What Is a Merchant Account and Why You Need It: Interview With Libby James

No sales, no shopping, and no money move go without a merchant account these days. What is a merchant account? Who needs it? How to avoid merchant account scams? We discussed all these and more merchant account FAQs in our video interview with a co-founder of Merchant Advice Service, Libby James. 

Libby is an expert with more than 12 years of experience in the merchant business. In our video interview, she has shared her tips and recommendations on how to set up and use a merchant account, how payment gateways work, and what you should know when using them.

Watch the video interview to learn expert tips and follow the transcript to check particular points from our discussion:

• What is the Merchant Advice Service?
• How to get a merchant account?
• High-risk merchant account vs Regular account
• A merchant account with bad credit
• Merchant account scams
• Typical merchant account complaints
• What is a payment gateway?
• Merchant cash advances: good or not?

Introduction

Libby James:  The merchant account is the account that moves the money or the sales money from the customer's account to the business account. So an example, you're in a shop and you're buying some clothes at the checkout and you've put in your pin into the Chip-and-PIN terminal, and then it authorizes. So that is the communication between customer bank account and business bank accounts saying, "They've got the funds here. We're good to go. You can make that sale."

Who needs a merchant account? Anyone that's selling anything, I would say nowadays. We specialize in high risk. So it's not that scary. It is laughable today what people think they can get away with it. It has to go through an underwriting process. So somebody has to, or a machine has to look at your case and say, "Look, first of all, are you illegal and you're doing the right thing? Does it stack up for us as a business? Does it fit our criteria? If so, brilliant off you go have the merchant account.

What is the Merchant Advice Service and How Did It Start?

Elena: Hi, everybody, I’m Elena from PissedConsumer.com. Today, our expert will help you better understand what a merchant account is and how to create it. Our expert Libby James will share with you the tips and tricks on how to avoid merchant accounts scams, how to protect yourself and your business…

...Libby James is a co-founder of Merchant Advice Service that offers free advice for business owners, processing card payments, and searching for financing online. With more than 12 years of that experience in the financial and retail industry, Libby James educates people and provides expertise in the merchant industry. 

What is your experience with merchant accounts, payment gateways, and the financial industry, overall?

Libby: So I stumbled into financial services. I worked for a long time as an estate agent and then got into mortgage breaking off the back of that. Which is where I met my business partner, David. We saw a lack of transparency within the merchant services world. So mortgages, for those of you who don't know, super regulated. You have to dot the I's cross the T's all the rest of it.

Merchant services were polar opposite to that when we started. So we saw this gap in the market for an advice based site, and that's where Merchant Advice Service was born. It just became my obsession to learn everything about the industry, and to be the business people's champion. So to talk to customers like you would your mate in a bar over a glass of wine, give the type of advice that you genuinely appreciate.

Since then we built networks of brokers and banks that work alongside us. So not only can we offer advice, but we can also offer solutions. So that's our background.

To simply put, the merchant account is the account that moves the money or the sales money from the customer's account to the business account. So an example, you're in a shop and you're buying some clothes at the checkout and you've put in your pin into the Chip-and-PIN terminal, and then it authorizes. So that is the communication between customer bank account and business bank account saying, "They've got the funds here. We're good to go. You can make that sale." So that's probably the easiest way to describe a merchant account.

Well, that's increased dramatically in recent months, mainly with obviously people not taking so much cash nowadays off the back of the pandemic, dare I mention it. So probably rewind four or five years ago when we started this, it was your mainstream retailers, your high street shops and things like that. 

Now you can go to a Christmas fair and you can pay for a burger with a card. Especially with consumers using things like Apple Pay and mobile payments, that's really increased the demand for merchant accounts. So who needs to take much into account? Anyone that's selling anything, I would say nowadays.

How to Get a Merchant Account?

Elena: Here comes the pandemic and I ain't got nothing better to do than sitting at home. So I ate up all my reserves, and I remember that I'm baking fairly decent cookies. So I decided to sell these cookies. 

I want to use this payment method that you are talking about, the merchant account. How do I create it? Do I need anybody or any bank's approval for it? If I do, how do I get approval for it? What's the process of setting such an account up?

Libby: There are different types of accounts so in that circumstance, a new business, a business from home, you probably use a solution such as a little chip and pin machine, like the Squares, the SumUp, the PayPal's. They can get approved quite quickly. They offer them in a couple of days with very little underwriting surrounding that. 

