What Is a Merchant Account? And How to Get One in 2024

Understand what merchant accounts are and how vital they are for your business.

Updated: July 11, 2024
Matt Crabtree

Written By

Matt Crabtree

CompareBanks is reader-supported. When you click through some links on our site, we may earn an affiliate commission. Learn more

Generally speaking, cash transactions are definitely a lot more rare than they used to be in the 2000s and early 2010s — even just before the Covid era.

Still, it's not just because contactless payments became the norm during lockdown; it's generally just a far more convenient experience for your customers to accept credit card payments instead — whether that's because people carry less cash on them these days or they're in a rush.

Ultimately, though, businesses like yours are going to need to adapt to this changing landscape of the way people want to pay for things.

Furthermore, it's not just people who tend to conduct the majority of their business online that need to be concerned with this; it's your classic brick-and-mortar businesses as well — corner shops and department stores, for instance, all need to understand merchant account services to keep up with changing consumer behaviours.

So, throughout this article, we'll be taking a look at some of the fundamentals behind these kinds of business accounts and what they're used for — covering things like their functions, benefits, what kind of fees are associated with them, and even how you can get started with one and open an account yourself.

Understanding the Basics

Before we dive into some of the more tricky details, let's make sure we're all on the same page about what merchant accounts actually are and how they work.

What Is a Merchant Account?

Put simply, merchant accounts are a kind of arrangement that your business enters that basically gives you the opportunity to accept credit card and debit card payments from all of your customers.

Generally speaking, it's not too difficult a concept to get your head around, but just try to think of it like a kind of bridge that connects your business account with the network that actually processes all of your payments — the result being the ability to accept electronic payments from your customers in a secure way, but also incredibly efficiently and without having to wait hours for all the payments to get sent.

The Role of a Merchant Account Provider

So, to actually get this thing up and running, merchant account providers (or more commonly referred to as your merchant service provider) play a fairly crucial role, as they're the ones that help you with setting up and generally managing your merchant accounts.

These kinds of services essentially act as a type of intermediary between your business and whichever financial institution that's being used so that card payments can actually be accepted from whatever gateway you're using.

So, whether it's actually setting you up with your own payment gateway, helping you process transactions, or even just managing some of the fees that are associated with them, your merchant account provider is vital to your business.

The Importance of a Business Bank Account

Though we've covered some of the main fundamentals of these kinds of accounts, it's definitely worth exploring what a business bank account actually is before we dive into some of the more specific details of how merchant accounts work.

In essence, these accounts are the main location where all your company's funds are stored, giving you the chance to manage your finances and transactions fairly effectively. Just for a bit of clarity, this is completely different to your personal bank account that you'll use in your private life.

For starters, you are given various business-specific benefits and rewards for using these kinds of bank accounts, but the main reason for having a business bank account is so that your personal finances and business expenses aren't grouped together in a confusing mess.

Basically, though, merchant accounts complement your business bank account since they actually give you the ability to accept payments electronically, so it's naturally going to be a pretty valuable asset for your company, regardless of your size.

How Merchant Accounts Work

Now that we've got all the basics that are worth understanding out of the way let's break down the process of how merchant accounts actually function step by step in this next section.

Customer Makes a Payment

Kicking things off, the overall process naturally begins whenever your customer pays for some of the goods or services you sell using their credit or debit card, at which point the transaction has started. At this stage, the customer is essentially providing their card information to your payment processor.

Payment Processing

Next, all the information from your customer's credit or debit card gets transmitted to the payment gateway, which basically acts as a kind of intermediary between the merchant and whatever bank acquires the funds.

Acquiring Bank

Following on from the previous point, the acquiring bank, which is sometimes just referred to as the merchant acquiring bank, needs to evaluate the transaction and ultimately check that the customer has enough funds to make the transaction (along with a couple of other security measures).

Then, if all is well and the transaction ends up being approved, the funds are sent to a temporary account before going to your merchant account.

Funds Transfer

Once the acquiring bank finally approves the transaction, the funds are moved from that temporary account we mentioned in the last step straight to the merchant account that you're using for all of your business funds.

Merchant Account Fees

At this point in the article, it's worth mentioning that a lot of these kinds of accounts, although highly useful, come with certain kinds of fees to make the transaction possible — whether that's transaction fees or monthly fees.

We'll come onto some of these specifics in a separate section later on, but the main takeaway here is that once the funds have been successfully transferred, the merchant account provider deducts some of these fees from the overall amount that's been sent.

