Everything You Need to Know About Merchant Accounts

Merchant Accounts: Everything You Need to Know

The ability to accept payment cards like credit cards and bank cards is critical in today’s world. People like to pay in plastic. According to Merchant Sumo, almost 35 million purchases are made with payment cards every day — and the frequency is growing thanks to new technologies. Shouldn’t your company get some of that action?

Absolutely, but first you need a merchant account.

What Is a Merchant Account?

A merchant account is a type of bank account that acts as a sort purgatory for the payments you receive from credit cards and bank cards. Also known as credit card payment processing accounts, merchant accounts are necessary to maintain the chain of approval from when your customer swipes a payment card to when you actually receive the money.

Step 1: Your customer swipes a credit card to pay for a purchase.
Step 2: That card information is sent to the ‘acquiring bank’. This is the company you use to process payment cards and marks the start of the ‘payment gateway’. It is also called ‘payment service provider’.
Step 3: The acquiring bank forwards the payment information to the payment processor. This would be the credit card company (e.g., Visa, MasterCard).
Step 4: The credit card company then contacts the bank that issued the card.
Step 5: The payment is approved or denied based on the amount of funds available. (This is the conclusion of the payment gateway.)
Step 6: If the payment is approved, the bank that issued the card will send a code to the credit card company.
Step 7: This code is sent on to your acquiring bank and then to your payment processing terminal.
Step 8: Your acquiring bank collects the payment amount from the issuing bank and holds the funds in your merchant account.
Step 9: Transaction fees are automatically deducted from your merchant account.
Step 10: The balance minus fees is deposited into your business bank account. Some systems take anywhere from two to seven business days for you to receive the money while others deposit the money into your account once a month.

Types of Merchant Accounts

Merchant accounts often come as part of a package from your payment service provider (PSP), but there are some big differences between merchant accounts. While most merchant accounts can support all types of transactions, each one must be specifically enabled and that can cause its own difficulties.
Before you open a merchant account or contract with a PSP, it helps to make sure you understand what each type of merchant account has to offer and how they differ.

Card Present

The first type of merchant account you will find is a ‘card present’ or ‘face-to-face’ account. As the name would imply, this account is used for transactions that involve direct contact with your customers. Retail stores, coffee shops and grocers are good examples of environments that would need a card present merchant account. Sometimes called a point of sale (PoS) interaction, these have the lowest risk of there being a difficulty with the card. However, you will need to buy or lease a PDQ machine to process the physical card.

E-Commerce / Online

If your business operates online, you will need a merchant account that supports e-commerce. The risk can be a little higher with these accounts — after all, you have to trust the information the customer enters — and you will need to take measures to ensure your customer data stays secure. However, you won’t need to buy any physical equipment, just a shopping cart compatible with your PSP.

Mail or Telephone Order

Sometimes your customers will prefer to contact you directly to buy your goods or services. Rather than visit you in person or go to your website, they will prefer to call you or mail in their requests. To support these transactions, you will need a ‘mail or telephone order’ (MOTO) merchant account.

Mobile Accounts

Depending on your business, you might also need a wireless merchant account. This type of account is used by people who conduct business on the go, such as a landscape artist or a home repair technician, and who often collect payment when the job is done. In this case, you’d process payments using your mobile device.

How to Get a Merchant Account

Getting a merchant account is fairly easy. Many high street banks will offer you a merchant accounts. There are also independent sales organisations (ISOs) that provide payment card processing services. However, the terms of those merchant accounts can differ wildly, so be sure to conduct some research before you come to a final decision. Look at high street banks as well as ISOs and PSPs that offer merchant accounts in tandem with card processing services. You can also consider e-commerce solutions.

Examples of High Street Banks: Barclays, HSBC, Lloyds, NatWest, Santander
Examples of ISOs: PaymentSense, PayPoint, Sage Pay, Bluebird Global, WorldPay
Examples of e-Commerce: Amazon Checkout, PayPal, Stripe Payments

Read our complete list of the UK’s payment industry players here

Here are some points of comparison:

Application Process and Onboarding

Your merchant account application can generally be filled out online, although you may be able to complete the information in-person if you choose a high street bank. Most merchant account providers will review your business plan and pricing structure. Your application will need to demonstrate your credit worthiness.

Your personal credit history and certainly that of your business will also be considered. In some cases, you will be required to demonstrate two years of credit history, but this is normally only with high street banks. There are many independent merchant account providers that are more flexible. Merchant account providers also look at your expected sales volume, the type of business you operate and the size of your company.

Keep in mind that it is possible to have your application denied.

Contract Term Length

If your application for a merchant account is approved, you will be presented with a service offer. The provider will list out the contract term length, as well as the costs and fee structure.

Some providers will not hold you to a contract, but many will. For instance, if you choose Lloyds TSB Cardnet for your merchant account needs, you will generally be required to sign a 12-month contract. Some services, such as PaymentSense, do not require a commitment for their merchant accounts but they do ask for a contract to use their card processing terminals. Others, like SagePay, do not ask for a commitment at all, but they require you provide three-months’ notice before cancelling your service.

