What is a Merchant Account? 5 Essential Things You Need to Know

By Jasmine Glasheen

A merchant account isn’t just any old bank account. Processing customer payments through your merchant account is one of the most important aspects of running your business. Why? Simple:  it’s how you get paid. Yet finding the right merchant account for your unique business model – and, for that matter, knowing what a merchant account even is – takes a bit of research.

So, what is a merchant account? We’ll take a look at the top 5 things you need to know about merchant accounts, including: what a merchant account is, what type of businesses need merchant accounts, and how to pick the right account provider for your business model below.

What is a merchant account?

A merchant account is the bank account you use to accept customer payments, whether they pay by credit card, debit card, or a third-party payment solution like PayPal. There are a few key differences between a merchant account and a business bank account to take into consideration. Here are some of the differences to expect when using a merchant account, as opposed to a business or personal account:

  • Your merchant account is the middleman that settles credit/debit card transactions for you.
  • When your business gets paid, the funds go to your merchant account before they go to your regular business account.
  • It takes about 1-3 days for funds to transfer from your merchant account to your regular business account.
  • Your bank normally keeps a small standing balance in your merchant account which is used for processing payments for customer returns.
  • Banks may tack on additional fees for merchant accounts including: application fees, transaction fees, set-up fees and international fees, among others.
  • You may need a separate online merchant account for each card type your business accepts.

To simplify the inherently complex process of maintaining a merchant account, many business-owners wind up opting to have their merchant account with the same bank they use for their business account, or to house their merchant account with their payment processing solution provider.

Who needs a merchant account?

Merchant accounts represent a significant expense for business owners. Banks can tack on more than 3% in fees per transaction and, as a result, a lot of retailers try to avoid opening a merchant account altogether. However, the reality is that merchant accounts fulfill important functions, such as increasing security, reducing the risk of customer data breaches, enabling you to process international payments, and reducing accounting errors. Merchant accounts reduce the opportunities for shrinkage across multiple branches of your business, which should help you recoup some of your investment. However, banks can figure in a lot of additional fees for services geared towards mid to large-sized businesses that you may not even use if you’re a small business owner.

Merchant accounts for small businesses

Small businesses can’t afford the security issues that can come from trying to process customer payments directly. Taking payments through a payment services provider like PayPal is another unreliable option, since it can result in system freezes and shutdowns that delay operations.

When you are deciding between banks for your merchant account, the bank may try to make you interact with independent salespeople who really have no idea about the benefits and liabilities of partnering with their enterprise. Don’t waste your time with banks that can’t (or wont) provide you with a clear analysis of the fees they charge for merchant accounts, because you need to be able to see what the bank charges for – such as transaction fees, software, start-up costs, termination fees, international transaction fees, etc. – so you can evaluate how those fees stack up to your business’s needs to ensure your merchant account is maximizing your profits from each transaction.

How do you open a merchant account?

Opening a merchant account can be a very simple or a very complicated process, depending on your choice of bank or payment processor.  You’ll need to create a business profile with each bank you’re considering before you actually apply for an account. When you apply, banks will take a few factors into consideration when deciding whether to accept your application, and what type of merchant account is right for you. Their questions will include:

  • The size of your business
  • What portion of your business operates online (online has higher rates because of the increased fraud risk for online transactions.)
  • Your credit history
  • The average price of your merchandise
  • How many transactions you process per month

Each of these factors can significantly impact your rates. However, by applying for multiple merchant accounts from the offset, you can use the rates and functionalities of banks that approve your account as a bargaining chip when negotiating with prospective providers.

Merchant account vs payment gateway

Think of a payment gateway as an online POS station –– it sends customers’ payment information to your bank from your website; while a merchant account is the account from which your payment gateway transfers funds. A payment gateway receives customer information when they pay online, securely encrypting that payment information and sending it to your bank, which then approves or declines the payment based on whether the customer has funds available.

However, don’t confuse payment gateways with payment processors, which works with your merchant bank account to connect you to your customers’ credit card networks. It’s easiest to find a payment processor that can provide you with a payment gateway to simplify online transactions.

Bringing it all together

Accepting customer payments involves a lot of moving parts. The average business transaction requires as many as 7 different entities to be involved to process a simple payment. But you shouldn’t have to try to juggle information from all of these entities on your own.

The right payment processor can help you simplify the process of setting up your merchant account with fast account approval and easy delivery while helping to save you money in the process.

Not only does Payment Depot save merchants $400 a month on average in credit card processing fees, but it has award-winning in-house customer service. Since Payment Depot doesn’t outsource customer interactions to a third-party business or another country, you can call to have Payment Depot’s knowledgeable in-house team help you through any questions that arise throughout the payments process.