What are Merchant Accounts and How Do They Work?

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, 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 bank 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.
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What Is a Merchant Account?

A merchant account refers to a business bank account that allows businesses to accept electronic payments for goods and services. This includes 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.

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. Credit card processing fees represent the biggest cost of using a merchant account, as the processor will pass on merchant fees charged by the card network. Processing fees are typically a mix of percentage fees and flat-rate fees, depending on whether it involves a virtual terminal or in-person.

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.

Because physical store locations may be required to process high sales volumes, retail accounts are capable of quick credit card processing. 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 that payments are processed securely and fraudulent behavior is identified. 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. However, they typically charge a higher monthly minimum fee and/or per transaction fee to cover the additional due diligence or security measures.

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.

These accounts enable businesses to process card and debit card payments via mobile card readers or contactless devices. Some will include their own payment processing apps or integrate with others, facilitating a seamless payment process for customers.

Top Merchant Account Providers

Stax

Stax offers an industry-leading payment solution for eCommerce and in-person businesses. As well as integrating with a range of payment gateways and shopping cart plugins, the Stax Pay system brings all payment types into a single dashboard for seamless payment management. It’s a good fit for subscription businesses that require a full-service toolkit for billing and analytics. However, the higher monthly fee means that Stax is better suited for larger businesses with high processing volumes.

Features

  • eCommerce, in-person, and mobile payments all in one
  • U.S.-based customer support
  • Customizable batch times
  • Recurring billing
  • CRM management

Fees

Plans start at $99 per month

0% markup on interchange processing rates

FIS Global

Fintech company FIS Global offers a range of banking and merchant services to businesses, including payment processing for eCommerce merchants. After acquiring the Worldpay system in 2019, FIS became the largest payment processing company in the world. FIS Global also offers both a virtual terminal system and Commerce 360 platform for integrated payment processing and inventory management. Worldpay’s quote-based pricing means it’s highly customizable based on business needs, but is lacking in transparency and locks businesses into long contracts.

Features

  • Accepts a wide range of debit/credit card options
  • Includes POS technology
  • 24/7 customer support via phone

Fees

Quote-based pricing only

Stripe

Stripe Payments is tailored to eCommerce businesses that require a cost-effective and reliable payment processing solution. The wealth of payment options and currencies makes it well-suited to merchants with a global customer base. While Stripe does offer in-person payments, these capabilities are pretty limited. A system like Square, which offers a range of hardware and tailored plans, is a better choice for brick-and-mortar businesses.

Features

  • Easy set-up
  • Accepts multiple currencies
  • 24/7 customer support via email, live chat, and phone
  • Offers 100+ payment methods
  • No-code fraud protection tools

Fees

No monthly fees

In-person: 2.7% + $0.05 per transaction

Online: 2.9% + $0.30 per transaction

Authorize.net

Authorize.net is a comprehensive payment solution that offers businesses either a combined merchant account and payment gateway, or a payment gateway-only option. What separates Authorize from other providers is their comprehensive built-in fraud detection tool, which is fully configurable to the business’s preferences with filters like payment velocity and international currencies. However, Authorize is a relatively expensive option, and the outdated interface means a less seamless user experience than those offered by Stripe or PayPal.

Features

  • Recurring billing
  • Custom digital invoicing
  • Customer Information Management (CIM) for repeat customers
  • 24/7 customer support via phone, chat, or online form

Fees

$25 monthly gateway fee

2.9% plus 30 cents per transaction

ACH: 0.75% per transaction

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. 

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.

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FAQs about merchant accounts

Q: What is a merchant account?

A merchant account is a type of bank account that allows businesses to accept and process electronic payment card transactions. Merchant accounts are necessary for handling the funds that are transferred from the cardholder’s account to the business’s account after a credit or debit card transaction is completed. 

Q: What is an example of a merchant account?

An example of a merchant account would be a business account at a bank or financial institution specifically set up for a retail store or online business. This account enables the business to accept payments from customers using credit or debit cards, either in a physical storefront or through an e-commerce platform.

Q: What do you need to open a merchant account?

To open a merchant account, a business typically needs to provide:

  • Business information (like legal name, address, and tax ID)
  • Bank account details for fund transfers
  • Financial statements and credit history
  • An estimate of expected monthly card transaction volumes
  • A business license or proof of business registration
  • Personal identification documents for the business owner(s).

Q: What is a merchant account vs business account?

A merchant account is specifically designed for processing credit and debit card transactions and holding funds from these transactions temporarily. A business account, on the other hand, is a general bank account used for day-to-day financial operations of a business, like paying suppliers and receiving payments from clients that are not made by card.

Q: Who sets up a merchant account?

Merchant accounts are set up by a merchant acquiring bank or a specialized financial institution that processes credit and debit card transactions. The business seeking to accept card payments must apply for this account, and the provider evaluates the application based on various criteria, including the type of business, financial health, and projected sales volumes.

Q: Who qualifies as a merchant?

A merchant is typically defined as a business or individual that sells goods or services. Virtually any type of business, including retail stores, restaurants, online sellers, and service providers, can qualify as a merchant as long as they have a product or service to sell and meet the requirements set by the merchant account provider.