Payment processing and a merchant account are two distinct but interconnected components of accepting electronic payments online or in-person, such as credit and debit card transactions. Understanding the difference between them can be important for businesses that want to accept electronic payments and individuals who wish to understand how electronic payments work.
Payment processing refers to the technical infrastructure and services that facilitate the acceptance and processing of electronic payments. When a customer makes a payment with a credit or debit card, the payment processor is responsible for verifying that the card is valid, checking that the funds are available, and transferring the funds from the customer’s account to the merchant’s account. Payment processing can be done by a dedicated payment processor, such as a bank or payment processing company, or a payment gateway can handle it. This software application connects a merchant’s website or point-of-sale system to the payment processor.
A merchant account is a particular bank account designed to accept and process electronic payments. When a business opens a merchant account, it essentially agrees to accept electronic payments as a form of payment for goods and services. The merchant account acts as an intermediary between the payment processor and the business, holding the funds from electronic payments until they can be transferred to the business’s regular bank account.
There are several critical differences between payment processing and a merchant account:
- Functionality: Payment processing is focused on the technical infrastructure and services that facilitate the acceptance and processing of electronic payments. A merchant account is a type of bank account that holds the funds from electronic payments until they can be transferred to the business’s regular bank account.
- Responsibility: Payment processors are responsible for verifying the validity of the payment and transferring the funds from the customer’s account to the merchant’s account, while merchant accounts are responsible for holding the funds from electronic payments until they can be transferred to the business’s regular bank account.
- Cost: Payment processing typically involves fees for the services provided, such as transaction fees, monthly fees, and setup fees. Merchant accounts may also include expenses, such as monthly or annual fees, transaction fees, and other charges.
- Eligibility: Not all businesses are eligible for merchant accounts, and the requirements for opening a merchant account can vary depending on the bank or financial institution. On the other hand, payment processors are typically more accessible and may have fewer eligibility requirements.
In summary, payment processing and a merchant account are two distinct but interconnected components of accepting electronic payments. Payment processing involves the technical infrastructure and services that facilitate the acceptance and processing of electronic payments. At the same time, a merchant account is a particular type of bank account that holds the funds from electronic payments until they can be transferred to the business’s regular bank account. Understanding the difference between these two components can be important for companies that want to accept electronic payments and for individuals who wish to understand how electronic payments work.
