Accepting payments is the most important functionality that a business needs to start selling. But to accept payments seamlessly and securely, you need a merchant account.
A merchant account acts as a pathway between your business, your customers, and the issuer and acquiring banks to process electronic transactions like credit cards. Without a merchant account, it’s very difficult to ensure consistent cash flow or manage multiple sales channels effectively. Moreover, many merchant accounts today come bundled with a payment gateway, which is another crucial component of the online payment process that streamlines transactions and protects against fraudulent activity.
In this blog, we’re going to explain how merchant accounts work in both ecommerce and offline settings and what businesses need to consider when selecting a merchant services provider.
TL;DR
- A merchant account is a type of business commercial account that facilitates electronic payments, including credit cards, and acts as a temporary holding place for funds incurred from customer transactions.
- Different types of merchant accounts exist that cater to different business needs, such as retail merchant accounts for in-person transactions, online merchant accounts for ecommerce, and high-risk merchant accounts.
- Setting up a merchant account involves choosing the right merchant account provider for your needs, identifying your type of business, submitting an application, and undergoing an underwriting process to assess risk.
What is a merchant account?
A merchant account refers to a special commercial account relationship established with an acquiring bank that enables a business to accept electronic payments. It is a temporary holding ledger for funds received from customer transactions and is not a standard business checking account. Transactions include credit card payments, debit cards, and other payment options that require a merchant account to process payments, such as eChecks and ACH. A business will typically set up a merchant account in collaboration with a merchant services provider or merchant account provider.
Merchant accounts form an essential piece of payment infrastructure for businesses that want to process online transactions. In addition to streamlining the payment process, a merchant account makes it easy for businesses to accept a variety of payment methods and maintain cash flow.
How merchant accounts differ from regular bank accounts
Unlike a regular bank account, a merchant account is not a place for businesses to store funds for an indefinite period. Instead, it acts as an intermediary holding place to secure and verify funds when a customer makes a purchase. When a transaction takes place, the payment arrives first in the merchant account before being transferred to the business owner’s business checking account. It usually takes one to two business days before these funds are available to the business, though some payment processors may offer same-day deposits.
How merchant accounts work
The process of transaction handling
When a customer makes a payment, their payment information is securely transmitted from the checkout to the payment processor for verification. In the case of a credit card or debit card transaction, the processor will check with the card network that there are sufficient funds to complete the purchase and that the details provided match what the card processor has on file.
Once funds are verified, the card issuing bank will issue an approval code for the acquiring bank to transfer funds to the business’s merchant account. The merchant account provider will deduct any necessary fees, including markups, processing fees, and interchange fees before the money moves to the business’s checking account and becomes accessible.
Because the merchant account acts as a temporary holding pen for funds incurred from a transaction, payment gateways and processors are key pieces of infrastructure that make it possible to move money between the issuing bank and the business’s bank account. The payment gateway provides a pathway between an ecommerce website or app and the payment processor, ensuring that accurate transaction and payment information are provided. Meanwhile, the payment processor facilitates the final transfer of funds.
For clarity, the merchant account (provided by the acquiring bank) holds the funds. The payment processor (your service provider) handles the technical verification, fees, and the final instruction to deposit the funds.
Understanding fees and charges associated with merchant accounts
Assessing the pricing structure used by merchant account providers is important to understand the cost of accepting electronic transactions. Different providers will charge different fees for their services, such as per-transaction fees or monthly and annual fees based on sales volume. The type of business you operate may dictate what pricing model is best for your business’s needs.
Common merchant account fees include:
Processing fees. Processing fees represent the biggest cost. The processor passes on the non-negotiable fees: interchange fees (paid to the issuing bank) and assessment fees (paid to the card networks). The processor then adds its own markup (the percentage/flat fee charged for its service).
Setup fees. Some merchant account providers will charge a one-off setup fee to cover the cost of getting your account off the ground. This is especially common for high-risk accounts, as more vetting and due diligence are typically required.
Early termination fees. If you signed up for a fixed-term contract with a service provider, they may charge an additional fee to break this contract ahead of time.
Chargeback fees. If a customer initiates a chargeback, the merchant account provider may charge an extra fee to reverse the transaction to the issuing bank.
