Merchant Accounts 101: What They Are and Why You Need Them

A merchant account is used to help businesses process payments, charging processing fees and other usage rates for essential payment gateway services that allow ventures to charge customers and access funds.

Simply put, it’s impossible to take contactless, credit and debit card payments without them. And with cards responsible for 61% of the United Kingdom’s 48.1 billion transactions last year, according to the trade association UK Finance, merchant accounts are more vital for UK businesses than ever.

But what exactly are merchant accounts and how do you get one for your business? Backed by our nearly 15 years of experience covering the payments industry, we answer those questions and others in this handy business guide below.

What Is a Merchant Account, and Do You Actually Need One?

A merchant account is a type of bank account that allows businesses to accept payment by credit and debit card. Held with an acquiring bank, a merchant account holds customer payments while they’re approved and processed by the customer’s bank, before sending them securely to the merchant’s business bank account.

To be clear: without a merchant account, your business will not be able to process card payments.

Merchant accounts vs business bank accounts

Some people make the mistake of confusing a merchant account with a business bank account. However, they are different things.

A business bank account is used for general financial management and handling of all company funds, such as depositing and withdrawing cash, handling operational expenses such as your payroll and other business-related bills.

On the other hand, merchant accounts are focused on processing card payments and managing transactions related to card sales. It essentially serves as an intermediary between the card payment networks and your main business bank account.

Do businesses need both a merchant account and a business bank account?

In general, most businesses will need both a merchant account and a business bank account if they want to accept all types of payment. As explained above, that’s because the merchant account processes the credit and debit card payments and temporarily holds them before transferring them to a business bank account.

However, some merchant services do provide payment processing without the need for a separate merchant account, such as Square, Shopify Payments, Stripe, and PayPal. In these integrated instances, you’ll only need a business bank account, however, this is not a feature of all merchant services and it can sometimes come at the cost of higher transaction fees and longer funding times depending on the service provider.

How Does a Merchant Account Work?

Let’s look at what happens when a customer — we’ll call her Jane — pays using her card in a high-street shop:

• Step 1: Jane orders a coffee. Jane is served a coffee. Jane pays for her coffee by touching her contactless card to the card reader.
• Step 2: Jane’s card details are sent from the card reader to the merchant account, held with an ‘acquiring bank’, along with details of the transaction. The acquiring bank routes this information to the relevant card association — either Visa, Mastercard or Discover. Jane has Visa.
• Step 3: Visa forwards the transaction details to Jane’s bank — known as the ‘issuing bank’ — to see if Jane has enough money in her account to pay for the coffee.
• Step 4: Jane just got paid, so she has more than enough money. The issuing bank fires back a response to the acquiring bank, via the card association, which transmits the information to the card reader: “Transaction Approved”. Jane enjoys her coffee.

So you can think of a merchant account as a kind of holding pen — a secure place for funds to sit while the bank checks to make sure the customer has enough money in their account to make payment.

So at this point Jane has her coffee but you, the merchant, don’t have Jane’s money – and considering that you need it to be able to afford the rising business energy bills in the UK, this can feel like a tough spot to be in.

That said, relax, this is totally normal. The actual transfer of funds can take anywhere between 24 hours and seven days while the acquiring bank and the issuing bank faff around with authorisation codes. This is known as the “settlement period”, and varies from provider to provider.

Most top merchant account providers will have the money in your business bank account within three working days.

Different Ways To Take Card Payments

Of course, on its own, a merchant account isn’t enough — it is after all just a bank account. To take card payments you need a way of collecting payment information. And this can be done in a three different ways:

1. Electronic-Point-of-Sale (EPOS) systems: EPOS systems, commonly found in physical stores, consist of items like mobile card readers, countertop cash registers, and integrated EPOS software that handles inventory and sales. These hardware-software combinations can be rented, leased, or purchased from merchant service providers as part of your merchant account agreement.
2. Over the phone: To take card payments over the phone you’ll need one of the best virtual terminals. This is essentially a secure webpage accessed via a standard web browser into which you (the merchant) enter customer card details manually.
3. Online: To take payments online, you’ll need to get acquainted with a ‘payment gateway’. Linked to the checkout feature of a website, a payment gateway stores and transmits customers’ payment details to the merchant bank securely. If your business operates only online, you should consider signing up with an internet merchant account, as they’re designed to deal exclusively with virtual transactions.

Rates and Fees: How Much Does a Merchant Account Cost?

Merchant account fees vary based on the volume of card transactions processed. Essentially, the more money you take from card payments annually, the lower the rates offered to you by providers.

