Infrastructure
Merchant Account
Definition
Merchant Account a bank account that enables a business to accept card payments. The merchant account holds funds from card transactions before settlement to the merchant's business bank account. Obtaining a merchant account requires underwriting by an acquirer. High-risk merchants face more scrutiny and may require specialized acquirers. Terms include processing limits, reserve requirements, and fee structures.
Related Terms
Acquirer
A bank or financial institution licensed by card networks to process card transactions on behalf of merchants. Also called acquiring bank or merchant acquirer. The acquirer provides the merchant account, assumes liability for merchant behavior, manages settlements, and handles chargebacks. Major acquirers include Worldpay, First Data (Fiserv), Chase Paymentech, and Elavon. Different acquirers have different risk appetites for merchant verticals.
MID (Merchant Identification Number)
A unique identifier assigned to a merchant account, used to identify the merchant in card network transactions. The MID appears in transaction records and is used for routing, reporting, and dispute management. PayFac sub-merchants typically share their PayFac's MID rather than having their own. Having your own MID provides more control but requires direct underwriting.
Underwriting
The risk assessment process acquirers use to evaluate merchant applications. Examines business model, financials, processing history, chargeback rates, industry risk, and compliance status. Determines whether to approve the merchant and on what terms (rates, reserves, limits). High-risk merchants face enhanced due diligence. Strong applications include clean history, audited financials, and compliance documentation.
Rolling Reserve
A percentage of processing volume held by the acquirer as security against chargebacks and refunds. Typically 5-15% held for 6-12 months before release. The reserve 'rolls' as new funds are held and old funds release. Affects cash flow significantly for growing businesses. Reserve terms are negotiable and often reduce after establishing clean processing history. Alternative structures include capped reserves and upfront deposits.
See Also
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