What Is a Merchant Account? And Can Your Business Get by Without One?

Updated on January 30, 2020
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If you run a small business, you’ve probably been told a few times that you need a merchant account. But very few people take the time to actually explain what merchant accounts are before trying to sell them to small business owners. What is a merchant account? And are merchant accounts even necessary for small businesses?

The world of small business merchant services is full of imprecise, hard-to-crack jargon. And the discourse surrounding merchant accounts is no exception. To decide whether or not your small business needs a merchant account, you’ll first need to grasp precisely what a merchant account is.

So we’ve compiled a guide to nailing down what merchant accounts are. Plus, we’ve tacked on some answers to crucial questions surrounding them—like how to get one and how they differ from similar products.

What Is a Merchant Account?

Though merchant services can encompass a multitude of different payment processing solutions including merchant accounts, merchant accounts themselves are a more specific service.

Defined simply, merchant accounts are bank accounts that allow your business to accept card payments from customers.

A more precise merchant account definition is a bank account that fronts your business the majority of the proceeds from credit card payments you accept before your customers pay off their card issuers.

Because there will be a 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, you would have to wait for the proceeds from the transaction without a merchant account. But if you have a merchant account, it will front your business the money, minus fees, from card transactions, so that you won’t have to wait for your customers to pay their credit card bills.

Be sure to note: On their own, merchant accounts technically don’t include card readers, payment gateways, or any other additional merchant services necessary to accept card payments. They’re simply the banking service that allows you immediate access to transaction proceeds.

How Do Merchant Accounts Work?

So, a merchant account itself is just the bank account through which your business will receive the money you earn through your customers’ card purchases from your business.

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, which we’ll cover in a second—to your business bank account.

Merchant Accounts Typically Come With a Few Fees

To be frank, merchant account solutions typically don’t come cheap. Card payments typically go through multiple entities—as we described before—and each of these middle men will want their cut of the transaction. Plus, merchant account providers also tend to charge businesses for setup and maintenance.

Here are the details on some typical fees you’ll likely encounter if you decide to invest in merchant account services for your business:

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 merchant account fee will cost your business. Your setup fee will depend on your business’s card sales volume. And if your account provider is setting up POS hardware for you, that setup cost will also be incorporated into this fee—though the cost of the hardware itself will be whole other 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 for your merchant account is the most complicated facet of how much your merchant account will cost your business. When you get the money from a card transaction, a lot of back-and-forth has gone down just to make it happen.

And all of the entities that make card payments possible—card processors, card networks, and card issuers—want their cut of each transaction they see through. And that’s not even taking into account the portion that your merchant account will keep for themselves.

The amount that your merchant account will advance you for a given transaction won’t be the full transaction amount because of this. 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 middle men will claim through the process.

These merchant account fees can be structured in three different ways:

  1. Flat-rate transaction 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 card reader vs. keyed-in information). But flat-rate fees will be the same across the board, depending on how you initiate the transaction.
  2. Interchange-plus transaction fees are the most transparent merchant account fee options. 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 account provider won’t lump together pricing and overcharge you for payments payments that are more affordable to process, like regulated debit card transactions.
  3. Tiered transaction 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, is 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 merchant account transaction pricing is pretty esoteric and hard to understand, so we encourage small business owners to consider their more transparent fee options before settling for tiered fees.

merchant account

Why Merchant Accounts for Small Businesses Are Necessary

Getting a merchant account for your small business displaces the risk from your finances onto your merchant account provider—for a cost. With every card transaction, there is a slight risk that the customer never fully pays up: Maybe they don’t pay their credit card bills that month or they overdraw their checking account. Whatever the case, if you don’t have a merchant account or some alternative, with each card payment you run, there is a possibility that you won’t actually end up seeing the funds. And there’s an even bigger possibility that you will have to wait a while to see those funds, if they show up at all.

Both of these risks dissipate with a merchant account. Because merchant accounts immediately front you the funds from processed card transactions, they take on the risk of not ultimately receiving the proceeds of each fund. And because of the urgency with which a typical merchant account will front your business the funds from card transactions, that means you won’t have to worry about waiting for your revenues, either.