Obviously, the specific amount that gets deducted depends on the rates set by whichever merchant account provider you've partnered with, but essentially, the remaining balance (which, of course, is still the vast majority) is then deposited into your merchant business bank account.

Business Bank Account

Finally, you're now able to access all of the funds that you've been sent in the business bank account that we touched on a little bit earlier!

Remember, it's way more efficient to use one of these accounts rather than your own personal bank account, but either way, you'll have the ability to manage your finances however you want once they've been sent to from the merchant account.

Benefits of Merchant Accounts

Right, so now that you've got a better understanding of merchant accounts, let's talk about what kind of advantages you'd typically be able to expect when you use one of these accounts for your business transactions.

Accept Credit and Debit Card Payments

Obviously, it's generally just a lot more convenient for your customers to be able to pay for things with whatever card they feel like, but generally speaking, this is also something that can benefit your business.

Put simply, you're able to cater to a far broader customer base whenever you're allowing the customer to pay via credit or debit card, given just how many people rely on these cards for most of their everyday transactions — meaning not having this option could definitely deter potential buyers.

Now that you're providing a platform for your customers to pay with their preferred method, it's naturally going to increase the likelihood of them actually completing a purchase from either your site or in-person shop.

Increased Sales

Following on from this previous point, this kind of flexibility you're applying for your customers usually ends up having a fairly significant impact on your sales, too.

Beyond the sheer convenience that we talked about earlier, multiple payment options also tend to lead to an increase in impulse buying since the ease of making payments usually translates to a bit more spontaneity when it comes to buying things.

For instance, if they take a look at your store or website and are generally impressed by your products or services, they'd be way less likely to reconsider or even completely abandon their purchase if they're able to pay instantly with their card instead of going through some other longer process.

Global Reach

It goes without saying that you'd need merchant accounts if you actually want to grow your business across the world since you'd now be able to process payments in multiple different currencies.

Naturally, having one of these accounts is going to allow you to access new markets that you previously wouldn't have been able to access due to various kinds of payment limitations.

So, whether you're an online retailer or you sell some other kind of service, having the ability to accept international payments is going to be a huge game-changer for your business's overall bottom line.

How to Open a Merchant Account

There are a few different steps involved when it comes to actually opening a merchant account, so let's break them down in the final section of this article.

Research Merchant Account Providers

First off, you never want to apply for the first account that happens to come up on search results when you type ‘merchant account’ in — you'll always want to take a look around so you can compare a few different merchant account providers.

Ultimately, try to consider things like their fee structures, what customer reviews they have, and generally just what services they can offer you so you're able to find a provider that'll best suit some of your business needs.

Gather Necessary Documents

It goes without saying that you can't just sign up for one of these accounts without any form of paper — you're going to need a few different documents so the provider can properly check if you're eligible or not.

Whether it's some financial statements for your business, bank statements, your business plan, or even just personal identification documents, try to come prepared so you stand a better chance of having your application accepted.

Application Process

As we alluded to, you're going to have to go through an application process with your chosen merchant account provider once you've taken the time to research and find the best one.

Fortunately, this isn't a particularly difficult step as all it really involves is filling out a quick application form and providing them with some of the documentation we touched on in the last step.

Integration

If you're mainly going to be using one of these accounts for your online store, you're naturally going to need to integrate some form of payment gateway into your website so your customers can actually pay for things — so make sure you have this setup, too.

Start Accepting Payments

So, once you've done all this and your merchant account is approved and fully set up, you can finally start accepting credit card and debit card payments from your customers!

FAQs

Can My Small Business Benefit From a Merchant Account, or Are They Mainly for Larger Enterprises?

Can I Use My Merchant Account to Accept Payments in Different Currencies?

What Happens If My Business Doesn't Meet the Monthly Minimum Fee Requirement?

Related Articles

7 Business Bank Accounts with No Credit Check in the UK 2024
7 Business Bank Accounts with No Credit Check in the UK 2024
If you have poor credit or your business has yet to build a credit history, it's...
What are the Quickest Business Bank Accounts to Open? 
Long gone are the days when you needed mountains of paperwork and documents to open...
Allstar Plus Business Fuel Credit Card Review
Business expenses are something that all small and medium-sized company owners...
6 Best Business Credit Cards For Bad Credit In The UK 2024
Business credit cards are a useful tool when used correctly and can help when managing...