What is a Merchant?

The word ‘merchant' is believed to be derived from the Latin word “mercari” meaning traffic and the French word “mercis” meaning wares.

A merchant is a company or individual who sells a service or goods. An ecommerce merchant is someone who sells exclusively over the Internet. A merchant will sell the goods to the customer for a profit, and by law, will have a duty of care to the customer due to the knowledge of the products he has for sale.

A merchant can be a wholesaler or a retailer, and the products can be sold from any one source to any other source. A merchant is a non-specific term for anyone who sells anything, the only determining factor being that the product or service for sale is being sold for a profit.

Historically, a merchant is anyone who is involved in business or trade. During the 16th century, merchants included local traders such as bakers, grocers, shopkeepers as well as others who imported and exported goods over vast distances, and offered value added services such as credit and finance.

Over the years, the reputation of the merchants has varied. In ancient Rome and Greece, merchants may have been wealthy but were awarded a high social status. And, in the Middle East, the merchants enjoyed high status. The present scenario has changed a great deal. In modern times, a merchant is someone who does activities solely for the purpose of generating profit, cash flow, and revenue.

What Are the Different Types of Merchants?

There are basically two types of merchants – wholesale and retail. Apart from these, newer types of merchants known as the ecommerce merchants have also emerged and earned a place in this digital age.

Ecommerce Merchant

An ecommerce merchant or an online merchant is someone who sells products or services exclusively over the Internet. There is a huge difference between an online seller and an online merchant. An online seller just buys products and then sells them to generate profit, while an online merchant has more responsibilities than that.

An ecommerce merchant is not only in charge of his store’s inventory but also of the financial process, promotion of his products and even building the brand identity.

Ecommerce and internet-based business are high-risk activities. The boarding process undergoes a series of credit checks and underwriting before a payment gateway is deployed. Friendly fraud and stolen credits is an issue these merchants have to tackle.

An e-commerce merchant largely sells products and services over the internet. This could be via a marketplace such as Amazon and eBay, or by a third-party sales channel (Shopify, WooCommerce, BigCommerce).

Selling products online is, to an extreme edge, becoming an easier way for e-commerce merchants to scale and reach the global market. All associated costs for selling online are significantly lower in comparison to physical retail setups.

The low barrier to entry gives merchants selling products on the internet a broad edge over the conventional means of doing business.

Conversely, setting up a secure checkout and automating the order fulfillment workflow is never an easy undertaking for e-commerce merchants. To process payments, the seller needs a merchant account– which we’ll look at exhaustively later in this article.

While e-commerce merchants face their own set of hitches down the aisle,– from fraud to chargebacks, the risk is strikingly outweighed by the immense potential to scale and generate revenue from global sales.

To broaden the customer base, an e-commerce merchant can sign up for a seller account on Amazon and upload their product listings in minutes.

And since fulfillment forms a considerable part of the sales cycle, merchants can use the Amazon FBA infrastructure to have products reach their customers in a firmly-fixed and speedy way.

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Retail Merchant

A retail merchant or retailer buys merchandise from wholesalers and sells them to end-users or consumers, usually in small quantities. In a way, they act as middlemen between the producers and consumers.

Manufacturers are deeply involved in designing and developing a product, while the retailers are deeply involved in reaching out to the customers and selling these products. Both manufacturing and marketing are two different things and are hard to achieve, yet they both need each other to sustain.

Retailers are maestros in marketing, sales and customer service. After purchasing the merchandise from wholesalers or manufacturers, they sell it at slightly higher prices in the market. Note that the wholesale price is always less than the retail price. The difference in prices is considered as the cost of marketing/advertising.

Retail merchants are, for the most part, re-sellers. They source products from wholesalers and sell to end consumers in single units.

Wholesalers have little or zero control over products as soon as they sell to retail merchants. This gives retailers an option to repackage and label the items using their brand.

Such a marketing technique, however, can’t fly under the radar– especially with products that have binding trademark rights. While retail merchants tend to act as middlemen, they have a stable capacity to override costs such as buying in bulk and manufacturing.

A retail merchant only needs to set a budget for the promotion of products on social selling channels. Other expenses can be passed over to the selling price(think dropshipping). There’s a big retail chain in the market at the moment.

Resellers, therefore, are left with the task to adapt to trendy omnichannel selling strategies. Online retailing is seemingly becoming a thriving and contemporary means of promoting and selling products to shoppers at a cross-border level.

Other retail merchants prefer selling products at storefronts to walk-in customers. All the same, retailing is the most desired method of distributing products to end consumers.

