Local Banks & Merchant Accounts

Your local bank is not always the best merchant account provider for your business. It is natural to assume that because your local bank is a financial institution, they also offer merchant account services. In many cases, small local banks are contracted by a third-party processor or an independent sales organization (ISO) to resell merchant services to their banking clients.

Local banks & Their Relationship to Credit Card Processing

The process of transacting credit card sales is very complicated, and requires the collaboration of a number of different entities in order for it to work successfully. A local bank is a very small part of this equation. Often, a small local bank does nothing more than hold the direct deposit account (DDA) in to which the acquiring bank deposits a merchant's funds from credit card sales.

Local Banks and Resellers of Merchant Services - In many cases a local bank acts under contract from an independent sales organization (ISO), third-party processor, or a larger acquiring bank in order to resell merchant services to their banking clients.

Although many small local banks rely on resellers to provide them with merchant service capabilities, larger banks may be self-sufficient, and are actually the bank bone of the merchant services process. Larger banks such as Well Fargo and Bank of America have no need for resellers because they are the acquirers. In fact, larger banks contract third-party processors to handle their processing needs.

Misconceptions About Processing with the Local Bank

Many merchants obtain merchant account services through their local bank without even considering other options. We have found that the two most popular reasons that business people give for thinking that the local bank is the best place to obtain merchant services are:

The local bank will have the lowest rates and fees.
Local banks often resell merchant services that are provided by a larger institution. Because the local bank is purchasing merchant services from a reseller, they need to sell at higher rates and fees in order to make a profit. This additional price increase makes it very difficult for small local banks to be competitive in the merchant services arena.

The local bank will have better customer service.
In a reseller model, the local bank is not the entity that is responsible for handling customer service issues. In most cases customer service issues are the responsibility of the originating provider that is reselling merchant processing services to the bank. When the bank is contacted for customer support by a merchant, the bank will often refer the merchant to the reseller, or inform the merchant that they will look into the issue and get back to them after they have had a chance to contact the reseller for support. Either way, this is not the stellar customer service that most merchants are expecting when they sign up for merchant services through their local bank.

Rates, Fees and Prices with Local Banks

Local banks that act as a reseller will often have rates and fees that are higher than the industry standard, because they must add an additional mark-up to allow for their own profit.

Credit card machines and terminals are also resold by local banks. Equipment is often sold at much higher prices by banks than it would be through other merchant service providers. If you must use your local bank as a merchant service provider, you will most likely be able to purchase a credit card machine elsewhere for less than what the bank is charging.

Many local banks will charge an application fee for their merchant accounts. Application fees and other similar fees can usually be avoided by obtaining merchant services through an ISO or another more direct reseller.

Screening Your Bank

Not all local banks are resellers, and not all local banks will have higher rates and fees.
Many banks offer very competitive merchant accounts as a service to their banking clients. The main purpose of this tutorial is to combat the stereotype that local banks will always offer the best merchant services, or that because they are local they will be able to provide better customer service than a provider that is further away. It is good to consider obtaining merchant services through your local bank, but you should not give the bank extra consideration over other providers based solely on the fact that they are local.