Before entering a long term contract, you should consider the impact it may have on your business and opt for a shorter term contract if you’re unsure or operate a seasonal business.

Turnaround Time

Whichever method you choose, application processing times will vary. Be aware, getting a merchant account does not happen overnight. It takes time to set up a card processing solution. ‘Depending on the merchant account provider, your application could take from 24 hours to two weeks to be approved’, writes Merchant Services UK. ‘For instance, Elavon, an acquirer, promises to process applications within 48 hours while RBS, a high street bank, can take between five and ten days to process them’.

Merchant Numbers

Once your merchant account application is approved and you formally accept the terms of service, you will be assigned a merchant identification number (MID). It is like an account number for your merchant account. It is required to process payment card transactions and move funds from your customers when they pay to your business bank account once those payments clear. Typically you’ll receive a unique MID per physical storefront so you’re better able to trace transactions to where they were processed.

Merchant Account Costs

When it comes down to it, you will likely be basing your decision about which merchant account provider to use on how much its service costs. You should know that different providers charge different fee structures.

Setup Fees

The first fee you may encounter is the setup charge. This is a one-time fee that your merchant account provider charges for setting up your account. Not every provider charges this fee. The ones who do, often charge between £75 and £200.

Annual Charges

You might also be charged a yearly maintenance fee. This charge is assessed once per year. Most high street banks will charge something, while most smaller providers do not, but it really can vary. Also, keep in mind that even if a bank does charge an annual fee, it does not automatically make its terms disadvantageous.

Minimum Monthly Fees

There is a minimum monthly service charge (MMSC) to consider as well. This is an amount that your merchant account provider will charge you every month for having an account there. If your provider charges an MMSC, you can expect to pay from £10 to £30 per month.

Transaction Costs

Some providers will assess transaction costs instead of a monthly fee. These amounts often vary between bank cards and credit cards although some providers levy the same transaction cost for both. Average transaction costs go from 1.6% to 3% for credit cards while debit cards are usually assessed 20p to 50p per charge.

Chargeback Fees

Chargebacks are fees your merchant account provider charges you when things don’t go well. ‘In a merchant account, the provider is responsible for all transactions performed by a merchant. If the merchant operates in a grey or illegal manner, then this can expose the acquiring bank to huge losses’, explains Merchant Sumo. ‘The chargeback fee will usually by £15-£30 plus the transaction cost and processed amount’.

Machine Fees

If you will be using a POS system, you will need to use a payment card processing terminal. While in some case you may be able to buy or lease a device, some providers prefer to assess fees for use of their card processing machines. The structure for machine fees will vary considerably by provider and by which terminal you choose to use.

Support Fees

Some merchant account providers charge support fees for the customer service they provide. This could be listed as ‘customer support’, ‘merchant support’, or ‘support fee’ and the structure of this cost can be very different between providers. Some include support for free.

Termination Fees

If you are required to sign a contract with your merchant account provider, you will want to be sure to look at the termination fee. This fee is assessed when you do not fulfil the length of the contract or do not give adequate notice that you will be terminating the contract at its expiry.

You will need to look at your typical transaction size and volume to get a good idea of what your total costs will be. For example, Barclaycard charges 1.5% of your charged transactions plus a monthly maintenance fee of £10. In contrast, PayPal charges 20p per transaction as well as a percentage of your transactions that ranges from 1.4% and 3.4%, depending on the volume of transactions you charge. Do the maths to see what works best for you.

Merchant Account Features

Merchant accounts are not the only thing merchant account providers offer. Most of them provide a wide array of payment processing options. This could include payment gateways or a traditional card processing terminal like you might use when you visit a shop — but these are just options. You have the ability to choose who provides your payment processing service regardless of whom you contract for your merchant account. You might also decide to use several solutions at once, such as using an e-commerce solution for online sales and a physical terminal for in-store sales. Some service providers are more effective than others, or charge less, or offer more perks.


One of the biggest perks merchant account providers offer is reporting. The right service will perform analytics on your transactions and provide meaningful insights that you can use to schedule employees better, run sales, and more.

Merchant Account Reporting

Adyen merchant account reporting dashboard


Also, keep in mind that merchant account providers will also differ in the ways that they support different currencies. Some providers will assess your business a fee for transactions with payment cards that are not your transaction currency. Make sure you check with a potential merchant account provider to see if there is a fee.

Exceptions: High Risk Merchant Accounts

This has been an overview of merchant accounts and the information you’ve read is going to reflect what you will encounter as you search for the right merchant account for your business. However, there are some exceptions to the rule. Some businesses are classified as more ‘high risk’. If your company falls under this category, finding a merchant account is going to be more difficult. Many processors will not deal with high-risk companies at all. Some examples include credit repair companies, adult sites, and dating services, as well as many less obvious examples, such as casinos and travel agencies.