What is a Merchant Account, and How Do They Work?

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A merchant account is used to help businesses process payments, providing services such as card readers and payment gateways to allow ventures to charge customers and access funds.

With cards now responsible for more than half of the country’s transactions according to UK Finance (a trend accelerated by the COVID-19 pandemic), merchant accounts are more vital than ever for businesses since it’s impossible to take card and contactless payments without them.

But what exactly is it and how do you get one? Backed by our nearly 15 years of experience covering the payments industry, we answer those questions – as well as others – in the handy business guide below.

What is a merchant account?

A merchant account is a type of bank account which 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 by the customer’s bank, before sending them to the merchant.

Some people make the mistake of confusing a merchant account with a regular business bank account. They are two totally different things.

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

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How does a merchant account work?

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

Card payment transaction process
  • 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. In order to take card payments you need a way of collecting payment information. And this can be done in three ways:

  1. By card machine: Card machines are usually rented from merchant service providers as part of your merchant account agreement. Choose from countertop, wireless and 3G/4G mobile card readers.
  2. Over the phone: To take card payments over the phone you’ll need a 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.
  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 in to 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.

FeeTypical rateCharged
Debit cards0.8% – 1.60%Per transaction
Credit cards0.8% – 2.75%Per transaction
Authorisation fee2p – 4pPer transaction
Card terminal rental£9.99 – £29Monthly
Payment gateway£15 – £25Monthly
Virtual terminal£10 – £20Monthly
Minimum monthly service charge*£5 – £25Monthly
Joining fee£50 – £100One-off
Early contract termination*£50 – £100One-off

* 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.

Key takeaway: Pay a little up-front to avoid a hefty fine.

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.

Key takeaway: Expect to pay £15 for every successful chargeback claim against your business.

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. Interchange is capped at 0.2% of the transaction for debit cards and 0.3% for credit cards.

Key takeaway: Interchange fees are non-negotiable — they’re set in stone by the card processing companies. Don’t believe any merchant account provider that claims otherwise.
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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.

Some examples of high-risk merchant account providers are:
  • Verotel
  • Zombaio
  • Instabill

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 new 2023 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. Card machine rental costs on average £20, so if you want out after six months (on an 18-month contract) it’ll cost you £240.

Learn. Compare. And choose your merchant account wisely.

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How to open a merchant account

So now you know the answer to the question “what is a merchant account?”, how do you 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 there are some merchant account providers that don’t require one.

Next steps

With inflation on the up, your clientele will be more stringent with money – and to convince it to spend in your businesses, a smooth customer experience is key. Considering the role merchant accounts can play in this goal, you can see how essential they are in the current business landscape.

Through them, your business will have be able to use card readers and payment gateways, allowing you to take card payments (both in-person and online) and access the funds from these transactions – a must in an economy that’s in a steadily moving away from cash.

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!


What is a merchant account example?
An example of a merchant account is Square that don’t charge a monthly fee but charge a higher transaction fee (1.75% for card transactions).

Another example is Worldpay that charge a minimum monthly account fee of £9.95 + VAT plus lower transaction fees starting from 0.75% – 2.75%.

How does a merchant account work?
A merchant account works as a sort of temporary holding pen that funds are sent to as they are being processed. Once the payment has been processed it’s transferred from the merchant account to your business bank account.
What is the difference between a merchant account and a business account?
A merchant account allows you to accept and process card transactions whereas a business bank account can be used in various ways such as paying expenses.
How do you get a merchant account?
To get a merchant account you’ll need to sign up with a a payment provider. You can choose between a provider that has monthly fees such as takepayments or Worldpay. These monthly fees come with lower transaction fees and you’ll need to be locked into a contract.

Or, you could choose a pay as you go provider, such as Square or Stripe, however, the transaction fees will be higher.

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Written by:
Rob Binns
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.
Reviewed by:
Ruairi uses his 3+ years of research experience to uncover insights which can help Expert Market provide the best business solutions for their users. He has done this by meeting with business owners to find out what is important to them and what challenges they face on a daily basis. Ruairi specialises in tools that can be used to grow your business and has done research for a wide range of categories on Expert Market, such as EPOS, Website Builders, and Merchant Accounts.