The 4 types of merchants explained
And why it matters
As a small business owner, you probably know that in order to accept credit or debit card payments, you either have to have a merchant account or work with a third party payment processing partner who has one. You also might know that your business is a merchant. But, there are actually more than just one type of merchant. With so much jargon in the business world, it can be a little confusing, especially if you’re just getting your business up and running. Therefore, we’ll use this article to define what a merchant is, what the four different merchant types are, and talk briefly about merchant accounts. To start, let’s narrow in on what a merchant is.
What’s a merchant?
Put simply, a merchant is an individual or a business that sells goods or services. You may hear the term ecommerce merchant, which is a business or individual that exclusively sells their goods or services over the internet. When it comes to merchant transactions, there are two types – business to business (B2B) or business to consumer (B2C). In a business to business transaction, one business is selling goods or services to another business. An example of this is a telecommunications company who sells smartphone plans and services to a construction company. Because this is a transaction from one business to another, it’s a B2B transaction. But, in a business to consumer transaction, a business is selling goods or services directly to an individual consumer. One example of this is a fashion retailer who sells clothes to individuals.
While you may not initially think this distinction makes a big difference, it can affect a lot of the way a business might operate. From how they position themselves as a business to the types of people they show in advertisements, a B2B and a B2C might have completely different business models based on their business type.
It’s important to also know that the term “merchant” is a very broad term (and intentionally so). It’s a catchall term for anyone who sells anything, with a slight caveat that the determining factor is that the product or service for sale must be sold for a profit. Now, let’s look at the four different types of merchants.
The four different types of merchants
As we mentioned before, there are a few different types of merchants. As technology alters the way companies do business, that has affected the types of merchants. Let’s look at each of the four merchant categories:
The first type of merchant is a wholesaler. A wholesale merchant buys goods in bulk from one supplier and then sells them to a variety of smaller retailers for a profit. For example, they might buy a product from a manufacturer. In their order, they purchase 10,000 units of that one kind of product. Then, they’d work with retailers who can’t take on 10,000 products in their inventory to supply them with the number of units they can take on. A wholesaler works with multiple retailers in this way. They also usually have a warehouse or storage facility where they take possession of the large amounts of units before selling them to specific retailers.
A wholesale merchant turns a profit by selling the products for more than the wholesale price they paid to the manufacturer. Sometimes, a wholesaler may also sell directly to the end consumer, as is the case of warehouse retailers like Costco and Sam’s Club.
The next type of merchant is a retail merchant. Retailers are the go between suppliers and the end consumers. They’ll buy a product from a wholesaler or even directly from a manufacturer, and then sell it to the end consumers. Retailers take the products and market, advertise, and find the right consumer for them. In this way, retailers are doing the legwork to make sure the right product gets to the right consumer. Retailers make their money by marking up the cost of the products they sell. The difference in what they pay for the goods and what they sell them for is their profit, minus any costs they have selling the product.
Retailers are seen as resellers since they are buying the product from a wholesaler or a manufacturer and then reselling the product to the consumer. Reselling could even include packaging the product differently with a private label or proprietary packaging.
The third type of merchant is an ecommerce merchant. Ecommerce businesses are growing at a rapid pace, and an ecommerce business is solely based online. These merchants only sell their products or services on the internet through a variety of channels. They might use marketplaces such as eBay or Amazon to sell their products, or they may use their own website. Ecommerce merchants are responsible for building their brand, marketing their products, and taking care of things like bookkeeping and payment processing.
While ecommerce merchants have the advantage of reaching a global audience, they aren’t immune to challenges. One of the biggest challenges that ecommerce merchants face is accepting payments online. From the background checks a business needs to set up a payment gateway to dealing with payment processing and fraudulent purchases, operating an ecommerce business can be high-risk.
The last type of merchant is an affiliate merchant. This merchant is any online business that makes its money from referring people to other merchants (usually ecommerce merchants). In this way, an affiliate merchant drives traffic and helps a company generate leads for a product. Some businesses run their own affiliate program or hire affiliate merchants to help them sell more products at their business. Affiliate marketing is all about getting people down the purchasing funnel, and affiliate merchants use their knowledge to help do that.
Now that you know about the four different types of merchants, let’s look at what they all have in common – a merchant account.
What’s a merchant account and why do you need one?
If you’re a new business owner, you may not be familiar with merchant accounts. At the base level, a merchant account is vital to accepting payments at your business. They let you accept multiple forms of payment, including debit card transactions, credit card payments, Automated Clearing House (ACH) transactions, mobile payments, and online payments. Businesses can work with a merchant account provider like a bank or other financial institution to set up a merchant account themselves, or they can work with a payment processor to utilize the payment processor’s merchant account.
Typically, more newly-established businesses will lean toward working with a third party payment processor because of the strict underwriting requirements banks have. Either way, your business needs a merchant account to accept payments at your business – including credit card processing. Without a merchant account, businesses like yours can’t accept payments besides cash.
During a transaction, the acquiring bank or the payment processor receives funds for the transaction from the issuing bank and then moves them to your merchant account. Once funds from a transaction are placed into a merchant account, the transaction is complete. After the transaction completes, the funds are then transferred into your business bank account. Merchant accounts essentially serve as a holding account to protect banks and payment processors so they don’t get burned by fraud or chargebacks.
If you’re an ecommerce merchant, you’ll also need to get a payment gateway. The best way to think about a payment gateway is as an online point of sale (POS) system for your business. Not only does it help to authenticate an online credit card transaction, but it also securely transmits data from online payments or sales to the payment processor. Enhanced security is vital to protect your customers’ payment data, and a payment gateway does this through the use of tokenization and encryption, helping to limit instances of fraud and chargebacks at your online business. A payment gateway will also typically have website integration capability to make electronic payments on your website seamless for customers.
Whether it’s a payment service provider or a payment gateway, you’ll want to make sure to check the processing fees you’ll pay for these services. Some providers may include a base monthly fee and then a per-transaction fee, while others may have a flat-rate pricing structure or even an interchange plus pricing model, which relies on a markup of a card network (like Visa, Mastercard, Discover, or American Express) interchange fees. You’ll also want to investigate the necessary equipment you’ll need to accept payments (if applicable). From a POS system to card readers, it’s important to know what a merchant services provider can help you acquire for your business. Finally, you should keep an eye on any extra fees a credit card processor may have, including statement fees, service fees, bank routing fees, and more.
Merchant service providers can also help ensure your business follows PCI compliance guidelines. PCI stands for Payment Card Industry, and PCI compliance includes a specific set of procedures to help protect consumer cardholder data. These rules were set forth by the card issuers to help curb fraudulent transactions.
As you can see, knowing the difference between merchant types can help you steer your business to where it will be most profitable. And while each merchant type can have its place, it’s important to evaluate your business’s goals before deciding on what type of business you want your company to be. You’ve also seen the importance of a merchant account, and how thorough you should be before selecting a merchant services provider. After reading this article, you’re ready to get your business off the ground.
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