Does My Business Need a Merchant Account?
As a small business owner, no matter the type of business you are involved in, accepting credit cards can increase sales and produce positive results. Plenty of companies offer payment processing solutions with and without a merchant account.
A merchant account gives your business the greatest overall benefits and payment flexibility. However, if you want to make an informed decision when considering payment processing services for your business, read on as we delve into the differences between Stripe® and a merchant account.
What’s the Difference Between Stripe and a Merchant Account?
A merchant account is a type of business bank account that allows a business to accept and process electronic debit and credit card transactions. A merchant account is applied for and underwritten based on the characteristics of the business. These accounts facilitate the transfer of transaction funds between issuing banks and acquiring banks. One significant advantage of a merchant account is the direct relationship it creates between the business and the financial institution responsible for processing their payments. A business owns its merchant account.
On the other hand, Stripe is a PSP that operates as a Payment Facilitator, or ‘PayFac.’ Stripe doesn’t require a merchant account number or ‘MID’ (the traditional merchant account model); it boards its customers under its ‘master’ merchant account, which means you are a sub-merchant. Stripe funnels multiple merchants and their associated transaction funds through their master accounts. Since the merchant account is owned by Stripe instead of the business, the merchant can avoid the rigorous underwriting process necessary for merchant accounts.
Need to Read the Fine Print
One of Stripe’s key benefits, fast onboarding, can also be a speed bump for businesses. Since businesses start processing before Stripe has a chance to review your business and the products or services you sell entirely, and if you fail to read their prohibited list, like many merchants don’t, you can start accepting credit cards and wind up having your funds held.
Stripe is a Merchant Account, Just not Yours
Stripe utilizes payment aggregation to process payments from all merchants through one master merchant account. As a result, Stripe merchants have less control over their payment processing solutions and would need to start over when moving from Stripe.
How Does a Stripe Business Account Work?
Opening a Stripe account is simple. However, you must be prepared to provide business identification (proof of address and website ownership), like a business bank account, operation details, applicable licenses, supportability of your business, and overall risk level.
Once approved, you can begin accepting payments. Your first deposit, or as Stripe calls it, the payout is typically available seven (7) days after you add your bank account and submit your first successful payment. However, for some businesses in specific industries, the waiting period for the first deposit can be up to fourteen (14) days.
Getting Set Up with Stripe
Stripe is primarily known for its eCommerce solutions, which makes it friendly for developers and less so for those who are not. The Open API and tools can be difficult without software development experience. Stripe has recently added POS equipment and terminals to provide a full-service offering. But be prepared to go it alone.
As a smaller business, you won’t get a dedicated sales representative to help you navigate which options and services are right for your business. The lack of support and poor customer service rank as one of the biggest complaints of Stripe customers.
Costs
Every transaction has a cost associated with it. Some costs are tied directly to the transaction, whereas others are tied to the service provided. Stripe has a pay-as-you-go model, which you only pay when you use them. Stripe’s flat-fee pricing is based on the type of transaction and card used, but eCommerce merchants can expect to pay around 2.9% + $0.30 on every transaction.
Stripe charges are higher than average credit card processing fees. But, PSPs like Stripe is a good value for small, seasonal, or new businesses with relatively low transaction rates as they minimize overhead costs. Meanwhile, merchant accounts are often cheaper for well-established, higher-volume businesses that can take advantage of economy-of-scale pricing.
Not for Everyone
Stripe’s unique API ensures its platform can process for any size eCommerce business, including those looking for a custom solution. However, if you run what is considered a high-risk business, Stripe is not for you. High-risk businesses should partner with a merchant service provider specializing in high-risk businesses to obtain a high-risk merchant account.
Is Stripe a Payment Gateway or Payment Processor?
If your business fits its model, Stripe functions like a merchant account, payment processor, and gateway rolled into one. However, suppose you want other features and services, or you need a payment gateway or payment processing customized to support how you do business or industry requirements? In that case, when comparing the differences between Stripe and merchants accounts, a merchant account and a partnership with a merchant service provider is the best option.
How Do Merchant Accounts Work?
A merchant account is a specialized bank account required for payment processing. When one of your customers makes a payment through a payment gateway or point-of-sale system, the details of the sale and the credit card information are encrypted and sent to your bank, the acquiring bank. The acquiring bank then communicates with the bank that issued your customer’s card to verify the transaction. Finally, the issuing bank sends an approved or declined message through the gateway or terminal. If approved, the acquiring bank uses your merchant account to hold the funds from the transaction until settlement. After settlement, the transaction funds are transferred using EFT from your merchant account to your business bank account.
Pros and Cons of Using a PSP like Stripe
As with any payment solution, PSPs offer advantages and disadvantages to businesses. We explore the pros and cons of this payment option below.
Pros
- Quick Approval: Since payment aggregators don’t issue merchant accounts, they don’t require the due diligence merchant accounts do, so the application and onboarding process I quicker.
- Well-Known Brands: Due to its size and marketing, Stripe has significant brand recognition. Their familiar logo can increase trust between your business and your customers.
- Modern Interface: Most PSPs offer easy-to-use and sleek payment portals, enhancing the customer experience.
- Flat-Rate Pricing: Flat-rate pricing makes predicting credit card processing fees on every transaction simple.
Cons
- More Expensive: Only offer flat-rate pricing, lower rates are available.
- Lack of Support: PSPs don’t assign dedicated sales reps or support teams
- Prohibit High-Risk Businesses: Because PSPs lack the proper infrastructure to support high-risk businesses, they are prohibited.
- Slower Funding: Since funds from multiple merchants must clear a single merchant account, it may take longer to receive deposits.
- Risk of Account Freezes: PSPs reserve the right to freeze funds without notice if a transaction raises red flags.
Does My Business Need a Merchant Account?
Due to the quick setup, new business owners may be tempted to use a PSP like Stripe. However, as a business owner, you should know that merchant accounts offer various unique benefits, including lower processing rates, fee transparency, third-party software integration, fee reduction options, and advanced security features, among other advantages. For more sophisticated and affordable credit card processing, business owners should consider setting up their own merchant account with a merchant services provider.
Stripe is a registered trademark of Stripe, Inc.
