What is a merchant account?
A merchant account is a specific type of bank account provided by a financial services provider that allows a business to accept and process credit and debit card payments. This type of account acts as a temporary intermediary between the customer making a payment and the business's regular bank account.
Although at first glance professional bank accounts and merchant accounts may look alike, they are not the same. A normal business bank account is the account used by the business for its day-to-day operations, from which payments related to all areas of business operations such as payment of employees, rent for business premises or payment of suppliers are sent and received. On the other hand, merchant accounts are used solely for the purpose of holding the funds from a customer's sale immediately after the transaction is completed and transferring them to the company's main bank account.
Are merchant accounts indispensable for business?
Although most businesses need to receive card payments from their customers at some point, it is not always essential to have a merchant account as there are alternatives such as merchant service providers that offer end-to-end solutions that allow companies to receive payments without the need for a merchant account.
Merchant service provider platforms such as Stripe or PayPal function as payment aggregators that allow businesses to accept card transactions quickly and easily through a shared payment infrastructure. There are multiple payment processing services in Luxembourg and they are ideal options for startups or small and medium-sized businesses looking for simplicity in payment management.
In certain cases, however, a merchant account is necessary, such as for large companies that process high transaction volumes or require customized financial solutions such as more competitive rates or multi-currency services. These accounts are also preferable in high-risk sectors where standard service providers may not offer support due to the increased risk of chargebacks.
Advantages and disadvantages of merchant accounts
As we saw in the previous section merchant accounts are not essential, however in some cases, they can be very useful, lets then explore some of the main advantages and disadvantages of this type of account.
Advantages
- Straight-through and customized processing: these accounts offer an infrastructure dedicated exclusively to the business that allows direct control over funds and transactions. They also provide greater flexibility in terms of fees, integrations and customized solutions.
- More competitive fees for high volumes: as transaction volumes increase, the costs per transaction are typically lower compared to merchant service provider platforms.
- Quicker settlement of funds: funds are usually transferred to the company's bank account more quickly than with merchant service provider platforms. This can be of great importance in certain industries or activities.
- Support for multi-currency and global transactions: Merchant accounts allow companies to receive funds directly in the same currencies in which customers make payments, eliminating the need for automatic conversion and its associated costs. This is especially useful for international companies managing multi-currency operations as they can maintain bank accounts in multiple currencies and choose when and how to perform conversions, thus optimizing exchange rates. This level of control and savings is not found in merchant service provider platforms that automatically convert transactions to the merchant's preferred currency for additional fees.
- Direct relationship with acquirers: companies can work directly with merchant account provider banks to resolve specific issues and request customized services according to their needs.
- Suitability for high-risk sectors: merchant account providers can provide merchant accounts to businesses in sectors that regular service providers might refuse to serve as high-risk sectors. Such is the case with gambling, travel, cryptocurrency investment or even some areas of adult entertainment.
Disadvantages
- Complex setup process: The requirements for merchant accounts in Luxembourg can be extensive, setting up these accounts requires meeting strict regulatory requirements such as KYC and AML compliance checks and going through a business analysis process.
- Upfront and recurring costs: Merchant account providers charge multiple fees such as setup fees, monthly minimum fees, annual fees, remittance fees, chargeback fees and more. This can be very costly for small businesses with low transaction volumes.
- More demanding administrative management: with merchant accounts, companies are responsible for managing complex contracts and resolving fraud or chargeback issues, which requires significant time, human and financial resources.
- Contract termination risks: if a business accumulates too many chargebacks or is considered high risk, the acquiring bank could terminate the merchant account, interrupting operations.
Expert Accounting Help | EasyBiz
Payroll services and accounting from €90. Expert team ready to help.
Learn moreHow to open a merchant account in Luxembourg
Now that we have a better understanding of what merchant accounts are and their main advantages and disadvantages, let's take a look at the step-by-step process to open a merchant account in Luxembourg.
Assess your business needs
Before starting the process it is important to clearly define the business requirements by solving questions such as the type of transactions that need to be processed (online, physical or both), the currencies involved or the monthly volume of transactions. This step is indispensable in order to choose the right provider.
Selecting a bank or financial services provider that provides merchant accounts
In Luxembourg, it is possible to opt for banks such as BGL BNP Paribas, BCEE or ING Luxembourg but it is also possible to choose foreign providers with a presence in Luxembourg such as Adyen. At this point it is essential to research and compare the services, rates and conditions of the different providers to find the best option for your needs.
Contacting the selected financial institution and making an application for opening the account.
Once the provider has been selected, it is necessary to contact them and initiate the application process. This step usually involves granting information about the company such as:
- Legal name of the company and its legal form.
- Tax identification number of the company.
- Registered address of the company in Luxembourg.
- Description of the business and the products or services offered.
- Information on sales projections, expected monthly volume of transactions and processing history.
- Details on desired payment methods to be accepted.
- Personal details of the business owner(s).
Provide the required documentation.
Once the application process has been initiated, the provider will usually ask for formal documents to verify the legitimacy of the business and comply with KYC, AML and other regulations. The documents required may vary depending on the supplier and type of business but are usually documents such as the following:
- Certificate of registration of the company in Luxembourg.
- Articles of association of the company.
- VAT registration number.
- Identity documents of the company's shareholders and directors.
- Previous invoices or contracts with clients.
- Bank history or financial statements.
- Tax returns.
Risk assessment and analysis.
Once the supplier receives the request and those requested it will initiate a process of evaluation of the risks associated with the company. The purpose is to ensure the legitimacy and reliability of the company. During the process the supplier may request further information or clarification.
The supplier will consider risks associated with the company's industry, chargeback rates, regulatory compliance or international activity among other factors.
Waiting for application approval
The risk assessment can take several days or weeks depending on the vendor, the complexity of the case and the risk to the business. Some providers expedite approvals for businesses that have a good credit volume and a low-risk profile while they tend to take longer to analyze higher risk cases or those involving greater regulations as is the case for businesses in the area of Internet gambling, adult entertainment or cryptocurrencies. Among the factors that may delay the approval process, the following stand out:
- Incomplete or inaccurate information provided in the application.
- Discrepancies in supporting documentation.
- High-risk business profile.
- Request for additional information or documentation from the supplier.
Technical configuration and integration.
Once the merchant account provider has authorized the opening of the merchant account and the relevant contracts have been signed the account will be created and it will be necessary to set up payment processing with the provider. The exact tools and services that need to be configured depend on the payment channels to be used and may include POS terminals, payment gateway solutions and configurations required for multi-currency support.
System testing
Once everything has been carefully configured it is necessary to test the system, verify that everything is working correctly and troubleshoot any errors that may occur during testing before starting to accept payments from customers.
Start accepting payments
When the merchant account is created, properly configured and tested it is time to get the system up and running and start accepting customer payments.
