A merchant account is a bank account designed to enable merchants to accept debit and credit cards. This article is designed to explain what a merchant account is in more detail, and to explain some factors in how you should distinguish between when you’re making a selection.
If you’re looking to get started with a merchant account, you can click on this link and fill out a short contact form. You’ll be contacted by a payments professional with experience with hundreds of merchants in your shoes – we will explain what your options are, the differences between those options, and based on your specs, we can generate a market-busting quote. If you’re just looking to find out a little bit about merchant accounts, or to figure out how to choose one, that’s fine as well! We’re also an ePOs stack advice hub, so we can advise on how everything works together.
What is a Merchant Account?
The specific meaning of “merchant account” is described below, although it’s more often used to describe a relationship and contract with a payment processor. In layman’s terms, “I need a merchant account” is the same as saying “I need a payment processing contract” because it’s part of the contract.
However, in specific terms, a merchant account is the holding account in which a payment processor retains your money. It’s held there during the final legal checks before your processor can imburse you the money. This is the case even when your processor offers “instant payments” – they’re actually lending you their money while they wait for your money to clear.
When money is taken via a card machine, it goes through a few different places. It starts off in the cardholder’s bank account – e.g. Lloyd’s or Halifax. Then it heads to the card network – e.g. VISA or Mastercard. Then it goes into the first (and usually, only) payment processor – a kind of bank called a “acquiring bank” but which is also sometimes called a merchant bank or an acquiring bank for short.
It might go to a further processor – for example, iZettle is something called a “payment facilitator”, and they have a different kind of license (it would be false to call them a merchant bank). Their merchant bank is Elevon, so all the money processed through iZettle goes through Elavon first. Some successful secondary processors like Stripe have gone on to become banks in their own right.
Finally, it comes to you. This journey is called “the interchange”, an idea we’ll come back to when we talk about fees.
What is an ISO?
ISOs are organisations which sell payment processing contracts, and your merchant account contracts will often by branded by the ISO, e.g. PaymentSense. They do not feature in the above diagram because they don’t “touch the money” – they are not banks themselves. StoreKit is an ISO, and our contracts are fulfilled by Allied Irish and Cashflows banks – but we do also build a lot of technology around ePOS, payment, and tills, so the bigger picture is that we’re a payment technology platform. ISOs can often resell contracts more cheaply than banks will offer them directly, because ISOs represent large numbers of customers to those banks and can broker cheaper rates.
Choosing between merchant accounts
Without getting too technical, it’s useful when your card reader and ePOS can transfer data and that requires a bit of kit called a “payment application”.
With non-integrated payments, you would have to manually type out the correct amount in the card reader in addition to your ePOS each time somebody paid. With integrated payments, you don’t. The smaller the value of the item on your ticket, and the more volume-based your path to success, the more important it is that you find an integrated payments solution.
A payment application is software. It needs to be certified from a legal perspective from your bank or processor. It also helps if the ePOS software team sanction it as an “official” integration, which involves their professional agreement that it’s likely to work properly. But it can be built by anyone – including third party software houses – who may charge a discrete fee for it. That’s part of the reason we’d recommend consulting with StoreKit on your whole ePOS stack, to get the whole picture with fees.
StoreKit works very closely with the card reader manufacturer (Ingenico) our banking partners, and ePOS software brands in our marketplace to ensure that StoreKit payments offers a wide number of integrations. You can ask about whether we would integrate with your ePOS in the form through this link.
With online merchant accounts, integration is also important in order that you can share the data with your store software provider and use the reporting and inventory tool suite in your software.
E-commerce or Card Present?
The “type” of merchant account is normally divided into three. Card Present is anything through a card reader, including contactless cards, and cards stored virtually on phones via e.g. ApplePay. (Card machines now come with the equipment to read contactless payments as standard, so it’s not something you need to think about.) E-commerce payments are a different kind of merchant account – most providers will do both, but your rates could differ and they’re considered separate accounts. Finally, MOTO “mail order / telephone order” is a type of card not present account, which are offered less frequently now. Make sure your merchant account supports the type of payment you’re looking to take.
We do sometimes get merchants who value the aesthetics of card readers. This isn’t a frivolous interest! It’s your store and it’s important to encourage customers to spend. For example, Order & Pay systems have been shown to boost customer order volumes, which makes a rate which is moderately more expensive a rational thing trade off set against increased volumes. However, only in the case of payment facilitators does your card reader directly depend on your processor choice. With most merchant accounts, you’ll get a choice of a range of card readers from old to new with their partner card reader manufacturer, which is likely to be Verifone or Ingenico and you can choose after choosing the merchant account. StoreKit payments, for example, offers the full Ingenico range, from beautiful modern readers through to robust-but-homely readers for merchants on a budget.
