What Is A Merchant Account And How Does It Work?

What Is A Merchant Account And How Does It Work?

What Is A Merchant Account And How Does It Work?

Advertiser & Editorial Disclosure

As a small business owner 20 or so years ago, one of my most confusing and frustrating tasks was reconciling my credit card transactions. They were deposited in my business bank account with a lag of several days from the time the transaction was completed, and at the time, I don’t think I completely understood exactly what a merchant account was or how it worked. I just knew I needed to have one to process credit cards.

If your business accepts credit cards and debit cards, you need a merchant account. A merchant account isn’t something you can handle your own, you need to establish a relationship with a merchant services provider to create an account. 

Here I’ll try to make it easier for you to choose a merchant account and avoid the headaches I experienced.

What is a Merchant Account?

Basically, a merchant account allows you to get paid for your customers’ credit card and debit card purchases after they’ve been processed by a payment processor. You will most likely not have direct access to the funds in your merchant account, but funds will be automatically deposited into your business bank account, usually within one or two business days.

Advantages of a Merchant Account & Why Your Business Needs One

Your business will need a way to accept payments from customers. A B2B business with just a few clients may be able to get away with receiving ACH payments and/or Paypal. A small business with occasional consumer sales may be able to accept payment by cash or checks, and perhaps using Venmo, Cash App for Business or Paypal.

But if you really want to scale and grow your business, and accept payments from a variety of customers, you’ll need a payment gateway, payment processor and a merchant account. Some solutions will bundle these services into one comprehensive solution so you don’t have to search for each one individually. This can be helpful for small businesses, including new businesses.

A merchant account is one part of an overall solution that makes it safer, easier and faster to get paid. You won’t have to worry about handling cash or trying to deposit it into your business bank account. Your customers will likely appreciate being able to use their credit cards especially for online payments. (Credit card payments are safer for them than paying by cash.) And you may get paid more quickly than other payment methods.

How Does a Merchant Account Work?

The payment gateway confirms the availability of funds whenever one of your customers uses a credit or debit card to pay for a product or service. If there are sufficient funds, they will authorize the transaction. Funds are held in the merchant account while the payment processor processes the transaction. When the payment is processed and funds are released they will be deposited into the linked business bank account.

There are usually fees associated with every transaction of anywhere from 3% to 5% (depending on the merchant services provider). These fees will be deducted from each transaction before the funds are deposited into your account.

This was one of the things that caused me bookkeeping headaches. Reconciling each transaction when it was deposited, making sure to account for the processing fees, and the two- or three-day lag waiting for the transaction was a bookkeeping chore that ate into the time I needed to do other things. At the time, like many of my small business peers, I lacked the bookkeeping savvy to understand how important it was to stay on top of all that stuff and probably should have accommodated for the credit card fees in the price of my services if I was going to accept credit cards, but I didn’t. 

That was a lesson I had to learn the hard way. Fortunately solutions may now integrate with accounting software, making this process easier.

How Merchant Accounts Work

There are several crucial steps between when a customer swipes or enters their credit card number and the payment for that purchase makes it to your business bank account. First, a payment gateway captures card information when a card is presented for purchase and confirms the availability of funds when one of your customers uses a credit or debit card to pay for a product or service. The payment gateway may also provide services such as fraud screening and PCI compliance to help protect customer data.

A payment processor then processes the payment between customer and merchant. It will provide the tools needed to facilitate the sale, including a point of sale (POS) terminal or a virtual terminal for online sales (or both). Funds collected are then deposited into the merchant account, minus fees.

The processor will then ensure that funds from sales, minus the fees, make it to your merchant account. From there, funds will be help for a period of time before being deposited (minus fees) into your business bank account.

How Does a Business Establish a Merchant Account?

You’ll have many options to choose from, and each individual provider may charge different fees, offer different features, and have varying contract terms. Choosing the right provider will depend on your business needs, such as the type and volume of charges. 

Once you’ve gone through the evaluation process and decided on the provider you want to use, it’s usually pretty straightforward. However, your business will need to fill out an application, similar to when you apply for a small business loan though the process will be easier.

You’ll need to provide information like your business name, contact information, and tax information, along with the routing and account numbers to your business banking account so they can make the automatic deposits. You may need to provide your business credit card number to pay certain fees, depending on the service you choose.

You may also be liable for any chargebacks or refunds on your account. What’s more, don’t be surprised if the merchant services provider pulls your credit report before they set up your account. Credit history (personal credit and/or business credit) can sometimes be a factor, especially for younger businesses.

