What is a merchant account – and do you really need one?

If you take card payments, you’ll hear the term ‘merchant account’ a lot. This guide explains what one is, when you need your own, when your payment provider includes one, and how to choose the right setup for your business.

New to card payments? Start with our guide to accepting card payments and explore your options on our card payment solutions hub.

At a glance

• A merchant account is a special account that holds card takings before paying them into your business bank account

• You may need access to one to process card payments. You can open your own merchant account with an acquirer or use a payment provider that gives you access to one under their umbrella

• For online payments, you also need a payment gateway, which is different from a merchant account

• Costs usually include interchange and card-scheme fees, plus your payment provider’s fees. You might also see fees for chargebacks, the Payment Card Industry Data Security Standard (PCI DSS), or early exit

• To open your own account, expect to have to fill in an application and supply some basic information (business details, what you sell, how you take payments). Depending on the type of business you’re running, your payment provider may ask for additional details

• If you sell via a marketplace provider, you often don’t need a separate merchant account

What is a merchant account?

Think of a merchant account as a secure staging area for card transactions. When a customer pays by card, the money lands in the merchant account first. After settlement, the funds move to your business bank account.

You can get a merchant account directly from a bank or as part of an all-in-one service from a payment provider. Some providers bundle the merchant account, payment gateway and reporting into one package, so you don’t have to stitch services together.

Do I really need a merchant account?

You need access to a merchant account if you want to take card payments directly. You have three common routes:

• Open your own account with an acquirer – such as Barclays Merchant Services or Lloyds Cardnet. This sometimes offers more control and negotiable pricing

• Use a payment service provider (PSP) or aggregator – such as Stripe or PayPal. Benefits include fast set up, one contract and blended fees

• Sell through a marketplace – such as eBay Marketplace or Etsy. Marketplaces usually handle the merchant account for you

For online payments, you also need a payment gateway to capture, encrypt and pass card details securely.

How a merchant account works 

• Customer taps or pays online

• The gateway (online) or terminal sends the details for authorisation

• Banks and card schemes approve or decline

• Money moves to your merchant account

• After settlement, funds are paid to your business bank account

Settlement time varies by provider and risk profile. Some pay out the next day, while others take a few working days or hold rolling reserves for higher-risk businesses.

Fees you’ll see (and what they mean)

• Interchange – Paid to the customer’s card-issuing bank per transaction

• Card-scheme fees – Paid to Visa, Mastercard and other schemes

• Provider markup – Your acquirer or PSP’s margin (percentage and/or pence per transaction)

• Other possible fees – Chargebacks, Payment Card Industry Data Security Standard or security packages, monthly minimums, early termination, and hardware or terminal rental

Providers price in different ways – flat or blended rates, interchange-plus or tiered. What is cheapest depends on your mix of transactions (value, card types, in-person versus online) and your volume. If you're unsure, obtain quotes for a month of actual transactions and compare the rates.

If you are comparing costs, our guide to card processing fees (UK) breaks it all down.

How to choose the right setup

Consider the following when choosing a merchant account:

• How you sell – In person, online or both? Do you need a single provider across channels?

• Costs – Look at the effective total cost, not just the headline rate. Check add-ons

• Contract – Length, exit terms and any monthly minimums

• Payout speed – When will funds hit your bank account? Any reserves or holds?

• Fraud and security – 3D Secure for ecommerce, basic risk tools and Payment Card Industry Data Security Standard support

• Reporting and reconciliation – Do you get clear, searchable reports that match payouts to transactions?

• Support – Hours, response times and UK contact options

How to open a merchant account 

If you open your own account with an acquirer, expect a short application and risk assessment process (which is called underwriting by financial institutions). Providers want to understand your business model and risk profile, so they require the following:

• Business details and directors or owners 

• Business bank account details

• What you sell and how you sell (website, in person, phone)

• Estimated monthly card turnover and average transaction value

• Basic security for online payments 

Higher-risk sectors or newer businesses may see extra checks, rolling reserves or slower payouts at first. If you would rather avoid a full underwriting process, many payment service providers and payment facilitators (PayFacs) offer faster onboarding with a single blended fee. Examples of these include PayPal, Stripe or Shopify.

Where can I get a merchant account?

There are several routes to opening a merchant account:

• Banks and traditional processors (apply directly)

• Payment service providers and PayFac-style platforms

• Your existing bank may offer merchant services. Hardware providers and ecommerce platforms also partner with acquirers

If you also need everyday banking, you can compare business bank accounts alongside payment options.

Read more …

• Find the best card machine for your business

• Card processing fees explained

• How to accept card payments