What is a merchant account and how do you open one?

In most cases, you need to have a merchant account if you want your business to be able to accept card payments.

Essentially, a merchant account processes electronic card payments between a customer’s bank account and your business bank account.

Simple, right? Actually, there’s more than one type of merchant account, and a variety of setups and fee structures to cater to all different kinds of businesses.

This article will explain everything from costs to getting set up, so you can find the best merchant account for your needs.

What is a merchant account and how does it work?

A merchant account is a type of business bank account that processes debit and credit card payments for a small fee.

Once a customer has entered their pin or tapped their card, the sale amount is transferred from their account into your merchant account, while the acquiring bank checks for sufficient funds and for potential card fraud.

Once approved, the money, minus the fee, will be deposited in your account within one to three working days.

Types of merchant account

There are three main types of merchant account:

  • Aggregated – aggregated merchant accounts pool multiple payments and process them as one single transaction, which allows the costs to be split and shared between multiple businesses. These lower rates make them the best option for small businesses.
  • Dedicated – a dedicated merchant account is set up for your business only, allowing custom rates to be negotiated based on your circumstances. Best for larger businesses with consistent, high-volume transactions.
  • High-risk – tailored to businesses operating in industries that are considered risky such as travel, gambling, and some subscription services. Fees are higher due to the increased risk.

Merchant account fees

Merchant account fees vary between providers and depend upon your contract type and the nature of your business. You could pay a monthly fee, a flat fee for each transaction, or even on a sliding scale depending on the value of your transactions.

The fee structure should be a major factor in deciding which merchant account provider you choose. For example, if you regularly take tens of thousands in monthly card payments, a sliding scale would be beneficial, but small businesses with fewer card transactions might be better of with a flat fee.

Setting up a merchant account

After you’ve researched merchant account providers and found one that’s suitable for your business, you can reach out and apply. Contracts generally last 18 months minimum, so the more research you do to inform your decision the better.

In order to be approved for a merchant account, you’ll need to supply all or some of the following information:

  • The nature of your business
  • The age of your business
  • Your credit history
  • Whether you’ve had previous merchant accounts
  • Average or expected value of all monthly card transactions
  • Average transaction value

The provider will then assess this information and decide whether or not to approve you for a merchant account.

Merchant account providers

Some of the most popular merchant account providers are:

Make sure to compare their monthly fees, transaction fees, and additional services in order to find a provider that matches your needs.

Can you take card payments without a merchant account?

Yes, it is possible to take card payments without a merchant account. To do so, you just need to be set up with one of the newer breed of payment providers (which essentially act as aggregated merchant accounts), which can handle all your card processing needs for a flat fee. These include:

  • SumUp
  • Square
  • Zettle by PayPal
  • PayPal

The flat transaction fees and absence of other monthly costs make these payment providers a great option for very small businesses. But if your business takes more than about £10,000 a month, you’d be better using a traditional merchant account provider, which allow you to negotiate more competitive fees.

Can you get a free merchant account?

There’s a simple answer to this: no. All merchant account providers charge fees of some kind. The best way to get a low-cost merchant account is to choose one with a fee structure that offers good value for the number and value of card transactions you take every month.

Further Resources

Global payment services for small businesses – An explainer on the best international payment solutions for small businesses that allow you to avoid higher fees when trading internationally.
Best payment processors for UK small businesses – 11 of the best payment processors for UK SMEs reviewed.
Taking payments online for e-commerce businesses – What are the easiest and most affordable options for small businesses?

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