What Is a Virtual Merchant? How Virtual Merchants Work (2024)

As a new retail entrepreneur, it’s crucial to create space for your business to expand. Traditional retail models often come with limitations such as local foot traffic dependence, high real estate costs, and the need for staff presence during specific hours, all of which can stifle growth opportunities. Transitioning to a virtual merchant model can break down these barriers and enhance customer satisfaction.

Take inspiration from success stories like Allbirds and Glossier who started as small startups and transformed into retail powerhouses by embracing a virtual merchant approach. This strategy allowed them to connect with customers globally. However, venturing into virtual merchant operations requires careful consideration, especially regarding the security of customer data during online transactions.

Understanding Virtual Merchant Services

A virtual merchant is an individual or business that conducts sales through an online store, providing customers with a secure platform to make internet-based payments. Virtual merchant services facilitate the connection between your business and a secure payment processor, enabling you to accept credit card payments and manage transactions on your website.

To operate as a virtual merchant, you need to collaborate with virtual merchant providers to establish a merchant account, which is essential for payment processing and credit card transactions. This setup allows you to accept payments through a secure payment gateway, with the service provider handling payment processing and deducting a small percentage—typically 2% to 3%—from each transaction, similar to traditional brick-and-mortar stores.

This approach is gaining popularity among entrepreneurs aiming to expand their customer base beyond local boundaries. It offers the flexibility to sell products round the clock, without the constraints of physical store overheads and limited operating hours.

Demystifying Merchant Accounts

A merchant account is a specialized bank account that enables businesses to accept and process electronic payments from customers. When a customer makes a purchase, their payment details pass through a secure gateway for fund verification. The virtual merchant provider then processes the transaction and temporarily holds the funds in your merchant account before transferring them to your business bank account, typically within one to two business days, minus processing fees.

To acquire a merchant account, you must apply through a payment processor or a bank, which evaluates factors such as your business type, sales volume, and credit history before granting approval. Many businesses opt for comprehensive platforms like Shopify, which bundle merchant accounts, payment gateways, and online store tools.

Key components that enable online businesses to process payments include:

• Payment gateway: A secure system that encrypts and transmits transaction data between merchants and card issuers.
• Virtual terminal: A web-based tool for manually processing payments for phone orders.
• Payment processor: The service responsible for fund transfers between customer and merchant accounts.
• Point of sale (POS): Physical hardware or software for processing payments at physical locations, working in conjunction with online systems for unified sales tracking.

Ensuring Virtual Merchant Security

Security is paramount for online businesses, especially when processing payments and handling sensitive customer information. A single data breach can have severe repercussions on your business and erode customer trust.

Modern virtual terminals employ multiple security measures to safeguard every transaction, starting from the initial online order to payment completion. These measures include:

• Multiple firewalls: Digital barriers that create protective layers around payment systems, thwarting unauthorized access attempts before reaching sensitive data.
• Data encryption: Software that encrypts payment information into unreadable code during transmission, rendering it useless to potential hackers.
• Tokenization: A method where unique tokens represent payment data instead of storing actual card numbers, adding an extra layer of security.
• SSL certificates: Digital certificates that establish secure connections between customers’ browsers and payment systems, verifying your site’s authenticity.
• Fraud detection software: Advanced algorithms that monitor transactions for suspicious patterns in real time. For instance, Shopify’s Fraud Control app tracks risk levels, chargebacks, and order patterns to help merchants block dubious transactions.
• Payment Card Industry (PCI) compliance standards: Industry regulations that dictate how businesses must safeguard card data. All Shopify stores adhere to Level 1 PCI DSS compliance, ensuring the highest security standards for protecting payment data across critical PCI categories.

Frequently Asked Questions About Virtual Merchants