What is a Merchant Account?

card processing terminal

By Rob Binns | Senior Writer | Updated: January 12 2021

…and how do I get one?

A merchant account is what allows businesses to accept cashless forms of payment. This includes credit cards, debit cards, and mobile wallets such as Google Pay or Apple Pay. 

So, whether you want to take card payments online, over the phone, or from your physical store with a card machine, you’ll need a merchant account to do it. 

But how does a merchant account work, exactly? What process takes place when your customer makes a card transaction? And, most importantly, how can you secure merchant services for your SMB?

Let’s find out. 

What is a Merchant Account?

Well, you can think of a merchant account as kind of like… a holding pen. It’s where the funds are first held when you take a credit or debit card payment from your customer.

When you use a card machine to accept a payment at the point of sale (or through your website, with a payment gateway), there are a whole bunch of different parties involved in the transaction. These include your bank (the acquiring bank), your customer’s bank (the issuing bank), and the card associations (also known as card networks), which include Mastercard, Visa, and American Express. 

These various entities work together to authorize, secure, and verify the transaction. And, anyone who’s ever used a card before will know they’re quick – the card payment itself is finished within seconds. Yet behind the scenes, there’s still a lot to do, and you won’t receive your funds until it’s done.

Here’s where the merchant account comes in.

After the customer pays, the funds leave their checking account and enter your merchant account. This is operated by your merchant account provider – basically, the bank or independent company (they’re called ISOs – see below) that provides your merchant services. The funds sit there for a couple of business days (think of that holding pen analogy again), before being deposited into your (entirely separate) business account, where you’ll have access to them.

Confused? We get it. Jump to the section called ‘How does Credit Card Processing Work?’ for the full lowdown on what happens when you take a payment, and who’s involved in the process. Alternatively, hit play on the video below to cement your understanding of what a merchant account is.

What are Merchant Services, and Who Offers Them?

The term ‘merchant services’ (also known as credit card processing, the term we’ll use more frequently from here on out) refers to the act of accepting cashless payments. You can secure merchant services via a few different routes, including:

Opening a merchant account with a bank

Best for large businesses

Many high street banks offer merchant services, including Bank of America (BofA) and Chase. Opening a merchant account with a bank can offer convenience  particularly if you already have a personal or business account open with them.

There are a couple of drawbacks to this approach, though. For one, banks don’t generally offer competitive rates when it comes to credit card processing. Secondly, banks often tend to act as middlemen (Bank of America, for instance, processes merchant payments through a third-party company called Fiserv, formerly First Data).

Another downside is that banks also tend to take longer to pay out than the alternatives. Which are what, exactly?

Opening a merchant account with an ISO

Best for small and medium-sized businesses (SMBs)

An ISO (Independent Service Organization) is payments industry parlance for a company that offers merchant services on behalf of an association member bank. ISOs are responsible for setting up the merchant’s account, providing ongoing customer support, and maintaining good relations with them.

ISOs are, typically, one of the cheapest and most flexible merchant account options for SMBs. Working with an ISO should allow you to negotiate the price and contract length that works best for your business. That said, one caveat of an ISO is that, like with banks, you’ll face a lengthy application process… and if you have a bad credit rating, you can basically forget about it.

Is there a better way?

Opening a merchant account with a payment facilitator

Best for small businesses and sole traders

Yes, there is – and, if you’re a small business, it’s the best way. It’s called a payment facilitator (PayFac). Even if you’ve never heard of the term before, you’re probably already familiar with some of the big PayFacs names in the US, such as Square, iZettle, SumUp, and PayPal Here.

Put simply, PayFacs work by ‘batching’ transactions from all the merchants they work with together, and processing them through their own merchant account. Put even more simply, that means PayFacs can save you time, money, and hassle.

So, what other benefits do they offer? Transparency is one – payment facilitators tend to offer a simple, flat-rate pricing structure, so you’ll pay an agreed percentage only on the transactions you take via card. Recurring or monthly charges are rare to non-existent, and the card readers themselves are provided for a nominal fee. 

On top of this, PayFacs help make sure you stay compliant with the myriad laws and regulations of the payments industry. and most don’t require a credit check! Plus, PayFacs such as Square (that integrate with companies like Wix and BigCommerce) can help you build your own website to start selling through.

If you’re a small business looking for affordable, understandable, ‘all-in-one’ credit card processing, Square is your best bet. And, at the moment, Square is offering its card reader for free to eligible merchants. 

