Table of Contents
A merchant account is a specialized bank account that allows a business to accept credit card, debit card, and electronic payments. While the process may seem simple from a customer’s perspective, several steps take place behind the scenes before a payment reaches your business bank account.
Understanding what a merchant account is, how it works, the different types available, and the fees involved can help you choose a payment processing setup that fits your business.
Key Points
• A merchant account is a specialized bank account that holds credit card, debit card, and electronic payments from a business’s customers until the funds clear and transfer to a primary business account.
• There are two main types of merchant accounts: dedicated accounts built specifically for one business and aggregated accounts shared by multiple businesses through a third-party provider’s master account.
• Transaction fees represent the largest ongoing expense, typically ranging from 1.5% to 3.5%, while a one-time setup fee can vary from free to around $200, depending on the provider.
• Opening a dedicated account requires a business tax ID or Social Security number, government identification, and a separate business bank account to receive cleared payments.
• Approval for a merchant account can take anywhere from one day to a few weeks, with high-risk businesses typically taking longer than lower-risk ones.
How a Business Merchant Account Works
Business merchant accounts are a type of business bank accounts designed specifically to accept customer payments, usually by credit card, debit card, or a form of electronic payment, such as digital wallets. The merchant account temporarily holds the accepted funds before transferring the cleared money to your primary business bank account.
Merchant Account vs Business Bank Account
Your bank merchant account is a temporary holding area which accepts customer payments and clears them. Once funds are clear, they can be sent to your main business bank account.
That business bank account is a dedicated account that handles company income and expenses. It may be linked to business credit cards or debit cards.
A business bank account can be a checking account or a savings account. Business checking accounts can provide checking services, while business savings accounts can be dedicated to holding surplus income and act as a cash cushion to cover operating expenses if needed. Business savings accounts can also allow you to earn interest on your savings.
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How Funds Move Through a Merchant Account
The journey through a bank merchant account starts when a customer makes a purchase with a card or their digital wallet. The transaction request is sent through a payment processor to the customer’s issuing bank, where the transaction is approved or denied based on available funds.
Once payment is approved, funds are held in the business’s merchant account temporarily until they clear. At this point, the business receives a final deposit into its primary business banking account.
Do I Need a Merchant Account?
If you want to accept credit and debit cards, as well as electronic payments, including digital wallets, you will need to open a merchant account or at least gain access to the functionality of one. You can open your own account or choose to use an end-to-end merchant services provider that can give you this kind of access as part of the services they offer.
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Types of Merchant Accounts
There are two types of merchant accounts — dedicated accounts and aggregated accounts. Understanding the difference between them can help you choose the option that best fits your needs.
Dedicated Merchant Accounts
Dedicated merchant accounts are made specifically for your business to process credit card, debit card, and electronic payments. These accounts can be useful for businesses looking for personalized customer service and a greater ability to negotiate rate and scale.
A dedicated account may work well for businesses that process a high volume of transactions as merchant account providers may offer discounted transaction fees based on sales volume.
Industries that are at greater risk for fraud or chargebacks (the reversal of a credit or debit card transaction) might also consider having their own dedicated accounts.
Aggregate Merchant Accounts
Aggregate merchant accounts are usually provided by third-party merchant services providers. They allow your business to accept payments through a master account owned by the payment provider and shared by multiple businesses.
Because your business doesn’t need to set up its own account and merchant identification number, setup is typically very fast, allowing your business to accept payments right away.
These accounts are often best for small businesses that have relatively low sales volumes.
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Merchant Account Fees to Know
There are several different fees associated with merchant accounts that you should be aware of.
• Setup fee: Many merchant account providers offer account setup free. Others may charge a one-time fee of up to $200.
• Transaction fees: The biggest expense associated with a merchant account is typically the result of the ongoing transaction fees. You’ll be charged a transaction fee every time a transaction is processed. These could range from 1.5% to 3.5% for most businesses. Businesses with larger sales volumes may have more leverage to negotiate these fees down.
• Monthly and annual fees: Some providers will require you to pay a minimum payment processing amount each month. If you don’t hit that target you’ll be charged the difference between the minimum and the amount you paid. Some providers will also charge an annual fee for their services.
• Chargeback fee: If one of your customers disputes a charge and it’s reversed, your payment process may ask you to pay a chargeback fee that could be as much as $50.
• Batch fee: Your business transactions on any given day are bundled into a “batch” at the end of the day. A small batch fee of up to $0.30 may be charged.
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How to Get a Merchant Account
You can open a merchant account with a traditional bank or a merchant services provider. To open a dedicated account you’ll need to provide your business tax ID number or your Social Security number, as well as government identification. You’ll also need to have a dedicated business account where cleared payments can be sent.
If you want to work with a payment aggregator, you can typically sign up online in a matter of minutes.
The Takeaway
A merchant account can be an essential part of accepting payments, but the right setup depends on your business’s transaction volume, payment needs, and budget. Dedicated accounts may offer more flexibility for established or higher-volume businesses, while aggregated accounts can provide a faster, simpler option for smaller businesses.
Before choosing a provider, compare transaction and account fees along with the services included to understand the full cost of accepting payments.
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FAQ
What is the difference between a merchant account and a payment gateway?
A payment gateway is the digital tool that securely collects payment information, encrypts it, and sends it to be verified by the customer’s bank. Once the information is verified, the gateway then sends confirmation back to your business that the transaction can be completed. A merchant account serves as a temporary holding account for the payment while it is cleared and before it is transferred to your business account.
Can a small business open a merchant account at a bank?
A small business can open a merchant account with a traditional bank to accept credit card, debit card, and electronic payments.
How long does it take to get approved for a merchant account?
Approval for a merchant account can take anywhere from one day to a few weeks, depending on how complicated your business is and whether it is low- or high-risk.
What industries have trouble getting a merchant account?
Businesses in industries deemed high risk may have trouble getting a merchant account. These are businesses at high risk for chargebacks, or those that face stiff regulations or financial instability.
Is a merchant account the same as a merchant services provider?
No, a merchant account is not the same as a merchant services provider. The merchant services provider is often the institution that provides the infrastructure businesses need to accept payments. A merchant account is the account in which card and electronic payments from customers are temporarily held until they’re cleared and moved to the business’s primary account.
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