Merchant Accounts

Understanding the Merchant Account Process


At first blush a merchant account seems quite simple. The customer provides the merchant with a credit or debit card and the merchant swipes the card through their processing device and the money shows up in the merchant's designated checking account in a day or two. At the end of the month the merchant uses the month-end processing statement to reconcile their charges with their deposits.


A merchant processing account is actually no different from an unsecured, open-ended, commercial loan - hence the need for the merchant to go through a credit review process as part of their application package.

The actual mechanics behind the system are both interesting and complex, even though, for the most part, merchants do not have to concern themselves with the technical aspects of the various relationships. Most components of the processing system are transparent to the merchant, and that is the way it is supposed to seem. If a merchant has a problem or inquiry they are advised to contact the NEMS Customer Service Advocates who are trained to resolve the technical and banking problems and questions that might arise in the course of transaction processing.

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There are generally two banks involved in the merchant transaction and both work on behalf of the merchant. The ACQUIRING BANK is the bank that actually provides payment to the merchant through their merchant processing account. The MERCHANT'S BANK is the bank where the merchant does their local banking and is the recipient of the funds processed through the merchant's terminal, advanced by the acquiring bank.

Aquiring Bank and Merchant Bank

When a credit or debit card is processed through a merchant's terminal the transaction begins by going to a "front-end processor", a secure company that formats the data sent from your terminal so that it complies with all the requirements of the federal electronic banking system it is about to enter. The front-end processor also provides the merchant with the near-instantaneous "approval number" specific to each and every transaction. This number signifies the cardholder has an adequate open balance on their credit card to cover the transaction being processed. (Contrary to popular belief, the approval number assigned to a transaction does not "guarantee" a sale or the validity of the person tendering the card.) After the data is formatted it is sent to a "back-end processor". (Sometimes these are one and the same, but many times they are totally different companies.) At the back end processor, the funds begin to be transferred through the federal ACH (Automated Clearing House).


The acquiring bank is notified of the transaction and the bank makes the funds available to the merchant, in their designated checking account. The customer's card issuing bank is notified of the transaction and the card is charged on that end. These are all electronic transactions that take from milliseconds to hours to accomplish. The actual funds are not delivered to the acquiring bank for many days or weeks. The acquiring bank advances the monies to the merchant through their merchant processing account.

Customer satisfaction as well as merchant/product integrity is guaranteed through a system that allows for disputes and resolutions called "chargebacks". In most cases, a six month limit is placed on any transaction except those where intentional fraud by a merchant can be proven.


MasterCard, VISA, and Discover® are card associations that are the basis for the entire system, but are really transparent to the merchant. American Express is a non-bank related card that settle through the same processor, but are generally not included on the same processing statement as MasterCard, VISA, and Discover® transactions. A separate month-end statement is received by the merchant for the purposes of reconciliation. Fees paid by the merchant are distributed to all the banks involved in the relationship, the processors, as well as the association involved, MasterCard, VISA, or Discover®.


While this is a quick thumb-nail sketch of the general merchant credit cards processing account and the relationships held within, it is the easiest way to understand the complexities that are beneath the simplistic exterior.


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Northeast Merchant Systems is a registered ISO/MSP of Merrick Bank, South Jordan, UT — Copyright © 2016 Northeast Merchant Systems Inc.