Of course, these advantages of having a merchant account for your small business will cost you: Merchant account providers need to fortify themselves against the risk they take on by fronting your business your revenues, so they charge you merchant account fees on top of the wholesale fees that processors, networks, and issuers charge for the interchange process.

Merchant Accounts Services vs. Payment Services: How They Differ

Merchant accounts services are great, but sometimes small businesses don’t necessarily need their own dedicated merchant account. Luckily, thanks to recent innovations in the industry, accessing a merchant account is no longer an all-or-nothing scenario.

Payment service providers like Square have disrupted the payments industry so that small businesses don’t have to shell out for their own merchant account. Square has one huge merchant account through which it aggregates all of its customers accounts. This allows Square to offer card payment processing with lower fees. However, this setup also allows for more errors and slower customer service, so if you’re working with a high volume of card transactions on a daily basis, it might be better to seek out full-blown merchant account services.

How to Get the Best Merchant Account Possible in 7 Steps

1. Determine What You Need From a Merchant Account.

What solutions do you need from your merchant account provider? All of the best merchant accounts will offer something beyond the account itself. Do you want to be able to access proprietary point-of-sale hardware that will come automatically connected with your merchant account? Do you want that hardware to be a souped up, traditional countertop POS? Or do you simply want a card reader plug-in for your smart device? Do you need to access a payment gateway for ecommerce use?

You’ll need to ask yourself all of these questions before you dive into your search for the best merchant account for your business.

2. Shop Your Merchant Account Options.

Now that you know what you need from a merchant account, it’s time to start shopping your options. With all of these features in mind, you can quickly, decisively filter out all of the merchant accounts that don’t meet your needs.

3. If Necessary, Request a Quote From Merchant Account Providers.

As a reminder, many merchant account providers will offer quote-based pricing. As a result, to truly know how much each of your merchant account options will cost, you’ll need to request a quote. It can be a headache to request a quote from multiple options—you’ll likely be inundated with more than few sales calls and emails. But knowing exactly how much each of your potential merchant accounts will cost your business will help you make the best decision possible.

4. Get Your Business Credentials Together.

Believe it or not, most merchant account providers will underwrite their decision to provide you with a merchant account. Again, they’re taking a risk by fronting your business the revenues of your card transactions, so they typically take the decision pretty seriously. Many providers will ask for your industry, time in business, your annual revenue, and your monthly card revenues. Some might even visit your business before deciding whether or not they want to extend you a merchant account. So, this step of getting all your business credentials in order is a crucial one.

5. Apply for Merchant Account Services.

Now that you have all of your business credentials together, you’re ready to apply for the merchant account of your choice. If you work in what many merchant accounts deem a “high-risk industry,” like an ecommerce business, you’re more likely to have a high chargeback or fraud rate for card transactions, so also consider applying for options that label themselves as “high-risk merchant accounts.” These merchant accounts will be easier to qualify for if your business falls under the umbrella of high-risk, but they will also cost more.

6. Have Your Merchant Account Services Set Up.

After you apply and are approved for a merchant account, your next step will involve getting your account set up. Whether you are accepting card payments through a payment gateway, a traditional card reader, or both, your provider should offer services that connect your merchant account to these payment processing technologies. Better yet, your merchant account provider might offer proprietary payment processing technologies that will come automatically connected to your merchant account.

7. Start Accepting Card Payments.

Now that you’ve gone through steps one through six, all that’s left to do is start accepting card payments! You can allow your customers to pay with debit and credit cards with the peace of mind that you’ll see your card revenues sooner rather than later.

What Is a Merchant Account? Some Final Thoughts

There you have it: Your answer to what a merchant account is, and then some. With all of this information in your toolbelt, you’re ready to start your search for the best merchant account provider for your business. Be sure to keep the exact merchant account definition in your head as you make crucial decisions surrounding merchant accounts and card payment processing as a whole.

Contributing Writer at Fundera

Maddie Shepherd

Maddie Shepherd is a former Fundera senior staff writer and current freelance writer. Maddie has an extensive knowledge of business credit cards, accounting tools, and merchant services, but specializes in small business financing advice. Maddie has a bachelor's degree in Spanish and Latin American cultures from Barnard College.
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