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What is a merchant account?
A merchant account is a type of bank account used by businesses where funds from their digital sales are temporarily collected before being transferred to the business’s main bank account.
A merchant account allows you to accept non-cash payments from your customers, including card, wallet, and online payments, where the funds are held before entering your business’s cash flow.
Why do businesses use a merchant account?
There are many reasons why businesses use a merchant account, but the main one is handling refunds, order cancellations and payment disputes. When an online transaction takes place, the funds are deducted from the customer’s account and processed before being transferred to the business.
However, there is more to this process. Customers are given a time window where banks allow users to dispute transactions, demand a refund, or report any other issue. To account for this, the funds can be accessed through the merchant account before finally reaching the business.
Benefits of using a merchant account
Businesses can get multiple benefits from using a merchant account, including:
- Include multiple payment methods
- Increase security for digital payments
- Efficiently handle refunds and chargebacks
- Improve customer experience
- Process transactions faster
How does a merchant account work?
During an online transaction, several steps take place, and the merchant account works in coordination with the other parts of the process. Let’s explain it in simple terms:
- When a customer swipes or taps their card for payment, sensitive information such as the card number is secured by the payment gateway.
- The payment gateway then transmits this information to the payment processor, which initiates communication with the customer’s bank to authorise the transaction.
- After the availability of funds in the customer’s bank is confirmed, the transaction is approved, and the funds are transferred to the merchant account.
- Once the settlement period (1-3 business days) ends, the funds in the merchant account are transferred to the business’s main bank account.
How to set up a merchant account?
There are two main ways to set up a merchant account:
- Use a standalone merchant account provider.
- Use a merchant account service offered by your selected payment gateway.
These services are mostly available via an online application or a digital account set up provided by the service provider.
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Requirements for setting up a merchant account
You will need the following information to set up your business’s merchant account:
- General business information and licensing details
- Business’s employer identification number
- Business address
- Contact number
- Financial information, including the business’s bank statements and current bank account details
How to choose the right merchant account?
Before choosing a merchant account, make sure they cover these critical aspects of an ideal provider:
Should have a transparent pricing structure, with all the transaction and monthly costs listed without any hidden fees.
Should support card payments, digital wallets and local payment options popular with your customers.
Funds should transfer from the merchant account to your business account within a reasonable time.
Should follow PCI compliance standards and implement updated security measures.
Merchant account pricing in the UK
Merchant account providers in the UK have different approaches to pricing, so no fixed cost estimate applies to each type of business. Pricing depends on factors like the business’s minimum card revenue, financial profile and the number of transactions per month.
Depending on these factors, providers may charge a monthly fee or offer contract-based pricing agreements. In many cases, the merchant accounts are combined with the payment gateway services, meaning the provider includes the bundled costs in a single package, rather than charging separately.
The main types of fees generally charged are:
- Per-transaction fee
- Monthly fee
- Other (chargeback fee, administration charges, contract-based early termination fee, etc.)
- PCI compliance fee
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Merchant Account FAQs
A merchant account is a type of business account that holds a business’s funds from card and digital payments for a short settlement period. In case of any payment dispute, the funds from the merchant account remain available for settlement. Otherwise, once the period ends, they are transferred to the main bank account.
No, merchant accounts only support digital payments like cards and digital wallets. Cash transactions are not included.
If your business accepts card or online payments, then a merchant account can become a comprehensive payment solution. It is needed to process and manage those transactions. The process also remains secure because it works with payment gateways and processors.