What Is a Merchant Account? Do You Really Need One? [2023]

Our business expert explains everything you need to know about merchant accounts, in plain English! Find out what it is and if you really need it.

Starting an online business is fairly simple, but accepting credit cards and other payment methods is where things can get tricky. You need an infrastructure in place that will allow you to accept online payments, process them, and actually receive the funds.

A merchant account is part of that infrastructure. In this guide, I’ll explain exactly what it is, how it works, and how it can fit into your online business.

Need a Merchant Account?

When you sign up for Pay.com, you receive a full suite of merchant services, including a merchant account. You can save yourself the hassle of a tedious application process and start accepting credit cards and various other payment methods on your website in minutes.

Click here to read more about the benefits of Pay.com.

What Is a Merchant Account?

When a customer uses a credit card to make a purchase, the funds are not sent immediately from the issuing bank of the credit card to your bank. 

There’s a short process involved: the money is placed temporarily in a special account, called a merchant account, until the transaction is approved and cleared. Then, the funds are transferred to your business account, where you can access them. It usually takes 1-3 business days for you to be able to access the funds. 

In other words, a merchant account is the middleman between the customer’s credit card or bank account and your bank account while a payment is being processed. 

As a business owner, you won’t have direct access to your merchant account. It’s not an ordinary bank account, and you won’t be able to use it to make transactions. 

Here are some key points to remember:

  • Unlike a traditional bank account used for withdrawals and deposits, a merchant account is simply a holding place for funds while a transaction is processed.
  • A merchant account communicates directly with credit card networks and issuers (e.g. Visa, Mastercard, etc.) to make sure transactions go through.
  • Banks that provide merchant accounts are known as acquiring banks.
  • A merchant account offers an extra level of security and fraud protection for card payments.
  • Opening a dedicated merchant account involves signing a long-term contract and paying ongoing processing fees.

How Do Merchant Accounts Work?

A merchant account is established via a detailed account agreement between the merchant acquiring bank and the business. The agreement describes all the terms and conditions, including fee structures. 

Once a merchant account is set up, it is ready for use. When a customer makes a payment using a credit or debit card, a communication is sent to the merchant acquiring bank. The bank then contacts the card processor, which contacts the issuing bank of the card. 

The issuing bank authenticates the transaction and makes sure the cardholder has the available funds and that no fraudulent activity is taking place. 

Once a transaction is authenticated, the merchant acquiring bank is notified. It authorizes the transaction and moves the funds to the merchant account. 

While this may sound like a complex process, it actually all happens automatically, within a couple of minutes at most. 

Remember, the merchant account is just a holding place for the funds before they are released to your business bank account. The funds are not in the merchant account for very long and you should have access to them within a couple of business days. 

Without a merchant account, this process would take much longer. There’s a significant time lapse between when a customer buys something using a credit card and when they pay their credit card bill. Your merchant account essentially “fronts” your business the funds until the customer pays their bill. 

Don’t miss our guide on how to set up a merchant account.

Types of Merchant Accounts 

Before you open a merchant account, it’s important to understand the difference between a dedicated merchant account and a full-service payment service provider. 

A dedicated merchant account is your own account, used only by you and your business. A payment service provider, on the other hand, allows you to use a shared merchant account that other businesses may be using. 

If you have a large business with a high volume of sales and transactions, it makes sense to use a dedicated merchant account. The application process for a dedicated account can be long and complex, sometimes requiring setup fees. It’s only worthwhile if you expect to have enough business to cover the additional costs. 

Using a payment service provider like Pay.com comes with several benefits: 

  • You can start accepting payments quickly without going through an extensive application process. 
  • You don’t have to have an existing customer base or a large volume of sales to get started. 
  • You don’t have to sign a long-term contract or make any long-term commitments. 

Overall, merchant accounts can be divided into four categories:

High-Risk Accounts

The term “high risk” can apply either to the business owner or the type of business. For example, if you have a low credit score, the bank may consider you to be a high risk. 

Certain industries are also considered high risk. Merchant account providers worry about things like the high risk of fraud in online healthcare, the risk of cancellations in the travel industry, or the lack of a reliable cash flow with subscription-based services. 

If you or your business are considered high risk, you can still get a merchant account, but you may need to pay higher fees. Keep in mind that fees can always be renegotiated as your business grows. 

Aggregated Merchant Accounts

Aggregated merchant accounts are what payment service providers use. They’re very common among small businesses. These accounts are called “aggregated” because the payment service providers group together merchants in similar industries into a single merchant account in order to get a better rate on fees. 