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Wholesale Merchant

A wholesale merchant or wholesaler will typically purchase goods in bulk and redistribute the products to retailers in smaller quantities. Wholesaler suppliers are effectively both a reseller and a merchant because they buy goods from manufacturers and then resell these goods to retailers, hence they act as a link between the producers and retailers.

Usually, a wholesale merchant would operate out of a large establishment such as a warehouse in order to store stock before distributing it to retailers and individuals, however, it has become common for a wholesale merchant to act as a broker without physically dealing with the stock; the term for this is dropshipping.

Wholesale merchants are mostly at the enterprise level in any niche market. It’s quite interesting to note that wholesale merchants source products from manufacturers. Suppliers for wholesale products use the B2B model to make sales.

To get a grip on how wholesale merchants operate, this guide rolls out the basics on how to choose the best wholesale suppliers for your e-commerce store. And here’s an overly thought out list of 10 genuine platforms where online merchants can find legit suppliers:

Want to learn more about wholesale merchants?

Wholesale suppliers establish a perfect value chain optimization in the market and give retailers a capacity to compete on pricing and quality. Retail merchants looking to drop-ship products have to grasp how the wholesale industry works.

A whole lot of expectations from customers tilts around reliable shipping and stellar product quality. As a result, SMB merchants have to pay close attention to the wholesaler’s overall performance and reputation.

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Affiliate Merchant

An affiliate merchant is a company that wishes to drive traffic and generates leads to their website or sales of their product through ads and links placed throughout a network of affiliates. A merchant may run their own in-house affiliate program or they may use an affiliate network. These affiliate networks charge merchants a membership fee and also take an additional commission from every sale so it is more economical to run their own in-house affiliate program.

Many companies have decided to incorporate both the traditional roles of retailers and manufacturers. Apple, for example, is both a manufacturer and retailer of its products. Hence Apple has eliminated the role of wholesalers here.

Some other companies like Samsung give their products to wholesalers or distributors. This distributor is solely responsible for order picking, delivery, training sales associates, promotions etc for the Samsung brand. This distributor is called a full-service wholesaler. Some wholesalers start service-related businesses and provide services for the products they are selling. As a result, they get both – sales and service orders.

Companies like Best Buy are the biggest retailers in the world. They purchase products from manufacturers like Sony and LG at wholesale price and sell them to consumers at a higher price.

All kinds of merchants exist in this economy, either it could be purely wholesaling or retailing or it could be a blend of both. However, ecommerce is rising and there is now a lesser demand for wholesale in developing economies. Ecommerce will soon take over the market and dropshipping will be a game changer in the coming years.

To understand how this works, you need to think of the scope that relatively goes into digital affiliate marketing.

Affiliate merchants promote products through a website and earn a commission once the buyer makes a purchase using the affiliate link. Online sellers pay affiliate merchants only when a sales conversion gets through.

While some merchants choose to source an external affiliate service to help with leads and traffic, others opt to use an in-house affiliate tracking software and run their own program.

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What’s a Merchant Account?

A merchant account is a type of bank account that allows sellers, especially in the ecommerce space to electronically accept credit and debit card transactions from customers, with the aid of a payment gateway. You should note that a merchant account isn’t the typical bank account, as it’s the basic assumption that poses a lack of certainty.

If you’re an e-commerce business owner, it’s important to use a cashless payment framework that is trusted by customers and has high-security standards. So you’ll need to set up a merchant account to process payments from online shoppers.

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How to Obtain a Merchant Account

There are a couple of pertinent factors that go into obtaining the best merchant account. While handling payments from customers, you’ll realize firsthand that with each sale transaction, there are a few hidden fees to settle.

Almost entirely, the merchant has to cover the transaction fees from payment processors, the credit card association, and the issuing bank for the merchant account. To that effect, it’s perhaps savvier for the merchant to look out for an option that’ll help cut down the cost per transaction.

On the other side, a low processing fee doesn’t guarantee reliable service and support in the long run. To be eligible for a business bank account, you’ll need to have a valid business license and an EIN (employer identification number). The EIN serves as your social security number when you need to settle all tax obligations.

To be eligible for a merchant account, you’ll need to have a positive credit score. That includes clearing any bankruptcy records with the requisite bureau and declaring the existence of any previously acquired merchant account.

Other merchant accounts hold special features mostly for sellers with large volume transactions. These features attract higher fees. You want to check these operating costs to know whether a particular merchant account is an absolute fit for your business.

You’ll need to fill out an application form and attach supporting documents. Financial statements are used to assess your business’s turnover and establish the rates on each sale transaction.

If you run an online business, you’ll need to make all the necessary integrations on your website. This is to ensure that the checkout page is secure for shoppers and all payment options are concise.