But if your business is more complicated or a little bigger than the example that you mentioned then you are probably going to want to source an acquiring bank provider. Purely because they overall cost for you as a business would be lower. 

The PayPal's, and the Squares, and the SumUp, they make their money because they charge large percentages per transaction that you take. Whereas, if you went to say the person that's offering your business bank, they would probably offer it to you at a lot lower rate, but charge you to rent a terminal. So there isn't a blanket answer for how do we go and get a merchant account.

...each business is different and each bank has varying criteria as to what they'll onboard. If you're totally stuck, use a broker that has access to loads of different banks. Because they can point you in the right direction and they can help package your application properly to get it approved.

Well, you probably talking weeks at the minute because loads of people are taking cards now that weren't. But pre the pandemic, yeah you can get an account agreed in a couple of days providing... 

That's why using a broker is quite good because they'll be able to help you get all of your paperwork together and send it off to the bank and get it approved really quickly. Rather than tooting and fraying and going back and forth with different requirements.

A High-Risk Merchant vs Regular Account

Elena: What I read in one of the articles is that there’s something called a high-risk merchant account. What is that? What is the difference between it and the regular merchant account? 

Libby: Okay. So we specialize in high risk, so it's not that scary. So high risk isn't always the businesses that you would automatically think as high risk, first of all. So I'll give you a few examples in a minute. But basically, it's industries that experience chargebacks within the industry, or they have quite a long time between the customer ordering the product and receiving the products, or they've got a lot of fraud and historically. 

So the banks will balance onboarding that type of business with offering slightly different terms. Such as higher rates or a rolling reserve, which is like a deposit that sits on your account. So providing it's legal, you can place the majority of businesses with high-risk providers. A lot of the time, it's not going to be your high street bank that you're really familiar with. Some of the time, it's going to be with an offshore account provider, but it can be done. 

So you walk into the shop, you order your kitchen on day one, and then you don't take delivery until say, I don't know, day 60. You've paid for part of those goods. Within that time frame, lots of things can go wrong. The customer can change their mind. The business could fold, there could be loads of different things that go wrong in that period. Because it's a long period of time, the banks need to balance that risk.

So they'll do things like say, "Two merchants? Right, okay. We'll onboard you, but we're going to keep a percentage of your takings for X amount of time. And release them when we know that everything's going well."

Can You Get a Merchant Account With Bad Credit?

Elena: Let's say somebody with bad credit wants to get to establish a merchant account. Is it possible to do that? Is there something that this person needs to know about setting up an account under the circumstances that they have bad credit?

Libby: I suppose the first thing here is that within Merchant Services, we have the thing for the MATCH List, basically. But if you get put on the MATCH List for bad credit or bankruptcy or something, then it's really, it's almost impossible to get you placed anywhere else. 

So, that's the key thing when we are placing customers with banks. In terms of personal credit and business credit, a lot is done on the company address. So that's quite important. Again, it's the variation so if you have a couple of late payments back in 2012, that it's really simple to get that sorted.

If you were made bankrupt yesterday, finding processes that are going to onboard you at that point becomes a little more tricky. I never say never, but the terms that you're going to be offered at that point with extreme adverse credit are going to be sticky. 

As long as you're not on that MATCH List that I mentioned then yeah, it's feasible. It's really hard to give a blanket answer to credit-related questions because the extreme sort of the adverse credit itself can be really, really difficult to understand in individual as well.

What Merchant Account Scams Are There?

Elena: Are there merchant accounts scams? What are they, and how can one protect themselves against scams?

Libby: Well my fight personally is against the lack of transparency within the industry. Basically, what we come across a lot of is headline rates being really, really super appealing. You're like, I'm not going to beat that rate anywhere else. So for the viewers that don't know, you're charged a percentage rate per transaction you take through your business account. 

There are lots of tricks of the trade to hide fees. So, some brokers or providers will advertise really cheap rates and then they'll charge massive fees for your Chip-and-PIN terminal, or they'll have settlement times that are really lengthy.

Or you've got a hell of a rolling reserve and lots of different things, elements that you need to consider before signing on the dotted line for a merchant account. So what I try to do, and the guys at Merchant Advice Service on the other side, are encouraging businesses to compare on a pound for pound or dollar for dollar or in your case, basis. 

So, right, "Okay, what's the bottom line? What did I process last month? What's my split of credit and debit cards? What's that actually going to cost me? If I move somewhere else, what am I going to save?" 