Head to Square’s website to see if your business qualifies. It’s simple to set up your account – you can be done in minutes, and be taking payments by the end of the week. Alternatively, check out our guide to the best credit card processing services for small businesses to find the merchant account provider that's right for you.

How does Credit Card Processing Work?

So, now you know what a merchant account is, and where you can go for your merchant services. But what actually happens when your customer swipes or dips their card at your store, or when they enter their card details into your website’s online payment form?

Luckily, a professional artist was on hand to render the whole credit card processing journey… in stunning visual detail.

how credit card processing works

The payments process, summarized. Confused? Don't sweat it… we'll explain it all below!

As you can see, it all starts with the customer opening their wallet, and ends with the issuing bank getting clearance to release funds to the merchant’s account.

But what happens next? Let’s take a closer look at the various entities jostling for their slice of that lucrative, payments-shaped pie.

What is a payment gateway?

A payment gateway is a piece of software that helps verify and process a credit or debit card transaction on behalf of a merchant. As the first link in the credit card processing chain, it’s integral to the success and security of both face-to-face and ecommerce transactions.

What is a payment processor?

The payment processor (labelled ‘credit card processor’ above) then takes over, authorizing the transaction and acting as the mediator between the merchant and all the other financial institutions involved. Essentially, a payment processor makes it all happen; ensuring that the right checks are done, and facilitating the transfer of funds so the merchant gets paid promptly.

What is a card association?

Card associations (also known as card networks) are companies that issue credit and debit cards: Mastercard, Discover, American Express, and Visa. Card associations act as the arbiter between the acquiring and issuing bank, and do their bit to help verify the transaction.

It can all be pretty baffling, right?

Right. That's why we recommend a payment facilitator, such as Square. Square takes care of the whole end-to-end credit card processing journey. It uses its own network of payment gateways to save time, and batches the transactions of multiple sellers through a single merchant account to save you money. It also offers a single, fixed rate of just 2.6% + 10 cents per face-to-face sale, for ultimate simplicity.

To find out more about accepting card payments with Square, click here.

Why Should You Get a Merchant Account?

Credit cards and debit cards have been around for ages – anyone can tell you that. But what fewer people know is that cashless transactions have been growing year-on-year in the US (and around the world) for some time… in their billions.

The 2018 Federal Reserve Payments Study reported that card payment transactions grew more than 10% between 2016 and 2017, while the value of those payments also increased (8.4%).

Elsewhere, recent research reports that debit card payments at the point of sale made up over two-thirds (68.3%) of total transaction volume in 2018, while mobile wallets are also experiencing an unprecedented upturn.

What does this mean for you, exactly? Well, it’s a harsh reminder that a new way of paying is taking over; and it’s time to adapt, or risk being left behind. Because if you can’t offer your customers the opportunity to pay with a card, they’ll go somewhere that will.

what is a merchant account

Millennials, in particular, tend to favor cash-phobic, card-oriented attitudes – and they make up over a quarter of the world’s population.

How Much does a Merchant Account Cost?

When it comes to credit card processing fees, there’s no hard and fast rule as to what your business will pay. Fee structures and the prices themselves are often obscured, and will always depend on a range of factors. These include:

Your business’ type and industry: ‘High risk’ businesses include those in the fields of gambling, online pharmaceuticals, travel, events and ticketing services, foreign exchange, and more. If this is you, chances are you’ll have to seek out a specific kind of merchant account specializing in catering to high risk businesses. And, you guessed it… they don’t come cheap!

Your credit rating: New businesses, or those with a less-than-ideal credit rating, may struggle to be accepted for a contract with a merchant account provider. If this sounds like you and you are accepted then you may be eligible to pay higher merchant account rates, to reflect your business’ higher level of risk.

Your sales volume: Many merchant services providers offer discounted rates when you process a large amount of card transactions each month. Likewise, merchants that take only a small number of card payments may have to pay a minimum monthly service charge to make up any shortfall in processing fees.

Your chosen merchant account provider: This one’s kind of a no-brainer, but yes – fees differ wildly across merchant services providers. 

But they’ll also differ based on the type of provider you select. Read on for the key differences between a traditional merchant account and a payment facilitator.

Traditional merchant account (bank/ISO) fees


  • Low transaction fees
  • Better rates can be negotiated with the provider
  • Ideal for businesses with large sales volume

X Cons:

  • PCI compliance fees apply
  • Costs aren’t transparent…
  • …and, as such, can be extremely difficult to predict!

