What Is a Merchant Account and Do You Need One?

Updated on August 1, 2020
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If you want to accept debit or credit card payments at your business, you’ll need to invest in merchant services. As a whole, merchant services include all of the financial tools, software, etc. required for you to accept and process card-based payments. Of these tools, perhaps one of the most important is a merchant account.

What is a merchant account? Do you need one for your business? We’re here to answer these questions—and more—in this comprehensive guide to merchant accounts.

What Is a Merchant Account?

A merchant account is a type of bank account that allows your business to accept debit and credit card payments from customers. Your merchant account will front your business the funds—minus fees—from the credit card transactions you accept, before your customers pay off their card issuers.

In other words, the payments from your debit and credit card sales will be deposited into your merchant account, and then transferred to your business bank account. It’s important to note, therefore, that a merchant account is distinct from a traditional business bank account.

How Do Merchant Accounts Work?

With this merchant account definition in mind, let’s explain how these bank accounts work in a little more detail.

Once again, a merchant account itself is simply the bank account through which your business will receive the money you earn through your customers’ card purchases from your business. On its own, a merchant account does not include other technology or services associated with merchant processing, like card readers, payment gateways, or other software used to accept credit card payments—these accounts are only the banking service that allows you immediate access to transaction proceeds.

This being said, however, you might be wondering: Why do I need a merchant account?

In essence, a merchant account prevents you from having to wait for the proceeds from credit card transactions—caused by the delay between the moment your customer pays for your good or service with a credit card and the moment they pay their credit card bills.

Therefore, the process of accepting credit card payments—and the role your merchant account plays—can be broken down like this:

  • After one of your customers pays for your good or service with a card, the card processor will send the transaction details to your merchant account.
  • Your merchant account provider will then send the transaction details, through the card processor, to the customer’s card issuer.
  • Once the customer’s card issuer confirms that there are sufficient funds available to cover the transaction, the issuer then contacts the processor who, in turn, contacts the merchant account with approval. Credit card networks like Visa and Mastercard oversee this process of data exchanges, called interchange.
  • After all of this back-and-forth, your merchant account then begins to front your business the proceeds of the card transaction—minus all of the fees—to your business bank account.

Merchant Account Fees

As we just mentioned above, the final step in the process of accepting credit card payments involves funds being transferred from your merchant account to your business bank account—minus fees. When you open a merchant account, which we’ll explain in greater detail below, your merchant account provider will charge fees for the services they’re providing.

First and foremost, merchant service providers need to fortify themselves against the risk they take on by fronting your business your revenues, so they charge you merchant account fees. In addition, you’ll also pay wholesale fees that processors, networks, and issuers charge for their part in the interchange process. Depending on your merchant account provider, you might also pay for additional tools, hardware, software, and basic setup and maintenance.

Overall, here are some of the typical merchant account fees you might pay when working with a merchant services provider:

Setup Fees

Merchant account providers often charge customers a one-time, upfront fee for setting up their merchant account. Unfortunately, many providers only provide quote-based pricing for this fee.

As a result, you’ll need to ask for a quote to get an idea of how much this setup fee will cost your business. Generally, your setup fee will depend on your business’s card sales volume.

In addition, if your account provider is setting up POS hardware for you, that setup cost may also be incorporated into this fee—though the cost of the hardware itself will be a separate expense.

Monthly Maintenance Fees

Most providers will charge you a monthly, ongoing fee for their merchant account services, as well.

This will typically be a flat fee of $10 to $30 that could be called a statement fee, an account fee, or simply a monthly fee.

Transaction Fees

Now, the per-transaction fee you’ll have to pay will be the most complicated facet of how much your merchant account will cost your business.

As we discussed above, when you get the money from a card transaction, there are a number of entities involved in the process—card processors, card networks, and card issuers—and each wants their share of every transaction that’s processed. 

This being said then, the amount of money that your merchant account will advance you for a given transaction won’t be the full transaction amount. The per-transaction fees that merchant accounts charge will be fees by omission—they’ll front you your transaction amount, minus what all of the middlemen will claim through the process.

