How to Accept Credit Card Payments Without a Merchant Account
Can you start accepting payments without one?

When you’re getting your small business up and running, one of the key pieces is figuring out credit card processing. There’s so much information available that it’s difficult to know how to get started. You may have read that you’ll need a merchant account to start accepting credit and debit card payments. While that’s one way to start accepting payments, it’s not the only way. 

This article will look at how to accept credit card payments without a merchant account. We’ll focus on the best way to do that – with a payment service provider (PSP). We’ll tackle what it is and how it differs from a traditional merchant account. Then we’ll look at some of the pros and cons of utilizing a payment service provider. To start, let’s look at the process of accepting payments.

How does payment processing work? 

As a business, if you’re ready to accept credit card transactions, you need a merchant account. Usually, these are set up through a merchant account provider, which is a financial institution or acquiring bank. These merchant account providers take on the responsibility and risk of your business, so making sure you’re not liable to fail is an important part of evaluating your business for these financial institutions.

Once you’re set up with a merchant account, you can work with the merchant service provider to accept many forms of payment, which will all end up in your merchant account. After these transactions are approved by the credit card networks (like Visa, Mastercard, Discover, and American Express) and issuing banks, the funds in your merchant account can then be moved into your business bank account. 

While many larger businesses choose to set up their merchant accounts, establishing a merchant account of your own involves a long, arduous process. The merchant service provider (acquiring bank) needs to analyze your business in-depth. But what if you want to start accepting credit card payments more quickly and don’t want to set up a merchant account? Let’s look at the next section.

What’s a payment service provider?

When you open a business, chances are you want to get up and running as soon as possible. And if you don’t have the time to wait for the long underwriting process of getting a merchant account, the other solution is to utilize the help of a payment service provider, also known as a payment processor or payment facilitator. Because these companies already have existing relationships with financial institutions, they can charge you to use a slice of their pre-existing merchant account. 

Payment service providers are sometimes known as payment aggregators. That’s because they’ll combine all of the transactions from their submerchants and put them in their own merchant account. Once these transactions get processed, the payment service provider separates each of these transactions by business and then disburses your company’s funds into your business bank account. 

A PSP can leverage its existing relationships with financial institutions to give its submerchants access to all of the benefits of a merchant account without owning one themselves. Now, let’s take a look at the main advantages of working with a payment service provider.

What are the benefits of working with a payment service provider?

A third-party payment processing partner can be a lifesaver for businesses that don’t want to establish a merchant account. These providers also offer a whole host of benefits. Here are the most common ones:

Fast and easy setup

One of the biggest advantages of using a PSP instead of a merchant account is the ease of setup. As we noted earlier, establishing a merchant account can be lengthy. In addition to a drawn-out review process, the merchant service provider must go through an entire underwriting process. This can drag on for weeks or even months before your business is ready to accept payments other than cash. Since a payment service provider pools your account with many others, there’s less risk for them, which means faster approval for your business. You could even get approved within as little as a few hours. Plus, some providers even offer a completely online setup process.

No monthly or annual fees

Unlike merchant account providers, a third-party processor often doesn’t charge annual or monthly fees. Contrast this with a merchant account, which will typically charge a large deposit and monthly or yearly fees to get set up. There are other fees like Payment Card Industry (PCI) compliance fees and gateway fees (to accept online payments). However, working with a payment processor may help you streamline your fees, as you may only pay processing fees to the payment processor based on your actual transactions. This can streamline the fees you are expected to pay.

Easy to terminate contracts

Another benefit of working with a PSP is the flexibility of contracts. Many payment providers make it easy for you to alter or cancel your contract with them, and some even let you cancel the contract online. In contrast, MSPs have long-term contracts that lock your business in for much longer – up to three years. These variables differ depending on the payment processor you choose to work with. But generally speaking, third-party payment processors work on a month-to-month basis. Also, many merchant accounts impose minimum transaction limits per month, while PSPs don’t typically have such a requirement. That means a small business like yours may have more flexibility with PSPs.

