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What is a Merchant Account? (2024 Guide)

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What is a Merchant Account?

A merchant account is a bank account that allows any business to accept transactions made through a card (credit or debit). Every business has at least two types of bank accounts to manage its finances: a business bank account and a merchant account.

The merchant account is strictly for handling credit or debit card transactions, while the main bank account of the business manages all types of funds, including those received through cash transactions.

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What Does a Merchant Account Do?

A merchant account temporarily holds the funds made by card transactions before transferring them to the main business account. Any business accepting card transactions needs this account from their bank service.

You can consider a merchant account as a subset of a business account. When a payment is made by card, it takes a detour to a merchant account instead of going directly to the primary bank account of the business.

Note that a merchant account in the UK specifically handles card payments affiliated with any bank provider, and does not process other forms of expenses such as cash, digital wallets, or contactless payments not made through cards.

Purpose of a Merchant Account

Why does a merchant account need to hold the money from card transactions? Why not just transfer the money directly to the business’s bank account, avoiding the additional delay or extra fees? Well, there are a lot of reasons for this, as follows:

To verify transactions

Holding money in a merchant account allows the bank to verify the transaction. This verification is more than just checking if the customer has enough money for the transaction.

  • It confirms that the transaction matches with the Payment Card Industry Data Security Standard (PCI DSS). It is a global standard to secure the card information during the process.
  • This process also prevents any potential fraud by looking for any suspicious activity. An example of this would be a cardholder who typically makes purchases in Chicago. If there are suddenly a series of high-value transactions in Tokyo within an hour, it would trigger a fraud alert in the merchant processing system because of rapid spending and unexpected location change. The merchant account will alert the business and verify the details with the bank of the cardholder.

Chargeback protection

Chargebacks occur when a customer raises a concern about a transaction and asks their bank account to reverse it. If the chargeback is approved, then its money is deducted from the merchant account instead of the primary bank account of the business. This minimises the financial risk to both the processor and the merchant.

Manage processing delays

Payment processing is a step-by-step process, and unexpected delays can occur at any stage due to difficulty in verifying data, disruptions in the bank schedule, or technical issues. Holding funds in a merchant account allows the process to be completed smoothly without affecting the business’s primary bank account.

Fee deduction

Merchant accounts make it easier to deduct all the transaction-related fees before the funds are transferred to the merchant’s primary bank account. This makes it simpler for merchants to manage their finances, as they receive the net amount after all deductions.

Fees Associated With a Merchant Account

A merchant account accounts for various fees. We have grouped the types of fees according to their transaction frequency for better understanding. Please note that these fees can change depending on the provider.

Fees charged per transaction

Invoice factoring:

Transaction Fee: FIxed percentage that is charged each time a transaction is processed.

Discount Rate: A fixed percentage is taken from each transaction. The amount can vary based on each transaction.

Authorisation Fee: Charged specifically for each transaction authorisation, whether the transaction is processed or not.

Fees Rates
Transaction fee
1.5% - 3.5%
Discount rate
1% - 3%
Authorisation fee
1% - 3%

Fees charged monthly

  • Minimum Monthly Fee: Charged if the merchant does not meet a minimum volume of transactions.
  • PCI Compliance Fee: Charged annually to ensure that the merchant complies with Payment Card Industry Data Security Standards (PCI DSS).
Fees Rates
Minimum monthly fee
£10 - £20
PCI compliance fee
£10 - £20

Fees charged on a conditional basis

  • Setup Fee: A single-time fee charged at the beginning when to start setting up the merchant account.
  • Chargeback Fee: Charged when a customer wants to refute a transaction, leading to transferring the money from the merchant account to the customer’s bank.
  • Early Termination Fee: If the business decides to close its merchant account before the term mentioned in the contract.
Fees Rates
Minimum monthly fee
£80 - £100
Chargeback fee
£15 - £25
Early termination fee
Depends on provider

How to Set up a Merchant Account?

Setting up a merchant account is easier than it sounds.

  • Determine your transaction volumes to choose the right provider.
  • Compare different merchant account providers.
  • Prepare any necessary documents.
  • Fill out and submit the application form with the required documentation.
  • Start taking card payments for your business.

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The merchant in the merchant account means any business that wants to accept card payments from customers. This can include retailers, online businesses, restaurants, or any other type of seller.

Yes, every business needs a merchant account to accept card payments. Whether it’s an online store or an in-person store.

No, they are not the same thing.

  • A refund is when a business voluntarily reverses a transaction to give money to a customer. It is led by the merchant itself.
  • A chargeback is when a customer’s bank leads the transaction. The customer has a complaint and wants to have their money back but instead of contacting the merchant, they contact their bank. If the chargeback gets approved, then the funds are withdrawn from your merchant account and sent to the bank of the customer.

Written by:

Isabella Robinson
Isabella Robinson
Isabella Robinson is a seasoned business content writer, leveraging several years of experience to craft impactful narratives that seamlessly blend business insights with engaging storytelling across diverse industries. Her expertise lies in delivering compelling content that resonates with audiences.