What is a Merchant Account and How to Set One Up

Opening a merchant account is a critical step in starting your online business. Once you set up a merchant account, you can start accepting payments online.

Cash is becoming a thing of the past, as more and more people move to shopping online and paying via credit card. Even in brick and mortar stores, cash was only used in 13% of transactions in 2020, down from 27% in 2019. Whether you run an in-person or online business, in order to accept credit card payments you must have a merchant account and work with a merchant services provider. 

In this article, we will explain exactly what is a merchant account, as well as how to get one. Here’s what you’ll learn:

  • What is a Merchant Account?
  • How Does a Merchant Account Work?
  • What is Required to Open a Merchant Account?
  • Can Anyone Get a Merchant Account?
  • How do I open a Merchant Account?
  • How Much Does it Cost to Open a Merchant Account?
  • Is PayPal a Merchant Account?
  • Types of Merchant Accounts
  • How Does Pay.com Interact with a Merchant Account?

What is a Merchant Account?

You can think of a merchant account as a sort of holding account that sits in between your customers’ payments and your actual bank account. It is the place where the money sits after the customer clicks “pay now” and before the credit card issuing bank approves the payment. There is generally a payment gateway or payment services provider (such as Pay.com) that acts as the go-between between you (the retailer/merchant), the merchant account and the credit card company. 

In most cases, you cannot accept credit card payments online without a merchant account, so this is a key part of setting up your business. There are different types and providers of merchant accounts, so it’s worth doing the research to understand exactly what you need and what makes the most sense for your business. 

How Does a Merchant Account Relate to a Bank Account?

While a merchant account is a type of bank account, it is separate from your regular business account that you use for the transactions involved in operating your business. You are the owner of your own merchant account, but you cannot directly access the funds in it, as while they are in that account they do not yet “belong” to you. Once the payments are approved by the credit card issuer, then the funds can be transferred from the merchant account to your business account. These transfers can happen instantly or (as is more commonly done) on a weekly basis or other defined timeframe. 

How Does A Merchant Account Work?

The best way to understand how a merchant account works is to think about what happens behind the scenes when a customer purchases a good or service from your website. 

First, you must have a way to physically accept the credit card information from the customer. If you have a brick and mortar store, you can do this via a credit card machine that you can rent from a merchant service provider. To take orders over the phone, you will need a “virtual terminal” which is a secure website that you use to enter the credit card details that the customer tells you on the phone. Finally, as an online store, you need to use a payment gateway or payment service provider who will provide you with a checkout page and handle transmitting the credit card info to the merchant bank. 

Once you have a payment method set up, the merchant account works as follows:

  1. Accepting payment - customer submits credit card details in order to make a purchase. 
  2. Processing payment - the credit card details are sent via the payment gateway  to the payment processor and then on to the issuing card’s network and then finally the customer’s bank. All of this happens within seconds, and once the transaction is approved the card reader receives a notification (and the customer is told that the sale has gone through).
  3. Receiving the funds - here’s the part where you need a merchant account. Once the transaction is approved, the customer’s bank will deposit the money in your merchant account - it will wait there until it is transferred to your business account, usually within 24 hours to 7 days depending on the specific terms. 

What is Required to Open a Merchant Account?

There are 6 main things that you will need in order to open a merchant account (although the details may differ slightly depending on your merchant service provider):

  1. Bank account and routing information - You’ll generally need to show that you have both a personal bank account and a separate business account. This is something you have likely done when you first opened and registered your business and it ensures that you are not liable for your business debts with your personal assets.
  2. Financial statements - A merchant services provider will probably ask to see bank statements to ensure that you are in good financial standing and to get a sense of your average expenses.
  3. Company  Tax ID - You’ll need to provide your Employer Identification Number (EIN) or tax ID that is the unique identifier for your business on all tax and legal forms.
  4. License - If you are a business that requires any type of official license, you will need to submit a valid license as part of your application to open a merchant account.
  5. PCI compliance - You will need to show that you have fraud and other security protections in place to ensure the safety of your customers’ private financial information.
  6. Additional supporting documents - Depending on the particular merchant service provider that you choose, you may also need to submit marketing materials, business plans, inventory reports or other supporting documents and information. 

Can Anyone Get a Merchant Account?

It is not a given that anyone will automatically be approved for a merchant account. If you have past bankruptcies or other black marks on your credit report, it may be difficult for you to get approved. Difficult, but not impossible - you will need to speak to credit reporting agencies to try to resolve any outstanding issues. You may also need to pay higher fees at first until you can prove yourself trustworthy to the merchant account provider, at which point you can renegotiate your fees. 

How do I Open a Merchant Account?

You’ll want to shop around to find the merchant services provider that works best for you and you will probably end up applying to more than one. The process may vary slightly by provider, but in general it involves reaching out to providers, asking for a quote and then completing the (often rigorous) application process.

Most providers will want to know details about your business and the types of products and/or services you sell, as well as your average monthly payment amounts by credit card and average transaction size. Many merchant service providers will also conduct a credit check. 

While the merchant service provider has to accept your application and be willing to open a merchant account for you, you also want to make sure they are a good fit for you and your business needs. Not all providers are equal so you should compare things like pricing and fees, PCI compliance, and additional payment solutions beyond just credit cards. 

