What is a Merchant Account?

Published: 10/11/2019

Whether you’re ready to start accepting card payments online, in person or over the phone, you’ll need a merchant account. Not sure what it is? Then you’re in the right place, we're here to help with all of your merchant card services questions.

A merchant account is simply a type of bank account which allows you, as a business, to accept payments via debit cards, credit cards and e-wallets.  

When a customer pays for goods or services in this way the funds are initially deposited into the merchant account, and from there are transferred into your business bank account. 

In essence, a merchant account is a three-way agreement between a) the retailer, b) the merchant bank, and c) the payment processor, for the settlement of credit, debit or e-wallet transactions. 

Merchant accounts in action

If you’re still not 100% sure what it is or what it’s for, let’s create a little scenario and take a look at a merchant account in action.

Before we do though, let’s clear up some lingo. We’ve got the merchant bank account and this is held with the ‘acquiring bank’ since they’re the ones that acquire the money. We’ve also got the ‘issuing bank’, which is the bank used by the customer which issues the funds.

Back to our role-play and enter Freddie, who wants to pay for a sandwich using his card.

  1. Freddie orders a BLT and pays by tapping his contactless card on the card machine.
  2. Freddie’s card details are sent from the machine to the merchant account, held with an acquiring bank, along with the details of the transaction.
  3. The acquiring bank sends this information to the relevant card issuer - Visa, American Express, MasterCard etc. - Freddie uses Mastercard. 
  4. Mastercard forwards the details of the transaction to the issuing bank to check Freddie has the funds to pay for his BLT.
  5. It’s Freddie’s payday (hence the BLT), so he’s got the funds. The issuing bank pings back a response, via Mastercard, which tells the card machine the transaction has been approved.
  6. Freddie devours his BLT.

So, a merchant account is a secure place for money to sit - a holding pen if you will - while the bank runs checks to ensure there’s enough money in the consumer’s account to make the payment.

Are there different types of merchant accounts?

Yep, the intricacies aren’t over with yet, we’re afraid. There are three types of merchant accounts to choose from.

1. Aggregate merchant accounts

These types of account are offered by payment facilitators and are often the best choice for small businesses. Merchants are recruited by the payment facilitator on behalf of the acquiring bank. 

Your business will be given a code when signing up based on the sector as well as services and goods on offer, and similar businesses are then grouped together in shared pools. 

By grouping the transactions of multiple merchants together and processing them as one, payment facilitators can negotiate the same great rates available to larger businesses. However, with an aggregate account, you don’t have control over when your money is paid to you. 

2. Dedicated merchant accounts

To set up a dedicated merchant account you’d go straight to your acquiring bank - there’s no middle man. With a dedicated account you’ll be able to negotiate rates specific to your business.  

3. High-risk merchant accounts

Don’t worry, it’s not as dicey as it sounds. These accounts are for businesses who’ve struggled to gain approval from the mainstream banks because they’re high-risk.

Reasons you might be considered high-risk likely relate to the longevity and stability of your business, the sector you operate in, and the credit history of those applying.

If you opt for a high-risk merchant account you’re likely to be charged higher rates, but it’s a good alternative to get the ball rolling. 

Important things to remember

Before you open a merchant account, here are a few hints and tips to ensure things run smoothly.

Factor in PCI compliance

Anyone who processes card transactions is legally required to be PCI compliant and that costs money. There’s quite a lot of work involved with becoming PCI compliant yourself and if your merchant account provider offers a PCI compliance service (like we do!), it can make things easier.

Don’t forget about fees

When you accept payment by card you’re charged fees, so bear that in mind from the get-go. We’ll let you know which fees you’ll need to be aware of when you sign up with us. They include:

  • Chargeback fees - these are in place to protect the customer. If they suspect a fraudulent transaction on their account they can challenge it with the bank, and if their challenge is upheld you’ll be charged a £15 fee.
  • Interchange fees - these are mandatory and are paid by the merchant’s bank to the customer’s card issuer for the acceptance of a card-based transaction. The money will be gone before it hits your account.

Be ready to rumble

Once you’re ready to start comparing the market for your perfect merchant account, arm yourself with all the information providers will want in order to get an accurate quote. This includes the nature of your business, your monthly or forecasted turnover for card payments, and your average (or predicted) transaction size.

Whether it’s help accepting card payments, getting PCI compliant or setting up your merchant account, our team of experts is here to help. Get in touch today on 0808 274 2017.

Bryony Pearce

Bryony Pearce


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