How to accept online payments without a merchant account

To accept online payments without a merchant account, you could consider using companies like PayPal or Square a merchant accounts often carry hefty fees. No matter which company you choose, watch out for hefty margins on the exchange rate for international transactions, if you’re selling overseas.

Hark! Can you hear that sound? It's the global economy, and it's changing rapidly. Thanks to the explosion of the internet, e-commerce is now the new global norm, and the power and reach of international business is within anyone's reach, no matter how small their shop.

Yes, by leveraging the right tools, even the newest, bright-eyed online sellers can compete with the big boys and girls on the block. And it nearly goes without saying that perhaps the single most important tool of them all is the ability to accept online payments.

There are several options for online sellers who want to know how to accept online payments, especially credit and debit cards. The most common of these are merchant accounts.

Of course, merchant accounts have several major drawbacks, and many online sellers wish to know how to accept online payments without merchant accounts. That's why OFX is here to break down just what merchant accounts are, how they work, and how you can accept online payments without a merchant account.

Let's take a look!

What are merchant accounts?

Merchant accounts are, most basically, a special type of bank account that allows businesses to accept payments via debit or credit cards.

In reality, they are a bit more complicated than that, since the very nature of credit card transactions is actually a bit more complicated than that. What merchant accounts represent is really an agreement between you, the customer's bank, your bank, and your credit card processor. See, the way it works is that when one of your customers buys one of your products (congratulations!) and pays with a credit card, your credit card processor (more on them below) sends the transaction to the credit card interchange, which then routes it to the customer's issuing bank to be approved. Once approved, the amount of the transaction is deposited into your merchant account, which is operated by your credit card processor.
The money is not yet truly yours. The funds must then be transferred from the merchant account (operated by your credit card processor) to your business bank account (operated by your bank).

Then, and only then, can you use your shiny new profits to go buy yourself something nice. It's quite the involved process.
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Merchant Account Requirements

Merchant accounts are the most common way to accept online credit card payments from customers, but they feature several key drawbacks, requirements, and considerations that gives pause to many online merchants and leave many others wondering, “How can I accept online payments without a merchant account?”

Here are some of the important things to consider – and indeed, reconsider – when deciding whether or not to open a merchant account to accept credit card payments.

Merchant Account Underwriting

Merchant account underwriting

The delayed and piecemeal nature of credit card transactions (compared to simple, immediate cash payments) means that more of that ugly thing called “risk” has a chance to weasel its way into the cracks in the process. Indeed, threats like chargebacks and transaction denials/rejections put a greater deal of risk on the shoulders of your payment processor and banks. What if your business fails before you can deliver the products your customers have paid for, and they issue chargebacks against you? Your bank is responsible for that financial loss. Big financial institutions don't like risk – in fact, they hate it – and they take all necessary steps to limit it whenever they can.

In the case of merchant accounts, they limit the risk by underwriting the accounts. When considering whether or not to underwrite an applicant, the banks consider a number of factors. These factors include the merchant's industry (whether it has a higher occurrence of fraud than others), the age of the business, the business' history (bankruptcies, defaults, payment history, etc.), the previous merchant account history of the applicant him-or-herself, and the personal credit history of the applicant.

If your applicant history is less than stellar, that does not necessarily mean your application will be denied. Banks tend to look more favourably upon applicants that already have an existing personal or business account with them. Further, even if your application displays higher degrees of risk, it may still be accepted on the conditions that you pay higher transaction or transfer fees to make up for it, just as a loan underwriter may charge less-qualified applicants a higher rate of interest.
Merchant Account Fees

Merchant account fees

And, about those fees...well, they can be considerable. Be wary, because many credit card processing companies bundle and group their fees, so it can be difficult to discern exactly what fee is for which service. Generally speaking, you can expect fees of varying sizes and amounts for any of the following things: application fees, setup fees, transaction fees, monthly fees, and currency conversion fees.
Setup fees are a one-time sum you pay to the credit card processing company for the privilege of opening a merchant account with them. Fees usually range from a few hundred to a thousand dollars, and are sometimes (if you're lucky or you beg hard enough) waived by the processor. Of course, “waiving” sometimes really means “transferring to your monthly fees,” so study your contract closely.

Transaction fees are charged every time a sale occurs and the merchant account provider processes the credit card information through the exchange. This fee is added each time you make a sale, and can be from 3-5% of the total value of the transaction. On a $10,000 purchase, that's $500 out of your pocket.

Monthly fees tend to be a flat, round amount, and can vary wildly depending on the length, term, and conditions of your account contract. Some providers offer lower monthly rates with longer contracts, just like a mortgage, but be sure to shop around and compare your options before choosing one. You are responsible for this fee every month, regardless of your revenue, so be sure it is not prohibitively expensive for your business.
Merchant Account Delays

Merchant account delays

Another unfortunate aspect of merchant accounts is that payment from your merchant account (essentially held in a type of escrow) to your personal bank account can be delayed, removing an aspect of the control of your business from your hands.

Most credit card companies process their merchant account transfers in batches, and these batches are generally processed every other day, or on a weekly basis. Of course, if you have payroll coming up, or have an invoice payment due, or any number of other easily imaginable and perfectly mundane reasons why the state of your cash flow is important, this can be problematic, or at worst, catastrophic.