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A payment gateway and a merchant account both seem to mean the same thing, but they aren’t. They’re however two table-stakes that work concurrently. Let’s look at the difference.

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Merchant Account vs Payment Gateway

A gateway is an end-to-end encrypted solution that's designed to connect merchant accounts to all online payment networks. It’s built to powerful APIs that integrate with the merchant's online store to help handle credit card processing virtually.

The payment gateway captures payment details securely and transmits the data to the acquiring bank for security checks. A merchant needs a strong fraud protection solution to avoid chargebacks and penalty issues. And that’s where the payment gateway comes in.

The long tail factor which online merchants need to safeguard besides product quality and fast shipping are secure transactions.

And for that reason, the retailer needs a competent merchant account service provider. With payment gateways, the major component to look at is the processing fees. There’s usually a small surcharge for each credit or debit card transaction. The fees vary from one processor to the other.

All processed payments go to the merchant account. And that’s why any ecommerce merchant needs one so that funds can be transferred in real-time. It’s consequently worth noting that it may take anything between 2-4 business days for funds to reflect in the business’s bank account.

Further reading:

Payment Processing 101: What’s the Difference Between a Payment Processor, Payment Gateway & Merchant Account.

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What to Look For in a Payment Processor?

Fees

Pricing models for monthly subscriptions and transaction fees are both considerable criteria to assess the most convenient merchant payment processor. Most of these solutions have a string of fees on each sign up such as; application fees, discount rate, cross-border fees, rental fees for the credit card terminal, monthly fees, setup fees, and so on.

Extra fees can potentially raise the rate on each credit card transaction. The merchant needs to check out all options in the market and make a full comparison of the payment processing fees.

The most widely used pricing structures include; flat-rate, interchange-plus, tiered rates, and direct interchange. To dig a little bit more, let’s have a look at each structure separately:

Flat rate: A flat rate is more like a fixed percentage that’s based on a charge when processing payments. This pricing model has the best ease of use and is quick to setup. A flat-rate fee is a suitable option for small retail setups and startups with low sales volumes.
Interchange-plus: An Interchange fee works best for credit card transactions. Credit card issuers such as Mastercard and Visa are more inclined to this option for its capacity to handle large volume payments, preferably those above $20,000 per month.
Direct interchange: Simply put, a direct interchange fee is one where the merchant charges a one-off monthly fee without any percentage rate. It’s not the best for small businesses that generate low volumes of sales.
Tiered rates: Tiered rates are distinctively grouped in different structures that separate each card type(Visa, Maestro, Discover).It’s, however, not the most convenient for SMBs since the fees fluctuate thus not ideal for B2C transactions. Tiered rates are best for merchants handling large payments such as business-to-business sales.

Integrations

Easy integration should be least of your worries especially if you’re an online merchant. You want to first check whether your selling channel connects to the most popular payment gateways in the market.

PayPal’s integrations directory, just to illustrate, lists quite a number of ‘big wheel’ e-commerce channels such as Shopify, BigCommerce, WooCommerce, Magneto, Squarespace and Wix.

Security

You can’t overlook security standards, especially when handling online transactions from customers. NACHA (National Clearing House Association) mandates that merchants who initiate ACH transactions using third-party payment processors should execute a strong security policy and ensure that customer’s payment information is protected.

EMV chip cards and contactless payment transactions such as Apple Pay or Google Pay offer high-security standards via end-to-end encryption. A merchant who operates a small business will need a card reader for in-store purchases.

To uphold high-security standards, SMBs with brick-and-mortar stores should look at options such as:

Ease of use

Nothing is more illuminating than easy navigation, speed, and flexibility. It’s accurate to say that e-commerce hangs on an electronic cross-border economy and customers want that instant gratification.

So before you pick a merchant payment processor, these are the essential questions to ask:

Is there 24/7 customer support?
Can you run both online and offline credit card processing services?
Is their payment infrastructure PCI- compliant?
Does the provider impose an early termination fee?

Features

Not all merchant payment solutions have refined elements to help you easily operate your business. Your needs are different from those of other merchants in the market.

If, for instance, you’re a merchant selling products online, you probably need a solid payment gateway that your target customer demographic can familiarize with, a virtual terminal, payment processor, and one with fraud detection technology.

You also need to look at how a payment gateway’s POS system is structured. For ecommerce merchants, especially, make sure the inventory tools are up to par with the market needs. Customers want a faster and secure checkout experience. Hence, you can't overlook all the pertinent security standards.