A suite of tools

Compared to merchant service account providers, PSPs will often have more tools for business owners like you. These tools can include invoicing, reporting, loyalty programs, marketing tools, etc. Again, having these tools at your fingertips is another enticing reason to consider working with a third-party payment processor instead of setting up your own merchant account.

Now that you know about the biggest benefits of utilizing a payment service provider let’s explore taking different types of payments without a merchant account.

What are some of the challenges of working with a payment service provider?

While it may be easier to get started accepting payments at your business with a payment service provider, there are a few challenges that you may face compared to having your own merchant account. These include: 

Higher transaction fees

In order to help make obtaining a way to take payments easy, payment processors have to make money, too. They do this by charging you slightly higher fees than you’d pay if your business had its own merchant account. These higher credit card processing fees and setup fees are the price you’ll need to pay for the convenience and simplicity of working with a PSP. Also, some PSPs set limits on the transaction size and volume of transactions. This is something to evaluate when choosing a payment processing service that can grow your business.

Less stable accounts

With a third-party payment processor, your business can accept different payment methods much faster than with a traditional merchant account. But this comes with a downside: the chance of having your account frozen or canceled if your business becomes too high-risk. A PSP may not want to deal with all that comes with high-risk merchants, especially since they are responsible for a whole host of other merchants. In contrast, those who provide merchant accounts can be more tolerant of changes since they’ve gone deeper into your business history and financials.

Customer support

While third-party payment processors tend to streamline the payment process for your business, they may be less responsive when issues arise. Many payment processors have online support and articles that can help walk you through issues. However, they may have less human support available. In contrast, financial institutions are more likely to have dedicated support for your issues, including specific people who service your business.

Now that you understand some of the challenges you might face with credit card processors, let’s look at how you can accept credit card payments without a merchant account.

Processing in-person credit card payments without a merchant account

If you don’t have a merchant account, you might wonder how to process in-person transactions at your store. Luckily, the process is pretty simple. You’ll need to work with your payment processor to determine all of the equipment you’ll need, but generally, you’ll need to get a credit card reader or a point of sale (POS) system. The POS system is the more robust option and works great for brick-and-mortar stores and includes scanners, PIN pads, card readers, and more. 

However, if your business is much more mobile (like a food truck), you’ll want to consider a credit card reader or mobile credit card reader option that lets you take payments no matter where you are. You may also need a virtual terminal that helps turn your mobile device like a smartphone or tablet into a POS system. This makes it easy to keep track of your business even on the go.

The good news is that many third-party payment providers also offer software that integrates with the hardware you’ll need to accept credit card payments. These software programs integrate with many of the systems you already use and can provide even more insight into your business, including employee management integrations and inventory management functionality.

Processing online credit card payments without a merchant account

While it may seem daunting to also have to worry about taking credit card payments online, the process is pretty straightforward. Because many payment service providers are also technology companies, they can help you process online transactions at your ecommerce business or online store. 

Generally speaking, you’ll need a few things to accept credit card payments at your online business. The first is a payment gateway. This connects your ecommerce shop to the payment processor’s network, allowing you to process payments when a customer makes a purchase through your ecommerce storefront. The second thing you might need is a virtual terminal. This terminal lets your customer enter their credit card information manually and secures them at checkout. 

You’ll want to talk to your third-party payment processor to see their pricing for these tools, as each processor will have different rates. Once you’ve added these tools to your store, customers can safely shop at your ecommerce site. When customers enter their payment information, it connects to the payment processor’s network to accept the payment and then pay you appropriately.

Whether you utilize a merchant account at a financial institution or work with a PSP, the experience will be the exact same for your customers. So they won’t be able to tell if you’re utilizing one or the other.

As you can see, there are some definite benefits to utilizing a payment service provider who can help you accept credit card payments. The biggest benefit for your company is that you can start accepting payments much faster than if you have your own merchant account. However, there are some restrictions that payment processors can put in place that may limit your business. Therefore, when it comes to deciding whether or not to utilize a third-party payment processor or get a merchant account, you’ll need to evaluate your business needs and make a plan that works best for you.

Ready to work with a payment processor who can help you accept credit cards and other payment options?

Heartland is the point of sale, payments, and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back, and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.