How Do Online Merchant Services Work?

Online merchant services are similar to traditional merchant services in that a merchant account will be needed to process credit cards. A merchant account is a type of bank account which is designed to hold the money that merchants receive from credit card payments. However, a merchant account will only hold these funds temporarily, usually for about 48 hours, after which the funds are placed in a checking account owned by the business. However, there are a number of differences between online and offline merchant services.

Payment Gateways and Aggregators

Online merchant services provide more options than their traditional offline counterparts. For example, if an online business doesn’t want to use a traditional merchant account, they have the option of using an aggregator, which is a business that manages transactions through merchant accounts they own for other businesses. One of the best examples of an aggregator is PayPal. Many online businesses prefer aggregators because they are cheaper and easier to set up than traditional merchant accounts.

Another feature that makes online merchant services distinct from their offline counterparts are payment gateways.  When a credit card payment is carried out, data needs to be transmitted someplace in order to determine if the customer has the sufficient credit to cover the transaction. In traditional stores and shops, it is the credit card terminal itself which will be responsible for this process. However, because credit card terminals are not used with e-commerce websites, a method had to be developed for verifying whether a customer had the funds to complete a transaction. This is what payment gateways are used for.

A payment gateway will receive a request for a transaction (which will be sent by special software), and then the gateway will contact the customer’s bank, as well as Visa or MasterCard in order to determine if they have the sufficient credit to complete the transaction. If sufficient credit is available, the transaction will be completed, and the credit will be sent from the customer to the merchant account.  For online merchant services, both the gateway and merchant account will usually be established by the same company.

The Payment Processor

Many people confuse the payment processor with the merchant account, but the two are not the same. The payment processor is the source where payment gateways will transfer transaction requests. When the payment processor receives a transaction request, it will process it and transfer the settlement files along with the authorization through the network to multiple gateways and providers of merchant accounts. The payment processor is also responsible for managing chargebacks and settlements.

As with traditional offline merchant accounts, those that wish to use online merchant services must apply for them. The reason for this is because online service providers run the risk of losing money when they process a credit card transaction. A screening process is used to reduce the risk of losses which can result from handling credit card transactions. Most online merchant services will charge an application fee, and if your application is declined you may or may not be refunded.