It's the lack of transparency as a whole and the pricing structures as a whole because they vary from bank to bank. We look at a lot of transaction statements on a daily basis. Some of them are almost funny because I'm just like, how can you get away with charging some of the stuff?

But I guess to the business owner, they're like, “Right, I've got a brilliant rate. I'm not going to get 0.2% or whatever elsewhere.” Yeah, exactly, it is a laughable day, what people think they can get away with. 

I mean it's businesses that process through the same provider for years and years and years, and they don't even realize that costs are increasing, or those hands are changing until you sit down and look at it with them and say, "Hang on a minute, come on", and you move them elsewhere.

What Are Typical Merchant Account Complaints?

Elena: In your experience, what do people complain about the most?

Libby: Okay. Well, I guess the fees and stuff. But I suppose from a business point of view is when people are terminated. So the key providers, the Stripes, the PayPal's, etc., will onboard merchants really quickly with a really, really quick underwriting process. 

Then they'll go back and review it because their selling point is getting card machines out quickly and doing it in volume. So a lot of the time businesses will be processing and then six, 12 months down the line, they'll receive a letter saying, "We don't onboard businesses like you, 30 days notice off you go, go find someone else." 

That's one example of that but that can happen in other circumstances, that you can be processing with a bank, and large mainstream banks as well. They're always balancing their risk portfolio so they can choose at any given point to move away from a certain sector and say, "Do you know what? We don't want you anymore to go and find somebody else." Then we have to find alternatives for them.

What Is a Payment Gateway? How Does it Work?

Elena: Let us move a little bit towards payment gateways. Could you please explain to our viewers what payment gateway is and how does it work?

Libby: Okay. If you remember at the beginning, you mentioned the account is the bit that authorizes the payment and moves it from customers to business banks. So the payment gateway supports the merchant account for online transactions. 

So basically it encrypts the customer card details and makes sure it doesn't fall into the wrong hands and that the payments are secure when you're making online checkout payments. So if you're using a merchant account provider and a payment gateway provider and those two separate, then the payment gateway provider will charge you per transaction as well. So that's how they, they make their money off it.

When looking for a payment gateway, it's all about security because of that... The security for the customer and for you as a business. Because using the right payment gateway will mean that you get fewer chargebacks, which is a pain to deal with. And it means that your customers know that they're in the right place and their details are going to be secure. 

So there are two elements with the payment gateway. It's the PCI compliance and basically ensuring that you tick that box. Now PCI compliance works on a rating system, and we always suggest you go with somebody that is PCI compliance number one. So if you're going down that route, then you're not going to go too wrong.

Should You Use Merchant Cash Advances?

Elena: Question about merchant cash advances. So do you think a merchant cash advance is a good idea for a business to have?

Libby: Okay. Another blanket question. So merchant cash advance has its purpose. I'm going to give you that. So merchant cash advance is really great for businesses that are either seasonal or that are closing down to renovate. 

So the way a merchant cash advance works is it's a loan in which repayments are made through your card turnover. For example, I've got an ice cream shop and I am shutting down to renovate in winter. So I've got, say six months, maybe without processing card payments during that period of time that you will shut down if you're not making any repayments to the loan.

However, when you reopen in the summer and everyone's buying your ice creams, you then start making repayments to the loan. Some would argue in those circumstances because your turnover is higher, making those repayments isn't as painful. 

In short-term finance, I think that's the key to the merchant cash advance. Well, you can't get it over long terms, but it's a quick fix, shall we say.

Elena: If I understand correctly, certain things here in terms of merchant accounts, they are very subjective. There is no yes or no answer. Right?

Libby: Exactly. So it's a bit like I mean, as with personal borrowing, you could go to your bank tomorrow and be accepted for a loan. It has to go through an underwriting process. 

So somebody has to, or a machine has to look at your case and say, "Look, first of all, are you illegal, and you're doing the right thing? And does it stack up for us as a business? Does it fit our criteria? If so, brilliant off you go have a merchant account." 

But there are so many elements to it which is why we exist as a business, I guess. Because we write about those problems and we try and solve them for clients.

Elena: Thank you very much. 

Merchant accounts provide many advantages to starting and ongoing businesses. We thank Libby James, a merchant industry expert, for this interview. She helped us find answers to top consumer FAQs about merchant accounts. 

In this video, we figured out the peculiarities of a merchant account, how it works, and why your business might need one. Once you consider opening a merchant account, we suggest you dive into Libby’s advice. 

If you have questions that you’d like to ask our expert, please leave a comment below. 

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