What is a Merchant Account for Small Businesses?

Someone with a merchant account
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    Do you run a small business? Having a merchant account is an easy way to improve your small business productivity and reduce the problems of receiving payments. A merchant account protects you and your consumers in different ways. It will also speed up payment times and save you money.

    Today, online payments have become very popular. Credit and debit cards are common online payments used in many businesses. If your small business still relies on payment processing companies and doesn’t accept these cards on its own, you are potentially losing a lot of customers.

    To accept these card payments, however, you need to create a merchant account. This account will serve as a middleman between your customer account and your business bank account. In this article, we will discuss everything you need to know about a merchant account. 

    Key Takeaways

    • A merchant account is rather an intermediary between your customer deposit and your business account.
    • A merchant account and payment gateway work hand-in-hand. You will need to use both to accept payments from your customers.
    • A merchant account is used by merchants (vendors, e-commerce businesses, etc.) to process their customer’s payments while the payment gateway takes the money from the customer’s account and put them into the merchant account.

    What is a Merchant Account?

    Is a merchant account not the same as a business account? The answer is a surprising No. A merchant account is rather an intermediary between your customer deposit and your business account. It allows your small business to receive the money for shopping immediately after the transaction is made.

    You can liken a merchant account to a money pot that preserves your customer’s money for a short time.

    What is the difference between a Payment Gateway and a Merchant Account

    Merchant accounts and payment gateways are two terms you might have come across if your business accepts credit card payments. If you don’t know the difference between both, you are not alone. Don’t they mean the same thing or have the same function? No. You will need to use both to receive payments from your customers!

    A merchant account is used by merchants (vendors, e-commerce businesses, etc.) to process their customer’s payments while the payment gateway takes the money from the customer’s account and put them into the merchant account. Once the money reaches the merchant account, it can then be transferred to the business account of the vendors.

    How Does the Merchant Account Work

    These are the important steps taken when a transaction is processed:

    • The transaction goes through a payment gateway
    • The transaction fee is deducted from the customer’s account
    • Money is deposited to the business account

    The Transaction Goes Through a Payment Gateway

    A payment gateway is a method separate from the merchant account that checks if the customer has enough funds for a transaction. If your business accepts credit card payments online or over the phone, it will need a payment gateway. This tool is also useful if your customers place orders ahead of time. 

    Transaction Fee is Deducted from the Customer’s Account

    After the transaction is approved, the merchant account removes the purchase amount from the customer’s credit or bank account. It does so by first deducting a transaction fee, usually 3 to 5% of the total purchase amount. The fees deducted depend on the payment type. For instance, cross-border cards are usually higher than Mastercard or Visa.

    Money is Deposited to the Business Account

    The next step is that the merchant account sends the money to your business account. This is done in batches at the end of the day or sometimes after a transaction is made.

    Types of a Merchant Account

    Because each business has different payment needs, here are the different types of merchant accounts:

    • Mobile Merchants: Your business will require this account if it travels to different locations regularly, e.g. a food truck business. 
    • Retail: This is for retail businesses with a fixed location. These businesses are generally offered low set-up and transaction fees.
    • E-commerce: This merchant account is mostly used by businesses that sell products online or through mobile devices.

    What Fees are Associated with a Merchant Account?

    Opening a merchant account requires you to pay some charges to the provider you go for. These charges vary from one provider to another. It is important to go for the best bank for merchant accounts that offers affordable charges to clients. You can do this by carrying out a price comparison on each provider and selecting the one with the best offer.

    You must also make sure that you carefully examine the price quote of each provider you go for. This way you avoid paying hidden charges. 

    Here is a better look at the pricing system of different merchant account providers:

    • Interchange-plus pricing – This is common for small businesses. The interchange uses the same rate that is set by the credit card company. In the interchange-plus pricing, the payment processor will charge the rate + a markup as its gain. For instance, the interchange-plus pricing system can look like (2.8% + $0.15) per transaction. The 15 cents is the processor’s markup, while the 2.8% is the interchange percentage. This model is regarded as the cheapest pricing structure because it is more transparent but it will make your financial statements complex to read.
    • Flat-rate pricing – This is common for mobile credit card processors. For every transaction, you will be charged a fixed rate. For instance, anytime a customer pays with a credit or debit card, the processor will take a fixed percentage of that transaction. You can go for this pricing system if you are a small business that has low sales volume.
    • Tiered pricing – This system breaks transactions into three categories. The qualified, non-qualified, and mid-qualified transactions. Qualified transactions have the best rates, while non-qualified are very expensive. Each of these categories has different transaction types, but generally, you can expect that a normal credit card transaction at a POS system is a qualified transaction while a keyed-in credit card number through a mobile phone is a non-qualified transaction. 

    The mid-qualified transaction includes keyed-in card numbers that use an AVS (address verification service) to verify the customer’s address for added security.