Types of merchant accounts
| Type | Description | Ideal for | Services | Notes |
| Retail merchant accounts | Process payments in-person at brick-and-mortar stores | Retail stores, supermarkets, restaurants, beauty salons | POS integration, high-volume processing | Fast processing, secure transactions. |
| Online merchant accounts | Process payments for online businesses | Ecommerce websites, marketplaces, mobile apps | Secure payments, fraud prevention, payment gateway integration | PCI DSS compliance, multi-currency, recurring billing. |
| High-risk merchant accounts | Process payments for high-risk industries | Online gambling, pharmaceuticals, insurance, subscription businesses | Specialized approval process, secure transactions | Higher fees, additional due diligence. |
| Mobile merchant accounts | Process payments on the go | Businesses at trade shows, markets, pop-up stores | Mobile card readers, contactless devices | Flexible, convenient for mobile businesses. |
Many variations of the traditional merchant account now exist to cater to a specific type of business or industry:
Retail merchant accounts
A retail merchant account caters to small business owners that operate brick-and-mortar storefronts and require in-person payment processing capabilities. This type of merchant account can manage debit and credit transactions at a POS (point of sale) as well as card-not-present transactions.
Retail merchant accounts are desirable because they qualify for lower interchange fees on card-present transactions due to the reduced fraud risk. They are capable of quick processing because they use dedicated EMV/NFC terminals. They integrate seamlessly with a variety of POS software and hardware components, including card readers, cash registers, and barcode scanners. Common retail merchant account holders include retail stores, supermarkets, restaurants, and beauty salons.
Online merchant accounts
Online merchant accounts are specifically designed for ecommerce businesses that sell goods and services digitally. This includes purchases that are made via standalone ecommerce websites, online marketplaces, or mobile shopping apps.
The focus of online merchant accounts is ensuring secure payment processing. This often involves using tokenization, where sensitive card data is replaced by a non-sensitive token, drastically reducing the merchant’s PCI compliance burden.They will include or integrate with a payment gateway to securely submit credit card transactions from the merchant’s website to the payment processor, and then onto the merchant account itself. This should comply with Payment Card Industry Data Security Standard (PCI DSS) requirements to ensure that customer data is kept as safe as possible. Additional services offered by online merchant accounts may include multi-currency payments, virtual terminal services, and recurring billing.
High-risk merchant accounts
Because of the nature of the goods and services they sell, some merchants may be classified as “high-risk” for payment processing. Industries commonly considered high-risk include online gambling, pharmaceuticals, insurance, and subscription businesses.
Because many merchant account services will not work with high-risk merchants, it may be necessary to work with a specialized account provider who can run a more thorough approval process.
Just like a regular merchant account, high-risk account providers offer credit card processing, integrations with payment gateways and accept a range of payment methods. They typically charge a higher fee to cover the additional due diligence and may require the submission of enhanced data (Level 2/3) to help merchants qualify for better interchange rates on corporate card transactions.
Mobile merchant accounts
Mobile merchant accounts offer businesses the flexibility to accept payments on the go, as well as via traditional brick-and-mortar locations. This is valuable for business owners who regularly attend trade shows and markets or host pop-up stores away from their regular storefront.
Mobile processing is a channel and a feature of a standard dedicated merchant account. It provides the flexibility to process payments on-the-go using mobile card readers or apps, with the funds settling into the business’s main merchant account. Some will include their own payment processing apps or integrate with others, facilitating a seamless payment process for customers.
Key requirements for opening a merchant account
To open a merchant account, businesses need to undergo a thorough underwriting process to assess their suitability. This process will vary depending on the merchant account provider but usually involves the following:
- Having the appropriate business license
- Having a dedicated business bank account
- Providing details such as contact information, business address, and website address
- Undergoing a credit check
- Providing current financial statements
Steps involved in setting up a merchant account
Identify the type of business/industry you belong to
The structure of your business (i.e. sole proprietorship, LLC, or corporation), as well as the industry you operate in, will dictate which merchant account providers are available to you. Some industries may have specific requirements or restrictions, especially if they are considered to be high-risk.
Select a merchant account provider
As we covered earlier in this blog, there are different types of merchant accounts available that address different business needs. If you operate a brick-and-mortar storefront, for example, you will need a merchant account that is capable of integrating with a POS and processing in-person payments. Other factors to consider are pricing structure, contract length, security features, and relevant add-on services, such as recurring billing or analytics (more on this below).