Be sure to verify when and how frequently your processing company executes transfers, and do your best to plan your revenue streams accordingly.


How to accept online payments without merchant accounts

Another unfortunate aspect of merchant accounts is that payment from your merchant account (essentially held in a type of escrow) to your personal bank account can be delayed, removing an aspect of the control of your business from your hands.

Most credit card companies process their merchant account transfers in batches, and these batches are generally processed every other day, or on a weekly basis. Of course, if you have payroll coming up, or have an invoice payment due, or any number of other easily imaginable and perfectly mundane reasons why the state of your cash flow is important, this can be problematic, or at worst, catastrophic.

Be sure to verify when and how frequently your processing company executes transfers, and do your best to plan your revenue streams accordingly.

paypal

Accepting online payments with PayPal

The most famous grandaddy-of-them-all payment facilitator is PayPal. PayPal was one of the first and most successful companies to allow retailers to accept online payments without merchant accounts, and today they remain one of the largest in the world.

According to its U.S. website, PayPal does not charge setup or monthly fees, but does still charge not-insignificant per-transaction fees. For online transactions where the customer is located in the United States, PayPal charges a standard fee of 2.9% of the total transaction amount, plus $0.30 USD.

For international sales, the transaction fee jumps to a quite-pricey 4.4% of the total transaction amount, plus a small fixed fee depending on the currency the transaction occurs in.

Accepting Online Payments with Square

Accepting online payments with Square

The great thing about Square – the company that operates those little white credit card readers you see plugged into the headphone jacks of smartphones and tablets – is the flexibility it provides to merchants, like you!

Yes, Square has completely revolutionised the Point of Sale hardware industry with its card readers, but Square also offers powerful tools for accepting online payments without a merchant account.  The company has several robust, helpful APIs that allow developers to build out their checkout and payment processes into their storefronts, including the ability to accept credit card payments.

In the U.S. for instance, Square charges a fee of 2.9% of the total transaction amount, plus $0.30 USD per transaction for online payments, just like PayPal. One benefit of Square, however, is that it offers volume discounts for small businesses based on the amount of sales they do. If your online business does over $250,000 USD in sales annually with an average ticket price of over $15 USD, Square's sales team will consult with you to create a more attractive, affordable rate package that makes more sense for both you and Square, and will save you money on transaction fees.

You can find information about other online payment systems for small businesses right here, on OFX.

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Cheapest way to accept online payments

Depending on how and where you do business, some of the above-listed payment facilitators may be a good fit for you. Indeed, depending on what you need, some merchant accounts may even be attractive.

But there is one area where almost categorically, both merchant accounts and all other payment facilitators charge far too much money: international transactions and currency conversion.

Yes, as the economy becomes more global, chances are greater and greater that a significant portion of your business will come from international sales. As customers pay for your products in a foreign currency, you must first convert that currency to your local one before you can deposit it in your personal bank account.
Most banks and credit card processors charge as much as 4% over the current exchange rate to convert and transfer funds to your account.* That's a massive margin, and untenable for many would-be online sellers. Fortunately, there's a better way.

OFX offers online seller accounts that save you money on foreign currency conversions and transfers. OFX online seller accounts let you establish a local receiving account in seven different global currencies (USD, CAD, EUR, AUD, GBP, JPY, and HKD) so you can receive payment in your customers' local currencies.

When you're ready to transfer your money to your personal home bank account, OFX charges 1.5% or less to convert and transfer the currency. That's a savings of 2.5% over most competitors, per transfer!

OFX also gives you more control over your foreign exchange costs with tools like Forward Contracts and Limit Orders, so you're never at the mercy of unnecessary risks. Forward Contracts let you lock-in the current market exchange rate for up to twelve months, giving you security, predictability, and clarity in the long-term planning of your business finances despite the normal (and not-so-normal, like Brexit) fluctuations and undulations of the global market, so you can wait to execute the transfer until you're absolutely ready to. Limit Orders allow you to set a pre-determined market exchange rate with which you are comfortable, and when that rate is triggered, you will be automatically alerted and have the opportunity to initiate a transfer, protecting you from punitive rates and cash flow concerns.

How to accept online payments without merchant accounts: other things to consider

However, there is more to accepting online payments without a merchant account than simply choosing the cheapest option. Here are several other important factors to consider.
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Security

Good online payment systems will feature robust, always-on security commensurate with the sensitive nature of financial information. These include but are not limited to fraud prevention and identity protection.

Choose a payment system that 24/7 fraud monitoring, HTTPS secure portals, and/or two-factor authentication.

In addition, be sure to always monitor your transactions for irregularities, set spending limits on suspicious accounts, verify all account addresses, and check the CVV number on credit card payments.


Flexibility, online payments

Flexibility

Control is the name of the game in accepting online payments, and if you want to accept online payments without a merchant account, choose the option that gives it to you.

Whether that comes in the form of tiered merchant processing fee schedules, automated recurring billing, native integration with popular accounting software, or on-demand transfers to your personal bank account, the more control you have over the financial operations of your business, the better able you are to weather market fluctuations, changes in pricing, and unforeseen auxiliary concerns that can derail even well-meaning small businesses.

There are plenty of ways to accept online payments without merchant accounts today. Choosing the right one for your businesses is the key!