The biggest benefit to using an aggregated merchant account is the lower cost. In most cases, you’ll only have to pay transaction fees, with no setup fees or ongoing monthly fees. 

Independent Sales Organization (ISO) Merchant Accounts

An ISO merchant account is a type of dedicated merchant account. You do not share the account with other businesses and it is tailored specifically to your needs. 

The downside is the higher fees, including an upfront setup charge as well as ongoing monthly fees. If you have a large business and a high volume of sales, you may prefer the personal service that comes with your own merchant account. 

Internet Merchant Accounts

Online businesses use internet merchant accounts to accept payments online. This type of account usually involves a one-time setup fee and then additional fees per transaction. If you already have a different type of merchant account, it’s worth considering using the same provider to open the internet account too. 

Types of Merchant Services 

Merchant accounts typically come as part of a suite of services that you need in order to accept credit and debit card payments from customers. These services include all of the necessary financial tools, hardware, and software, such as: 

  • Mobile payments: This refers to the technology and infrastructure needed to accept payments through mobile payment services, such as Googly Pay and Apple Pay.
  • Credit card terminals: For merchants with brick-and-mortar stores, service providers offer the device that is used for customers to swipe (or tap) their credit card in order to make payments.
  • Ecommerce solutions: This is the infrastructure ecommerce sellers need to be able to accept credit cards online, including a checkout page.
  • Payment gateways: these allow for the actual processing of credit and debit cards in the back end once a customer enters their payment information. 

Merchant Account Benefits

While opening a merchant account can be a necessity, it also offers a number of important benefits:

Accepting Credit Card Payments on Your Website

This one is obvious: accepting credit card payments on your website is a crucial part of growing your business. Opening a merchant account ensures that you will be able to do this.

More Sales

The more payment options you offer your customers, the more sales you’ll make. When the process runs smoothly, the customers will keep coming back for more and you can sit back and watch your sales and profit grow.

Less Headache

When you open a merchant account, someone else is responsible for making sure that each of your transactions settles and that each customer has sufficient funds. If something goes wrong, they will handle it, leaving you time to focus on growing your business.

Convenience for Your Customers

Today’s customers want to be able to use their credit or debit cards. If you don’t offer this convenience, they will find another seller who does. Ensuring that you have the infrastructure in place to accept card payments is important. 

Should I Set Up Merchant Services for my Ecommerce Business?

The short answer is a resounding yes! While you don’t necessarily need to expend the time, energy, and financial resources in setting up a dedicated merchant account, you should at the very least set yourself up with a payment services provider who will take care of the merchant account services for you. 

The Bottom Line

If you’d like to allow your customers to pay using a credit or debit card (who doesn’t?), you need a merchant account. You can choose whether to open a dedicated merchant account, or save yourself the hassle and go with a payment service provider. Opening a merchant account one way or another is a key step in running your business. 


Why do I need a merchant account?

A merchant account is a necessity for any business that wants to be able to accept payment using a credit or debit card. If you don’t want to open a dedicated merchant account, you can sign up for a service that offers full merchant services, such as Pay.com.

What’s the difference between a merchant account and a payment gateway?

A merchant account and a payment gateway are two separate parts of the payment infrastructure. A merchant account is the bank account used to transit funds from the customer’s credit card to your business bank account. A payment gateway is the technology that collects a customer’s credit card details and transfers them to the payment processor.

How hard is it to get a merchant account?

It’s usually not difficult to get a merchant account, but it can be a long process. Each provider has its own requirements, but most are easy to satisfy and just involve gathering and submitting the appropriate paperwork. One potential roadblock is if you or your business have a history of bad credit. In that case, you may want to look for providers that specifically service businesses with less-than-stellar credit histories.

What is the difference between a merchant account and a normal account?

Unlike a normal bank account, you do not have access to the funds while they sit in the merchant account. It is merely a temporary holding place until the transaction settles and the funds are transferred to your bank account where you can access them.

Is PayPal a merchant account?

PayPal can operate as a merchant account, allowing a business to accept credit card payments using PayPal instead of opening their own merchant account. The downside is that the fees tend to be higher than with a standard merchant account.

What banks offer merchant accounts?

Most banks offer merchant accounts as part of their services. If you already have a bank account at a particular bank that you have a good relationship with, it could be worth asking about their merchant account services. You are not required, however, to open a merchant account with your existing bank.

Meet the author
Emily Kirschenbaum
Emily is a content writer with a special interest in fintech and business. She loves sharing her knowledge to help small businesses take their first steps towards success.

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