Online merchant accounts use a payment gateway, which is more likely to be informed by your merchant account choice as many providers offer their own gateway. Gateways are the portals for customers to enter card details, and have been shown to have a substantial effect on cart abandonment rate, so the value of design is less abstract here.
Some processors, such as payment facilitators, offer pay-as-you-go contracts with no minimum processing fee. They also require less stringent levels of legal documentation. However, this greater flexibility is traded off against a higher price in some cases, which we’ll cover in more detail below.
Increasingly, banks are reviewing their ways of showing their customers data – and moving away from wads of paper sent by post, in favour of a reporting suite which can be viewed simply and flexibly. It’s also possible to find good reporting via an integration with ePOS software or accounting software – which are often a little further ahead on this front than traditional banks.
Merchant account rates
Things to know when you begin looking
There’s four important things to bear in mind about rates. First, it oversimplifies to say that you should just “choose the cheapest rate.” Rates are structured differently, such that it isn’t always obvious which is the cheapest. It’s possible to have scenarios where different rates are cheapest for different kinds of merchants – we’ll cover this in more detail in a moment.
Second, like all commodities, there is a culture of price negotiation around some types of payment processing contracts. If you are a larger merchant we would encourage you to negotiate on price. With merchant accounts from traditional processors and acquiring banks, you can do this by calling around, taking multiple bids, and asking them to go lower.
It’s also worth bearing in mind that, if you have simply bought a payments contract from your business bank account provider, the rates are likely to reflect the behaviour pattern on display. You haven’t shopped around, you aren’t looking elsewhere, and they will charge accordingly.
Third, unfortunately some payment processors do mislead merchants. There’s lots of techniques to do this, for example “stuffing” higher rates onto more obscure card types which are still regular enough to make a difference. If you’re getting quotes in the form of two lines in an email, read the contract extremely carefully before signing. Our payments team has seen CFOs at companies you’ve heard of sign a misleading contract. (Read a misleading payment quote at the bottom of this page).
Finally, contracts come with different associated levels of risk for both banks and merchants. Pay-as-you-go processors are always more convenient but often more expensive. With contract processors, the longer the contract you sign, the cheaper your rate will be – but you might not want a long contract. You might be on a growth trajectory where you’ll be better able to negotiate in six months, so why sign on for three years?
Which merchant account is cheapest for me?
Ticket Item Price
The average spend per card transaction is even more important than your total turnover in identifying the best rate for you. This is because of different ways of formatting rates. Some are in a “percent plus” format (e.g. 1% + 10p) whereas others have a flat percentage rate (1.75%). Payment facilitators are particularly likely to offer a flat percentage headline transaction rate.
Here’s an example of why it matters:
Imagine rate A is 1.75% with iZettle, and rate B is 1% + 5p with StoreKit.
If you have a £5.00 average spend, like a to-go cafe, you’d pay 8.75 pence per transaction with iZettle and 10p with StoreKit, so rate A is better. If you have a £50.00 average spend, like in a clothing boutique, you’d pay 87.5 pence per transaction with iZettle and 55 pence per transaction with StoreKit. Therefore, the cheaper rate depends on your average transaction size.
Your card turnover is your negotiating power, as that’s the amount of business you represent to processors. All processors offer better rates to bigger merchants. However, banks and acquirers do to a greater extent. It’s also true that very small merchants should choose payment facilitators. Not only do you get free POS and additional flexibility, but the rate will be much cheaper. iZettle caps their rates at 1.75% for any type of merchant – merchant accounts from big banks will go much higher.
Unless you’re being misled by processors deliberately racking up exorbitant fees on rare cards (or you’re in an airport), this is likely to be less important than turnover and rate format. With traditional merchant accounts, different card types are charged different amounts. A high-reward foreign business card is expensive to process, a consumer UK debit card is cheaper. Some online payments and payment facilitators offer flat rates for all types of cards; traditional acquiring banks are more likely to offer different rates distributed by card types.
Card Not Present
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. The higher fraud risk will be reflected in a higher rate. This is also true of Mail or Telephone Order payments (sometimes “MOTO”), which will be pricer than card reader payments.
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.
Ready to get started?
StoreKit offers both types of rates. We sell payment facilitator brands such as iZettle, Square, and Sum Up; and we also offer our own merchant accounts via StoreKit Payments. Finally, we offer exclusive access to StoreKit payment tool – Order & Pay has been shown to boost customer orders in the region of 30%.