    There are other fees associated with the merchant account beyond the pricing system. They include:

    • Gateway fee: If you use a payment gateway for online transactions, you will need to pay a monthly gateway fee.
    • Monthly fee: This is also referred to as a statement fee. It is charged when you prepare your monthly financial statement and provide customer service support.
    • Monthly minimum fee: Some payment processing providers have a minimum value of transactions you can complete every month. When you fail to meet up to this minimum, you will be charged with this fee.
    • AVS fee: This fee is charged if you use AVS as added security to confirm a cardholder’s address. AVS or address verification system is a fraud-prevention system that e-commerce businesses that frequently carry out keyed-in transactions use as added security.
    • Retrieval fee: This fee is charged when a customer dispute a sales charge and their bank asks for the records related to the sales. This is not the same as a chargeback fee. A retrieval prevents a chargeback if your customer’s dispute is unsuccessful.
    • Chargeback fee: This occurs when customers successfully dispute a sale and get a refund. After returning the funds to the customers, you will have to pay a fee to the processor to cover the costs associated with the refund.

    How to Get a Merchant Account

    Getting a merchant account is easy. Here are some easy steps to follow when acquiring one:

    • Research, research, research
    • Gather important documents in order
    • Apply for the account
    • Wait for your application approval

    Research, Research, Research

    The first step to take is to make research. There are different providers that offer a merchant account and their fees and capabilities vary. You need to know which firms offer the best merchant account for your business. 

    You can ask your friends who are in your niche for recommendations or go online and search for providers. Also, ask your current commercial bank if they offer merchant accounts. Compare the prices, reputation, and quality of service of each of the providers before making a choice. 

    Also, consider the customer service quality of the provider you go for. If you have any complaints or issues, how quickly will they reply to you? Poor customer support can be detrimental to your business. Choose a processor that is open and transparent about its services.

    Gather Important Documents in Order

    If you are sure that the provider is the right one for your business, it’s time to get important documents in order. The merchant account provider will ask you for your business name, DBA, contact information, tax ID number, business account, and routing number, some important financial statements, and sometimes, a credit card to pay the application fee. You need to get each of these documents ready.

    Apply for the Account

    Once you have all the documents in order, the provider will check your personal and business credit history for debt. Some providers might ask you to pay for the application, some might not but get ready for anything. You can also add a cover letter to the application to explain what your business involves and why it needs a merchant account.

    Wait for Your Application Approval

    After applying, the merchant account provider will check your application and deduce whether you are a good risk or not. There are several things that the processor will take into consideration when approving your application, they include:

    • How long you have been in the business
    • Personal and business credit history (debts, bankruptcy, or loan defaults)
    • Previously owned a merchant account or not
    • Business niche and transaction type

    The provider will consider you a good risk if your plan is to process transactions in person. But if you plan to process cards by phone or online, you will be at a bad risk as these transactions are more susceptible to fraud. To reduce this online risk, the providers might ask you to add the address verification system when cards are not present.

    The merchant account firm is more likely to approve your application if your business transaction type and history make you a low-risk client. A high-risk business might be approved, however, it will pay more expensive fees.

    Benefits of a Merchant Account

    So what are the reasons you should get a merchant account over using a payment processor? The following as some of the key benefits of this:

    • It accepts all forms of cards
    • It increases sales
    • You manage money better
    • You avoid bad checks
    • It offers payment flexibility

    It Accepts All Forms of Cards

    One of the essential benefits of going for a merchant account is that it accepts both debit and credit cards. Debit and credit cards continue to become prevalent among many customers today. Since merchant accounts provide this functionality, it can potentially lead to improved customers’ experience.  

    It Increases Sales

    Research has shown that customers prefer to use credit cards over cash payments. When small businesses today accept credit or debit card payments, there will be an increase in their sales. This increase can impact your business’s overall growth and bring in more customers.

    You Manage Money Better

    One benefit of using a merchant account is that it allows you to have a better money management policy. When your small business can receive credit and debit cards, you streamline the transaction process of your business. Instead of expecting customers to pay you in cash, online payments help you become organized and improve cash flow management.

    You Avoid Bad Checks

    With the help of a merchant account, your small business can avoid bad checks. You reduce the problems and financial implications of bad or bounced checks. This expert guide on how to recover from a bad check will be of help to you. 


    In this article, you have seen what a merchant account is and why it is important to open one in place of using a payment processing provider. If you want to have full control of customer payments in your small business, it is vital for you to open a merchant account.

    Frequently Asked Questions

    Do I need a merchant account?

    If you want to offer payment flexibility to your customers, you will need a merchant account. This account will serve as a middleman between your customer’s deposits from their debit or credit cards and your business account.

    How can I apply for a merchant account?

    To apply for this, you will need your main bank account information, i.e. your account and routing number. You will also need any governmental license associated with your business, an employer identification number, and important bank statements.

    What is the difference between a merchant account and a payment processing gateway?

    Although they both perform similar functions, they are still different. A merchant account helps to facilitate transactions for your small business. While payment processing gateway helps to process card transactions for your small business.