Once you submit an application, it can take days or even weeks to get a response as they study your application and run a credit check. 

How Much Does it Cost to Open a Merchant Account?

There are a number of one-time and ongoing fees involved in opening a merchant account. First, you can expect to pay an upfront setup fee to open the account. Next, you will be required to pay a monthly maintenance fee to cover the cost of services provided. These fees usually range from $10-$30 per month. 

You will also be charged fees per credit card transaction which can be anywhere from 1.3% to 3.5%, depending on factors like the type of card and the payment network. Usually, the higher the volume of transactions processed (and the more money involved), the lower the fee rates. 

It is very important to insist on getting a full list of all charges from the merchant service providers as part of their initial quote so that you do not face any surprises later on. The key charges to make sure you get rates for include:

  • Credit cards
  • Debit cards
  • Authorization fees
  • Card terminal rental (if applicable)
  • Payment gateway
  • Virtual terminal
  • Monthly service charge
  • Setup fee
  • Early termination charge

Is PayPal a Merchant Account?

PayPal itself is not a merchant account, but it is a good workaround solution should you not want to open your own merchant account. Once you have a high volume of transactions, you will probably find it worthwhile to get your own merchant account, but when you’re just starting out PayPal might be a viable alternative. 

Technically, PayPal is a third party payment processor and it essentially combines all of its customers payments into its own large merchant account. The downside to PayPal is the large fees that it charges, but it’s up to you if it’s worth it for the convenience of having an easy way for customers to make payments quickly. 

Types of Merchant Accounts

There are three types of merchant accounts that you should understand in order to determine which is the right one for your business:

  1. Aggregated merchant account - this type of merchant account is usually the best option for small businesses. It’s offered by payment facilitators who act as re-sellers. You’ll be given a code based on your industry and then you’ll be grouped together with other similar businesses in your industry with all payments being processed in one large shared merchant account. By combining smaller businesses into one account, the payment facilitators can get better rates, which means that you’ll pay less than you would if you went straight to a bank on your own. Keep in mind that if you go with an aggregated merchant account, you can’t control when the money gets transferred to your business account so make sure it’s on a time schedule that works for you.
  1. Dedicated merchant account - this type of account is specifically for your business only and is set up directly with the bank. In this situation you have more negotiating power to get rates that are specific to your business needs and to ensure that the money is transferred to your business account when you want it to be. There is a more rigorous application process, however. And, the fees tend to be higher so it might only be worth it once you have a high enough sales volume. 
  1. High-risk merchant account - some businesses may be classified as “high-risk” due to things like the length of time the company has been in existence and its financial stability. Certain industries like gambling, travel and membership/subscription services are also considered high-risk because they have higher than average rates of chargebacks. Finally, if you or other key personnel have bad credit or history of bankruptcy, you may be considered high-risk as well. There are certain merchant service providers who specialize in offering merchant accounts to high-risk businesses with slightly higher fees. 

How Does Pay.Com Interact with a Merchant Account?

All of the different elements involved in collecting payments from customers can be very confusing, but using a payment service provider like Pay.com can make it much simpler for you. You need to open a merchant account, but once you have that, Pay.com can do everything else for you, including:

  • Creating the payment experience - of course you want anyone who visits your site to have a great experience and an easy time making payments so that they will be encouraged to make repeat purchases. With Pay.com you can create a customized checkout page that will have the same look and feel that your customers are used to from the rest of your site.  
  • Processing payments - once the customer enters their information on the site, your job as the seller is done. Pay.com handles all the behind-the-scenes work to ensure that the transaction is routed to the right acquirer and is approved. 
  • Expansion - Pay.com integrates with all kinds of payment types beyond just credit cards, such as Apple Pay and others - you can easily expand the types of payments you can take from customers.
  • Fraud protection - your merchant service provider will require that you meet certain standards of security and fraud protection, which is another technical aspect that you can put in the hands of Pay.com. 
Pay.com features

FAQ

Is it Hard to Get a Merchant Account?

While it is not difficult to get a merchant account, it is not necessarily a given that you will be approved by the first place you try. Your likelihood of approval is dependent on your risk profile. Being a high-risk prospect does not mean that you’ll be unable to open a merchant account, but rather you may need to work with a provider who specializes in high-risk merchant accounts and you may need to pay higher fees.   

How Does a Merchant Account Work?

A merchant account works as follows:

  1. A customer enters credit card details on your website in order to complete a purchase.
  2. Your site’s payment system passes the payment request on to the acquiring bank.
  3. The acquiring bank then forwards the payment request to the bank that issued the credit card.
  4. The issuing bank approves the request (or rejects it) and responds accordingly.
  5. When the request is approved, the merchant and customer each see a confirmation of successful transaction and the money is sent to the merchant account. 
  6. A few hours or days later, the funds are transferred from the merchant account to the business account. 

Who Needs a Merchant Account?

Generally speaking, any vendor who accepts electronic payments (any payments other than cash) needs to have a merchant account. As an online seller, it’s in your best interest to have a merchant account so that your customers can pay you via credit card. 

What is an Example of a Merchant?

Any person or business who sells a product or service either retail or wholesale is considered a merchant. If you open a business in which you are accepting payment from customers, you are a merchant. 

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