Merchant account fees are anything but simple. But, essentially, they consist of:

Transaction fees

You’ll be charged transaction fees on every payment you take through your merchant services provider. The most common of these are interchange fees. Interchange fees take the form of a percentage of the transaction’s value (say, 2.2%), a flat rate (50 cents) or a blended rate (1.8% + 15 cents).

Interchange fees go to the card associations to maintain the networks involved in the transaction process (and so Mastercard and Visa can make healthy profits, too).

And, because it’s the various card associations/networks setting the fees, the levy you pay will be at the mercy of the customer’s card type (debit or credit card), method (swiped, dipped, contactless) and the card brand itself (Discover, American Express, etc.). A VISA debit card, for instance, is cheaper to accept than an AMEX Gold, and a keyed-in transaction is cheaper than a dipped or swiped one.

Scheduled fees

Scheduled fees are regular, ongoing fees associated with maintaining your merchant account. You’ll most likely pay them on a monthly basis, and they include card machine rental, customer support, and, potentially, a minimum service charge, too.

Incidental fees

As the name suggests, incidental fees are hard to predict, and can be costly. The most common (and dreaded) incidental fee comes when your business receives a chargeback

A chargeback occurs when your customer disputes a card transaction they made with you. If their claim is upheld, they get a refund, and you get a fine. 

Payment facilitator (Square or iZettle) fees


  • You’ll pay fees only on the transactions you make
  • No hidden costs
  • No ongoing charges
  • Card reader provided at a nominal fee, or free or charge

X Cons:

  • Transaction fees are higher than those associated with a traditional merchant account
  • Accounts are liable to be shut down indefinitely
  • Less reliable in the long run

By contrast, the credit card processing fees of PayFacs such as Square are about as simple as they come. You’ll pay a transaction fee on each payment you take with your card machine, or through your website. And… that’s it!

PayFacs typically charge a flat rate, regardless of card type (Visa, Mastercard, American Express, etc.), meaning that you won’t have to discourage your customers from using their preferred card. 

However, costs will vary depending on the way the payment is taken. This is because of the higher level of risk involved with a card-not-present transaction, compared to one where the customer is present at the point of sale.

Transactions made using  a card machine, for example, are cheaper than those keyed in, or processed via an ecommerce method such as a virtual terminal or payment gateway. For instance, Square’s rate for face-to-face payments is 2.6% + 20 cents, while a manual, card keyed-in transaction costs 3.5% + 15 cents.

How to Get a Merchant Account

Now you know what a merchant account is, how much it’s likely to cost you, and why you should get one. You’re ready. But, ah… how do you get a merchant account?

Well, you should by now have a better idea of what kind of provider (bank, ISO, or PayFac) you’d like to approach for your merchant services. If you run a larger business and you’d like to opt for a bank, pop into your branch for a chat, or apply online. 

If you’re a small to medium-sized venture, you’re best to see what an ISO can do for you. ISOs are relatively easy to seek out – in fact, the very nature of their sales process means they’ll probably find you first!

And, for the rest – the small businesses, the market traders, the seasonal sellers, the tradespeople, the food trucks, the vendors operating out of the back of vans driving the world’s economy – for you, the choice is easy. 

You can apply for merchant services from a payment facilitator without a credit check, and it takes just a few moments to do. You’ll also benefit from low, transparent rates, sleek and simple card machines, and PCI compliance handled for you. So, where to begin?

We recommend Square as our top merchant services option for small businesses. With fees from 2.6% + 20 cents per transaction and no hidden costs, Square is a slim, straightforward, and smart solution to help turbocharge your business’ rise to the top.

Are you ready to start accepting debit, credit, and contactless card payments? Do you dare to Square? Hit the button below to begin.

Get your free Square card reader today Let's go

What’s Next?

You made it! Thanks for sticking with us, and learning more about what makes money move. You now know what a merchant account is (and if you’re still not sure, you can head back up to the top of the page and go again). You’re also comfortable with credit card processing, the fees involved, and how to get a merchant account.

The rest is up to you. Head to our recommended provider Square’s website to apply for merchant services for your business, or Tweet @expertmarket to let us know how your progress towards accepting cashless payments is coming along. Cash you later!

Rob Binns
Rob Binns Senior Writer

Rob writes mainly about the payments industry, but also brings to the table industry-specific knowledge of CRM software, business loans, fulfilment, and invoice finance. When not exasperating his editor with bad puns, he can be found relaxing in a sunny (socially-distanced) corner, with a beer and a battered copy of Dostoevsky.

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