To scrutinize further, merchants need to check if the payment solution offers these perks:

Flexibility to scale your business
POS compatibility. Does it work on both iOS and Android devices?
Is the hardware suitable for real-time inventory management?
Are there intuitive reporting and analytics tools?

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Top payment processors for merchants

So far, the best third-party merchant payment services for SMBs include:

Square

Square is a jack of many dealings in the market. Its mobile processing automation is a notch ahead of most competitors(read our review).

This solution is the resolute fit for low-volume merchants who sell online and want to sync their stores with a compact checkout gateway.

A merchant can swiftly accept payments on a tablet or a smartphone, send invoices to customers, and remotely take credit card payments from a computer.

Square’s Point-Of-Sale is fully customizable and the software is free to use for both brick & mortar and ecommerce merchants. It also has a dedicated solution for merchants in the hospitality industry(restaurants, coffee shops).

The processing rate for each tap, dip or swipe is 2.6% + 10¢. Square also offers a custom pricing model for merchants who make more than $250K in card sales.

Retail merchants can use Square’s POS to handle payments securely, manage their inventory, and grow their businesses using insightful real-time reports.

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Payline Data

If you’re a merchant who’s looking for a mobile gateway for e-retail payments, then Payline (read our review) could be a perfect deal for you.

At its core, the payment option seems to have a tolerant pricing structure, especially for SMB merchants. Its interchange fee is far more transparent, compared to other solutions and a merchant doesn’t need to deal with any early termination charges.

What’s extremely impressive is that Payline offers both its gateway infrastructure and virtual terminal at zero costs. Same as other competitors, Payline strictly abides by the PCI security standards.

So if you’re a merchant in the retail or ecommerce industry, you can run secure EMV and NFC- based payments right from Payline’s checkpoint. The same goes for recurring bills (think subscriptions) and ACH payments.

Its virtual terminal allows a merchant to accept payments even when the customer’s card is not present so long as the m-POS(tablet, computer) device is connected to the internet.

To calculate the monthly costs, you can use its online calculator or schedule a call to get a custom estimate. For every ‘swiping in person’ customer, Payline charges a 0.2% commission which is equivalent to $0.10 per transaction.

The merchant can alternatively choose to part with $10 per month. Where the credit card is not present, the commission is 0.3%/ $.020 per transaction. Or better still, you can pay $20/month.

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PayPal

If you’re a merchant running an online business, PayPal is the ultimate solution for you. PayPal wears so many hats. The online merchant services provider works both as a payment gateway and a payment services account.

It’s a preferable choice for many online merchants since there are no startup costs, termination fees or any monthly charges. For merchants with a verified business account, PayPal protection for sellers covers any fraudulent chargebacks, reversals, and other associated fees whenever a buyer files a claim.

For online payments, you’ll only part with a 2.9% flat rate + $0.30 per transaction. If you want to customize the checkout experience for your online customers, you can sign up for PayPal Payments Pro, but you’ll need to pay a $30 monthly fee. This solution offers easy API cart integrations for ecommerce merchants.

Want to learn more?

17 PayPal Alternatives: Top solutions reviewed in 2020
PayPal Vs. Skrill: And why you probably need both.
In-Depth PayPal Reviews: Is PayPal the right payment platform for you?

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Payment Depot

Payment Depot is a pristine alternative that offers a transparent pricing model for merchants selling online (read our Payline Data review).

With a sharp focus on the ecommerce merchants' business model, the payment services provider easily integrates with platforms such as OpenCart, PrestaShop, BigCommerce, 3dcart, WooCommerce, and Magneto.

There’s a wide range of equipment options to choose from. As a retail merchant, you can purchase any of Depot’s Point of Sale Systems (POS) for a cut-rate price, and run speedy in-store transactions.

Payment Depot also supports NFC-based credit card terminals, mobile payments(both iOS & Android), and a virtual terminal for ecommerce businesses. Its pricing is tiered to suit merchants running businesses at any scale.

The monthly plan for the Basic account which is perfect for new businesses with a processing volume of up to $25,000, is only $49 + $0.15 per sale transaction. You also get chargeback and risk monitoring reports in real-time.

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Bottomline

So let’s do a brief recap.

If you’re on the errand to run a business, whether a brick and mortar or an ecommerce store, opening a merchant account should be a significant step to include in your blueprint.

A merchant account should help you cross the bridge anytime you want to do credit card processing from various credit card networks.

Before getting your hands on a merchant account provider, you should run a deep overrun on the customer reviews, processing rates, hidden fees, customer service score, contracts, PCI compliance, and hardware compatibility.

For ecommerce merchants, you should check if a payment gateway integrates with your selling channel. This sets the seal to enhance a smooth checkout experience for your customers.