Core charges fall into two categories: monthly charges and charges per transaction.

Providers are often reluctant to offer up a full list of charges in their initial quote, so be sure to ask about all nine listed below. You may also be able to get variable rates based on whether you rent, lease or purchase the equipment.

* A minimum charge applies if your monthly transaction volume doesn’t reach a pre agreed threshold

PCI compliance

There’s another monthly fee for you to factor in, and it’s an important one so warrants going into a bit more detail. That fee is: PCI compliance.

PCI compliance is a legal requirement for all businesses that process card transactions. It’s basically a series of checks to make sure you’re handling sensitive data in a responsible manner.

For a small fee, merchant account providers offer PCI compliance guidelines and service — and we recommend you take it. Honestly, it’s not worth the hassle of trying to do it yourself.

Chargeback fees

Chargeback isn’t something to worry too much about — unless you’re doing shady business. It’s a measure designed to protect the consumer. If a consumer suspects that a transaction on their account is fraudulent, they are entitled to challenge it with the bank. If the challenge is upheld, the money will be refunded and the merchant will incur a chargeback fee. It’s basically a charge for wasting the bank’s time.

Interchange fees

Like chargeback, interchange isn’t anything to lose sleep over — but it’s worth understanding so you can impress your friends down the pub. It’s a mandatory fee paid by the merchant’s bank to the customer’s bank and forms a portion rates — discount rates, to use their proper name — charged by your merchant account provider. In the UK, interchange fees are capped at 0.2% of the transaction for debit cards and 0.3% for credit cards.

Types of Merchant Account

There are three types of merchant accounts:

1. Aggregated merchant accounts

An aggregated merchant account is a service offered by a payment facilitator (PF), and is often the best choice of merchant services for small businesses . A PF recruits merchants on behalf of the acquiring bank. They are basically re-sellers — like a travel agent who sets you up with a hotel and takes a tidy cut of the room fee as payment.

When you sign up, your business is given a code based on industry and type of goods sold. Similar businesses are then grouped together in shared pools.

By pooling transactions from multiple merchants together and channeling them to the acquiring bank to be processed in one jumbo, shared merchant account, PFs can negotiate the same low rates for small to medium-sized businesses available to larger enterprises.

The downside of an aggregated merchant account is that you have less control over when your money is paid to you. Plus, for some businesses, it may be the case that they’re able to negotiate better rates with a dedicated merchant account.

2. Dedicated merchant accounts

A dedicated merchant account is set up directly with the acquiring bank. It offers greater control over when your money is paid to you, and allows you to negotiate rates specific to your business.

3. High risk merchant accounts

Some businesses may struggle to get approved for a merchant account from mainstream providers because they’re considered “high risk”. If this is the case for your business, don’t be offended, it’s (probably) nothing personal.

There are several criteria that the banks look at to assess risk. They are:

Longevity and stability: How long has your company been in existence? And what’s its track record in terms of financial performance? Are there good years and then bad years or is turnover consistent?

Industry sector: Do you operate in a sector classified as being high risk because of above average rates of chargeback and cancellation? Gambling, travel and monthly membership and subscription services are all marked down on this front.

Credit record of Directors and owners: Have you or any of the other major players in the business gone bankrupt in the past? (If you fail on this criteria it’s entirely personal.)

So, what to do if your business is refused a merchant account? Don’t despair. Rates are a little higher, but there are plenty of providers out there which specialise in merchant accounts for high risk businesses.

What About International Merchant Accounts?

If your business is looking to accept payments from customers outside the UK, it’s important to consider whether your merchant account will facilitate international transactions.

Features of international merchant accounts

Merchant accounts that support international payments typically come with a few key features designed to make cross-border transactions seamless:

• Multi-currency support: This feature allows your business to accept payments in various currencies, which can be particularly attractive to customers who prefer to pay in their local currency. For instance, Worldpay can accept over 120 currencies.
• Dynamic Currency Conversion (DCC): Some providers offer DCC, allowing customers the option to pay in their home currency while you receive the payment in GBP automatically.
• Global payment gateways: To process international payments, your merchant account may integrate with a global payment gateway that can handle different currencies and payment methods if it can’t already. PayPal is an example of a payment gateway that supports international transactions and since it is available in more than 200 regions, it is an easy choice for UK businesses to receive payments from abroad.
• International fraud prevention: Handling payments from different countries can increase the risk of fraud, so international merchant accounts often come with enhanced fraud detection and prevention tools compared to those that focus on local transactions.

