud issues. Websites often ask for the card's three-digit security code, billing ZIP code and exact name on card. Other websites only ship to the card's billing address to reduce fraud even further. As hackers find new ways to thwart the system, merchant accounts are constantly evolving to include new software encryption and security tactics.
Merchant services often differ between physical and online shops based on fees. Each merchant account typically has a monthly fee, along with transaction fees added up through the billing cycle. In some cases, brick-and-mortar shops have a slightly higher monthly fee because the POS machine requires support. Other providers charge a separate fee for equipment, however. Online businesses don't have physical equipment to support, but can pay higher fees for their payment gateway access and software security updates.
One smart way that online businesses are reducing fraud and lowering transaction fees is through aggregators. These payment companies are used by the consumer as their form of credit card payment. For example, a customer's credit card information is saved with the aggregator. They pay an online business through the aggregator. Funds are already verified through the aggregator, reducing the work on the business's merchant account end. Fees often drop because of aggregator use. Some aggregators even offer charge cards to use at brick-and-mortar shops, making purchases even easier.
Merchant services differ between business types, but the gap between online and physical shops is shrinking. Consider your business needs when applying for a merchant account to cover both virtual and physical sales and increase profits.