Therefore, these merchant account fees can be structured in three different ways:

  • Flat-rate transaction fees: Flat-rate fees charge the same rate for each kind of card transaction you process, no matter what card issuer or card network. Flat-rate fees can look like 2.75% or 2.4% + $0.10, and they can also be different based on how you run your transaction (through a credit card reader vs. keyed-in information). But flat-rate fees will be the same across the board, depending on how you initiate the transaction.
  • Interchange-plus transaction fees: These are the most transparent transaction fee option. They consist of the amount it costs to process the payment (also known as wholesale costs) plus the fee that the merchant account will charge you (the markup costs). With interchange-plus pricing, you will be able to see exactly how much each transaction costs your business with an itemized monthly statement. Plus, your merchant service provider won’t lump together pricing and overcharge you for payments that are more affordable to process, like regulated debit card transactions.
  • Tiered transaction fees: Tiered fees classify card transactions into three tiers—qualified, mid-qualified, and non-qualified—based on the risk they pose. Transaction fees will be the lowest for the qualified transactions, which will always involve a physical card, in-person payment, and a same-day batch settlement. Meanwhile, if a transaction is keyed-in or has a settlement delay, then it could be downgraded to mid-qualified or non-qualified for the risk of non-settlement that it poses for the merchant account provider. This form of pricing is pretty specialized and hard to understand, so we encourage small business owners to consider their more transparent fee options before settling for tiered fees.

Review our comprehensive guide to credit card processing fees for more information on how these charges work.

Merchant Account Alternatives

As we’ve explained, a merchant account is required to accept credit card payments. Typically, a merchant account provider, like Dharma Merchant Services, Braintree, or Payline Data, will work with you to set you up with your own dedicated merchant account that is unique to your business.

This, however, is not your only option to accept credit card payments. If you’re wondering how to accept credit card payments without a merchant account, you can turn to a payment service provider (PSP), sometimes called a payment facilitator or payment aggregator.

Instead of issuing dedicated merchant accounts for all of their customers, payment service providers, like Square and PayPal, have a single merchant account through which they aggregate all of their customers’ funds. Therefore, all of the funds from your credit card transactions are deposited in this account (with the funds from other customers) and then are transferred to your business bank account.

With payment service providers, you’ll typically find lower fees, faster and simpler setup processes, and additional features (such as payment gateways, POS software, etc.) included with their services. This setup, however, is also prone to slower customer service and account freezes or delays, so if you have a larger business that accepts a high-volume of card transactions on a daily basis, it may be advantageous to use a more traditional merchant account provider.

Use our guide to payment service providers to learn more about the differences between PSPs and merchant account providers.

How to Open a Merchant Account

So, if you’re wondering how to get a merchant account, you’ll start by looking into different merchant account providers. As you’ll see, individual providers will have their own feature sets, pricing structures, and application processes.

Therefore, to choose the one that’s best for your business, you’ll want to consider factors such as:

  • How you’re going to accept payments (in-person vs. online, or both)
  • Whether or not you need point of sale software and hardware
  • Whether or not you need a payment gateway to accept payments online
  • What your budget is for your merchant services

With these things in mind, you’ll be able to research and compare different merchant services providers.

As we mentioned above, some providers will require that you request a pricing quote, in this case, you’ll want to thoroughly review any quote you’re offered before applying to work with that provider. This being since, once you’ve found the provider you want to work with, you’ll be able to apply to open a merchant account.

Similar to the process of applying for business financing, most providers will underwrite their decision to provide you with a merchant account. Many of these providers will ask for your industry, time in business, your annual revenue, and your monthly card revenues.

If you need a high-risk merchant account, i.e. your business has poor credit, operates in a particular industry, or has a history of chargebacks, this process will likely be more difficult.

In fact, many of these businesses turn to providers like, Durango Merchant Services or Payline Data, who specialize in high-risk merchant accounts. Of course, even with providers that specialize in high-risk merchant accounts, you’ll find that these options will be more expensive than others (due to the added risk the provider is taking on by working with you).

Once you’ve submitted your application and (hopefully) are approved for a merchant account, you’ll want to review any contract you’re asked to sign and ask any questions you may have.

Historically, merchant service providers have been known for long-term contracts, hidden fees, cancellation fees, and less-than-ideal terms for businesses—so you’ll want to keep an eye out for any of these things before signing an agreement.

This being said, after you review and sign your agreement, you’ll be able to work with your provider to set up your account and get any software or hardware you need to start accepting payments.

The Bottom Line

At the end of the day, it’s important to understand how a merchant account works and what role it plays in your ability to accept credit card payments.

With this in mind, it’s ultimately up to you to decide if you’d rather work with a merchant account provider or a payment service provider—and which credit card processing company, in particular, will best suit your needs.

Luckily, companies like Square, Stripe, and PayPal have pushed traditional providers to become more and more transparent about their fees, terms, and contracts—making it much easier for small businesses to find and access the tools they need at affordable rates.

Maddie Shepherd
Contributing Writer at Fundera

Maddie Shepherd

Maddie Shepherd is a former Fundera senior staff writer and current contributing writer for Fundera. 

Maddie has an extensive knowledge of business credit cards, accounting tools, and merchant services, but specializes in small business financing advice. She has reviewed and analyzed dozens of financial tools and providers, helping business owners make better financial decisions. 

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