Submit your application for an account
Your chosen merchant services provider will require you to complete an application. This includes submitting certain information, such as your business license or EIN, as well as providing information about your business’s specific payment processing needs. Be prepared to answer questions about:
- Your expected transaction volumes
- The payment methods you want to accept
- The types of products you sell
- How you can process transactions, i.e. online or in-person
Await the underwriting process
Underwriting is where the merchant services providers assess your business to understand how much risk your account presents and whether they can support your needs. At this point, the provider may conduct credit checks and ask for additional information, such as payment processing history and sales volume, to understand how vulnerable your business is to fraud or chargebacks. This process may take a few days or several weeks, depending on how thorough the checks are.
Set up your account
Once your application has been accepted, you can begin setting up your merchant account and payment processing tools. What this process looks like will depend on your provider and what types of payment you want to accept. Your merchant account provider should provide you with an account manager to guide you through the onboarding process, in addition to providing you with a wealth of self-service resources like knowledge hubs or set-up webinars. Key steps your business will need to complete to begin processing payments are:
- Integrating with a payment gateway or POS
- Configuring security settings
- Completing a test transaction
Choosing the right merchant account provider
Merchant account fees. Different providers will use different fee structures for transaction fees and account management, so it’s important to compare providers to understand which option offers the best value for your business.
Payment methods. Your account provider should be able to accept all of your chosen payment types, in-person payments, contactless payments, and other electronic transaction types like ACH.
PCI compliance. Make sure that the merchant account provider you select is fully compliant with PCI DSS standards for handling credit card transactions securely.
Scalability. Switching merchant accounts is time-consuming and disruptive, so your provider should be able to support your business’s growth and meet growing transaction volumes efficiently.
Customer support. Your merchant account is a critical piece of payment infrastructure, so you need to be able to access help quickly if you run into technical issues. Look for a provider who offers 24/7 support across a range of channels, including live chat, phone, and email.
Final words
For ecommerce and in-person businesses alike, merchant accounts are essential to support payment security as well as growth. A merchant account enables businesses to accept payments securely and seamlessly via a range of payment types, from credit and debit cards to ACH and digital wallets, and receive them into their business bank account promptly. Businesses need to assess carefully the right merchant account provider for their needs, taking into account considerations such as fee structure, contract terms, payment options, and customer support.
Stax is a strong fit for subscription and B2B businesses. Our transparent, flat-rate pricing model is cost-effective for businesses with high processing volumes and/or high average transaction values, as the cost savings quickly outweigh the monthly platform fee.
By selecting the best merchant account provider for your needs, you can feel confident that your business is ready to scale and provide customers with a seamless payment processing experience.
Quick FAQs about merchant account
Q: What is a merchant account?
A merchant account is a special type of business bank account that facilitates the acceptance and processing of electronic payments, including credit card transactions. It serves as an intermediary between the customer’s bank and the business’s bank during payment transactions.
Q: How does a merchant account work?
When a customer makes a payment, their payment information is securely transmitted to the payment processor for verification. Once the funds are verified, they are temporarily held in the merchant account before being transferred to the business’s checking account. This process usually takes one to two business days.
Q: What are the different types of merchant accounts?
Different types of merchant accounts cater to various business needs. These include retail merchant accounts for in-person transactions, online merchant accounts for ecommerce businesses, high-risk merchant accounts for businesses in high-risk industries, and mobile merchant accounts for businesses that need to process payments on the go.
Q: What are the fees associated with merchant accounts?
Merchant account fees vary based on the provider and can include setup fees, processing fees, early termination fees, and chargeback fees. It’s important to assess the pricing structure used by merchant account providers to understand the cost of accepting electronic transactions.
Q: How to set up a merchant account?
Setting up a merchant account involves choosing a suitable provider, identifying your business type, submitting an application, and undergoing an underwriting process to assess risk. Once approved, you can begin setting up your merchant account and payment processing tools.
Q: What factors should I consider when selecting a merchant account provider?
When choosing a merchant account provider, consider factors like the fee structure, contract terms, payment options, customer support, PCI compliance, and scalability.
Q: What are the key requirements for opening a merchant account?
Opening a merchant account typically requires having an appropriate business license, a dedicated business bank account, and providing details such as contact information, business address, and website address. Providers also usually conduct a credit check and require current financial statements.
Q: Why is a merchant account essential for businesses?
A merchant account is essential for businesses as it enables them to accept a variety of electronic payments securely, facilitating improved cash flow and providing customers with a seamless payment experience.
Q: How do merchant accounts ensure payment security?
Merchant accounts contribute to payment security by verifying and securing funds when a customer makes a purchase. They work in conjunction with payment gateways and processors, which facilitate the secure transfer of funds and protect against fraudulent activities.