Do all merchant accounts support international transactions?

While most UK merchant account providers support international transactions, not all will so it’s worth checking with your chosen provider if you need that capability.

Even those that do accept international payments may have specific restrictions or additional requirements such as the following:

Higher transaction fees

International transactions frequently have higher fees than domestic payments. These might include currency conversion costs, cross-border transaction charges and additional processing fees. For example, PayPal and Worldpay typically charge a higher percentage for payments received from outside the UK.

Separate application process

Some providers may require a distinct application for an international merchant account, especially if your business is heavily reliant on overseas sales. This can involve more stringent credit checks, a higher minimum turnover requirement or providing a more comprehensive transaction history.

Geographic restrictions

Many merchant account providers impose geographic restrictions meaning they won’t process payments from specific countries. This could be due to the high risk of fraud associated with certain regions or unstable financial environments. For instance, if a country has sanctions or is listed as high risk by financial institutions.

Currency restrictions

Similarly, the same can be true of individual currencies. Whether because of the operational complexity required to handle multiple currency conversions, pricing and settlement processes, local compliance laws, risks in currency fluctuations and fraud, or simply market demand, merchant accounts often restrict the number of currencies even if they allow international payments. Be sure to check the currencies you require are supported.

Settlement times

International payments often take longer to settle than domestic transactions. This delay can affect your cash flow and is typically due to additional steps involved in currency conversion and cross-border transfers. Providers such as Global Payments might offer faster settlement options for an extra fee, but standard settlement times for international transactions can still extend to several days.

Compliance with local regulations

When accepting payments from international customers, you may be required to comply with local regulations. This could involve additional paperwork or specific standards. For instance, if your customers are in the European Union, you’ll need to ensure compliance with GDPR and other local data protection laws. Your merchant account provider may assist with this process but the responsibility will rest on your business’ shoulders.

For more information, read our guide on how your business can accept international payments in the UK.

Why Does It Matter Which Merchant Account Provider I Go With?

The provider you choose matters because of two reasons: fees and contracts.

Merchant account fees vary. A lot. They can vary with the same provider from month to month, let alone from provider to provider. So it’s super important you weigh up all the options before signing a contract.

Once you sign on the dotted line that’s it, they’ve got you. As per the Payment Systems Regulator’s latest remedial directions, UK merchant accounts can keep you in a contract length for a maximum of 18 months. That’s a long time – and while early termination fees are rare, you most definitely will be required to pay any remaining rental costs, too.

Read our top merchant account providers guide for a full run-down of the top options and their respective costs.

How To Open a Merchant Account

So now you know the answer to the question “what is a merchant account?”, you must be thinking: how do I open one? Well, the first step is to arm yourself with the necessary information to get an accurate quote.

Providers will need to know:

• The nature of your business — what you sell and how you sell it
• Monthly turnover for card payments — or forecasted turnover if yours is a new business
• Average transaction size

You’ll probably be subject to a credit check, too – although some merchant account providers don’t require one.

In the UK, you must also provide specific documentation and identification when applying for a merchant account. This typically includes:

• Proof of identity: A valid form of identification, such as a passport or driving license, for all company directors or individuals involved in the business.
• Proof of address: Recent utility bills, bank statements, or council tax bills (usually dated within the last three months) for all directors or signatories.
• Business documentation: Depending on your business structure, you may need to provide different documents:
  • Limited companies: A Certificate of Incorporation, Memorandum of Association and details of all shareholders and directors.
  • Sole traders: A recent bank statement or a personal tax return.
  • Partnerships: A Partnership Agreement, if available, and proof of the identities and addresses of all partners.
• Business bank account details: Most providers will require your business bank account information, as this is where the funds from card transactions will be deposited.
• Processing history: If you have already processed payments, you may need to provide previous merchant statements showing your transaction history and chargeback rates.

Gathering these documents in advance will help streamline the application process and ensure you’re ready to open a merchant account without any unnecessary delays.

Next Steps

It should be clear to you by now that without a merchant account, your UK-based business will lose out on a substantial amount of customers.

Merchant accounts allow you to use card readers and payment gateways, take card payments (both in-person and online), and access the funds from these transactions. In an economy that’s steadily moved away from cash over the past decade, it is simply a must; your cashless clientele will appreciate the convenience and even become repeat spenders if the payment processing is seamless.

If you’re ready to start your search for a merchant account to help your venture out, just use our free comparison tool. Through it, we’ll match you with the providers most suited to your needs, and they’ll be in touch with tailored, obligation-free quotes!