If the provider requires a contract, the standard contract length today is two to three years with additional fees for early termination. Some service providers will go on a month-to-month contract, so you’ll want to look at several providers before you sign on the dotted line.

You should also be aware that those termination fees can be pretty steep if you cancel your merchant services agreement before the contract termination date.

What is the Cost of a Merchant Account?

As mentioned above, you should expect fees associated with each transaction, but those will likely not be the only fees you should expect to pay for the convenience of accepting a credit card.

You’ll want to review the merchant service provider’s fee schedule to understand their pricing structure. 

There are several ways you may see merchant account providers charge for transactions. Interchange fees are fees that must be paid by the merchant’s bank to the card issuer’s bank. The card networks, such as Visa and MasterCard, set these fees. Interchange fees vary based on a number of factors. 

For example, processing for a payment made with an American Express or Discover card will often be different from the fees from a purchase made with a Visa or MasterCard card. And in the latter case, fees will depend on the type of card used as well as the type of transaction, and the type of business accepting the card. Premium rewards credit cards tend to charge higher fees than standard credit cards, and PIN-based debit card transactions carry some of the lowest fees.

High-risk merchant accounts carry higher fees. 

These fees will be deducted from each transaction before the funds are deposited into your account.

Interchange Plus Pricing: With interchange plus pricing, cost is marked up by a specific amount, for example, a small amount plus a percentage of the transaction. 

Flat-rate pricing: With this common processing rate structure, the merchant services company will usually charge a percentage of the transaction amount plus an additional small markup that will depend on factors such as whether the transaction is online or the card is presented in person. 

Monthly subscription. You may be charged a monthly fee regardless of sales volume. There may be a trade-off between lower transaction fees and monthly account fees. Don’t assume that no monthly fee is the cheapest option. 

Additional Fees: Other fees can be important. One you’ll want to pay attention to is the chargeback fee. This fee is charged when your customers dispute a transaction, and can be as high as $25. Some accounts may charge an annual fee, statement fees, and termination fees.

Fees vary depending on the provider. Here is a sample account fee schedule.


Who Are The Most Popular Merchant Accounts?

You’ll find a number of options when searching for a merchant account provider. Your bank where you have your business bank account may offer this service, but you may find a better fit with another payment services provider. Popular choices include:


Stripe is especially popular with e-commerce businesses, and it’s integrated with website builders like Shopify. Recurring payments and subscriptions are supported. With a Stripe terminal your business can accept card payments in person as well. 


A great choice for established businesses, it offers no monthly fees and no long-term contracts and uses interchange-plus pricing. 

Dharma Merchant Services

Merchant processing serves a variety of different types of businesses (retail,  restaurants, medical, for example). If your business is B2B, it will help you get the lowest rates. It features interchange plus processing.


Square makes it easy for businesses to start accepting credit card payments. Affordable hardware and software plans are available. It uses flat-rate pricing.


With flat-fee pricing and no contracts or monthly payments, and three affordable card readers, SumUp can be an excellent option for businesses to start accepting cards.


Stax offers fee-based pricing, with no markup on interchange for the first $500,000 in annual processing. It offers support for recurring payments, invoicing, and more.

Chase Payment Services

Chase Payment Solutions℠

Never miss a sale with powerful new ways to accept credit cards, anytime, anywhere. Accept Learn More

Nav’s Final Word: Merchant Account

Regardless of whether you have a physical location, work out of a truck, or an online business, accepting debit and credit cards is likely a necessity. To do that, your business will need a payment gateway, payment processor and merchant account to process those transactions before they can be deposited into your business bank account. Some solutions will bundle these services into an all-in-one solution.

Before you decide which merchant service account makes the most sense for your business, be sure to shop around, look at two or three services to find the one that is the best fit.

Frequently Asked Questions About Merchant Accounts

This article was originally written on June 11, 2020 and updated on December 22, 2022.

Rate This Article

This article currently has 18 ratings with an average of 4.5 stars.

Have at it! We'd love to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and protect yourself. Refrain from posting overtly promotional content, and avoid disclosing personal information such as bank account or phone numbers.

Reviews Disclosure: The responses below are not provided or commissioned by the credit card, financing and service companies that appear on this site. Responses have not been reviewed, approved or otherwise endorsed by the credit card, financing and service companies and it is not their responsibility to ensure all posts and/or questions are answered.

Leave a Reply

Your email address will not be published. Required fields are marked *