By using our website you consent to all cookies in accordance with our Privacy Policy.

Have you ever wondered about the differences between a merchant account, a payment service provider, and a payment gateway? Or do you ask yourself which type of them suits your business?

merchant-account-cover

Here are some keynotes and a simple breakdown of a merchant account, a payment service provider, and a payment gateway. Stay tuned to find out!

1. What is a merchant account?

In simple terms, a merchant account is like a holding account where all of the payments go to before being deposited into your typical bank account.

what-is-merchant-account

A merchant account plays a role as a special bank account dedicated to receiving payments by online merchants. All of the income from your online sales are stored in this account. Whether you sell physical products, subscriptions, or digital products, a merchant account remains the same. It’s just an account to gather the transactions coming from your customers.

The revenue from your merchant’s transactions is being deposited until the settlement date, which is usually once every week. Only then you can receive the funds to your regular accounts.

Now, this is a crucial note to all e-commerce store owners: you can only charge your customers through merchant accounts as only merchant accounts are allowed to collect online payments with credit and debit cards (Mastercard, Visa, or Amex).

After successfully applying for a merchant account, you will be assigned a Merchant ID (MID). It is the unique code provided to store owners by their payment processor.

2. What are high-risk merchant account and low-risk merchant account?

high-low-risk-merchant-account

Before jumping into finding the ideal merchant service provider, you need to answer some questions beforehand.

Based on criteria that are developed by merchant service providers, your merchant account can fall into either one of the following: High Risk and Low Risk.

characteristics-high-low-risk-merchant-account-2

If your case falls into the High-Risk category, you must deal with a higher price than that of the Low-Risk Merchants. Besides being charged more, high-risk merchants also have strict contract conditions to minimize any possible risks.

3. What is a Payment Service Provider (PSP)?

PSP is a quick method to accept online payments without the hassle to set up a merchant account.

what-is-psp

The PSP operates using a single merchant account with a single MID. Hence, each time a new merchant arises, a PSP just creates a new sub-account within the parent account, aggregating all the other sub-merchants. This is also why some people call a PSP as a Payment Aggregator – they aggregate all the transactions from countless different merchants under one single account.

This can be considered as the fastest (and easiest) method to start receiving online payments. However, it also brings some significant disadvantages.

As mentioned earlier, when accepting payments with a PSP, you use a single MID with countless other merchants who are in the same neighborhood on the parent merchant account. And because you all use the same MID, the acquiring could evaluate you as one single merchant. Then, imagine if you ended up in a bad neighborhood with tons of chargebacks, frauds, and refunds, your transaction might be declined and your sub-account might consequently be suspended.

Another significant disadvantage is the lack of any customization and flexibility. When you opt for a PSP instead of a merchant account, you usually cannot negotiate the terms and conditions of cooperation. You also can’t negotiate the fees.

popular-psp

The most popular PSP on the market right now are Transferwise, Paypal, and Stripe.

4. What is a payment gateway?

Think of payment gateway as an interface working on top of a merchant account. It securely collects all the transaction details then passes them to your payment processor or acquiring bank.

what-is-payment-gateway

When your customers make an online payment, they do not interact with your merchant account, but the payment gateway. In simple words, a payment gateway handles:

  • Credit card payment forms on the front end
  • Transaction encryption
  • Verification systems on the back end

Most merchant account providers come with their own payment gateway. However, if you own a merchant account, then you will have tons of choices among payment gateways.

5. So, why should you open a Merchant Account?

Whether to open a merchant account or not lies in the nature of your business. To e-commerce businesses, merchant accounts are as fundamental as the goods themselves.

Setting up a merchant is not as simple as you think. In any case, whether what type of business you are, if you need a merchant account to operate, please consult with an expert or a trustworthy agent. At BBCIncorp, your business and you will be in the good hands of our experts. See more about how to set up a merchant account here.

By now you must get a hold of the three concepts and the ins-and-outs related to each: merchant account vs payment service provider vs payment gateway. It doesn’t matter that you are an e-commerce merchant or other type of business, getting to know and differentiating these concepts is a crucial step to run your business more effectively.

Recent Posts

alternatives-to-traditional-bank-accounts-in-hong-kong
5 Feb 2021

Alternatives to traditional bank accounts in Hong Kong

While opening traditional bank accounts in Hong Kong causes hassle for business owners, some alternatives to bank accounts have popped up in recent years. So, what are they?

Read more
banking-tool
18 Nov 2020

Choose the Best Banks for Your Offshore Companies

Use BBCIncorp’s banking tool to see what banks suit your offshore business most. You can also check the approval rate to get a bank account. Use it for free!

Read more
offshore-brokerage-account-advantages-and-disadvantages
5 Feb 2021

Offshore Brokerage Account: Advantages and Disadvantages

Offshore brokerage account is set up in offshore banks for investments and securities purposes. What are advantages and disadvantages of this type? Read below!

Read more
how-to-open-bank-account-during-covid-sharing-by-rachel
3 Feb 2021

How To Open Bank Account During Covid-19 & Sharing By Rachel Ng From BBCIncorp

How to open bank account, specifically in financial centers like Hong Kong and Singapore during Covid-19 Period? Let's get the answer with Rachel Ng from BBCIncorp

Read more
how-to-set-up-an-offshore-bank-account
14 Jan 2021

How to set up an offshore bank account: A step-by-step guide

Are you intending to set up an offshore bank account? If yes, a step-by-step guide as presented below will definitely help you learn what you must prepare.

Read more
benefits-of-offshore-bank-accounts
27 Jan 2021

Top 8 benefits of offshore bank accounts that urge you to move

Opening offshore bank accounts allow you to enjoy tax benefits, asset protection, and so much more. Read our blog to learn about the 8 benefits of offshore bank accounts!

Read more
countries-with-best-offshore-bank-accounts
5 Feb 2021

Top 4 countries with best offshore bank accounts for 2021

Below are top 4 countries with best offshore bank accounts that help you narrow down your range of choices for offshore banking. Which one suits you most?

Read more
delaware-to-become-the-20th-jurisdiction-in-bbcincorps-global-serviced-list
4 Mar 2021

Delaware to become the 20th jurisdiction in BBCIncorp’s global serviced list

Delaware is the latest jurisdiction in the service list of BBCIncorp, expanding our network to 20 incorporation countries in total.

Read more
vietnam-investor-visa-guide
4 Mar 2021

How To Get A Vietnam Investor Visa: Guide and Tips You Can't Miss

What are the requirements, and procedures to apply for a Vietnam investor visa? BBCIncorp will show you how to get the Vietnam investor visa in this article.

Read more
hong-kong-budget-2021-22-review-of-proposed-tax-measures
3 Mar 2021

Hong Kong Budget 2021/22: Review of Proposed Tax Measures

On Wednesday, 24 February 2021, Financial Secretary Paul Chan Mo-po released the Hong Kong budget initiatives for the fiscal year 2021/22.

Read more
eu-blacklist-2021-updated-dominica-is-a-newly-added-country
2 Mar 2021

EU Blacklist 2021 updated: Dominica is a newly-added country

On February 22nd, 2021, the EU made amendments to its list of non-cooperative third countries. Dominica became the newest country to appear on the blacklist.

Read more
most-common-types-of-business-entities-in-delaware
1 Mar 2021

Most Common Types of Business Entities in Delaware

Among all types of business entities in Delaware, LLC and corporation are most preferred. They are safe to incorporate and flexible in terms of taxation.

Read more