Do you Really Need a Merchant Account? - A Complete Guide

Opening a merchant account should be one of the first things you do when setting up your business so that you can start accepting credit card payments.

We are no longer living in a cash-based society. Most people like to use a credit card, debit card or other mobile payment app in order to buy just about anything, whether in person or online. It’s crucial for any business owner to know how to accept credit card payments and make sure that you make it easy for customers to purchase from you using their preferred payment method. This is a surefire way to increase sales and keep loyal customers coming back for more. 

It is not, however, as simple as just opening up an online store and accepting credit cards. You need an infrastructure in place that will allow you to know how to accept online payments, process the payments and actually receive the funds. Such infrastructure usually includes a payment processor, a payment gateway and a merchant account. 

Here are some key characteristics that define a merchant account:

  • Unlike a traditional bank account used for withdrawals and deposits, it is simply a holding place for the funds while the transaction is processed
  • The merchant account communicates directly with the card networks and issuers (i.e. Visa, Mastercard, etc.) to make sure transactions go through
  • Banks that provide merchant accounts are known as acquiring banks
  • To open a merchant account, expect to sign a long-term contract and pay ongoing processing fees
  • A merchant account offers an extra level of security and fraud protection for card payments

In this article, we will explain the merchant account component - what it is, why you need one and how to get one.

What is a Merchant Account?

When a customer uses a credit card to make a purchase, the funds are not immediately sent from the issuing bank of the credit card to your bank. There is a process that must take place first to ensure that the customer actually has the funds available to make the purchase. The money is temporarily placed in a special account - called a merchant account - until the transaction is approved and cleared, at which point the funds can be transferred to your business account where you can access them. It usually takes 1-3 business days for you to be able to access the funds. 

Put simply, a merchant account is the middleman that exists in between the customer’s credit card or bank account and your bank account during the time that the payments are being processed. The merchant account is busy in the background withdrawing money from the customer for deposit to you. 

As a business owner, you do not have direct access to your merchant account and you will never be able to make transactions directly from that account. Think of it only as a sort of holding pen, a temporary place for the money to stop on its journey from the customer’s credit card to your bank account. 

Is a Merchant Account the Same as a Bank Account?

A merchant account is a type of bank account, and it is what enables you to accept credit and debit card payments. But it is not the same as a business account that you use for your daily transactions. You must have a regular business account as well in order to actually receive and access payments and other funds that are transferred to you

What is a Merchant Account for eCommerce?

Just like any other business that wants to accept credit card payments online, an ecommerce store requires a merchant account. In fact, stores with physical locations can actually avoid opening a merchant account if they really wanted to by only accepting cash or checks. Online stores, on the other hand, have no choice as the only way they can accept payments is electronically. 

What is a Merchant Card Processor Account?

Merchant service providers offer a range of services - while the merchant account acts as a temporary holding spot for funds as the transaction is being processed, included in the service is often the processing of the card payments themselves. Meaning, you would pay one fee that would cover both the processing of the transaction as well as holding the funds and then transferring them to your business account once the transaction settles. 

Types of Merchant Accounts 

When you decide to set up a merchant account, before you start researching merchant account providers, you first must understand the different types of merchant accounts that exist. 

First, there is a difference between a dedicated merchant account and a full-service payment service provider

Dedicated Merchant Account

A dedicated merchant account is your own account that is only used by you and your business, while a payment service provider opens a merchant account that is used by several businesses served by that provider. 

It makes sense to use a dedicated merchant account if you are a larger business with a high volume of sales and transactions. There is a much longer and more involved application process to open a dedicated account, so it is only worthwhile if you expect to have enough business to cover the additional costs. 

Using a payment service provider is a good choice if you want to be able to start accepting payments quickly without going through an extensive application process, if you are early on in your business and do not yet have a large volume of sales, or if you are not ready to lock in a contract and want to first start out with a no-obligation arrangement with a payment service provider. 

Overall, merchant accounts can be divided into four categories:

High Risk Accounts

The term “high risk” can apply to either the business owner or the type of business that you operate. For example, if you have a low credit rating you might be considering high risk to the bank. Or, you may be working in an industry that banks consider high risk - such as the high risk of fraud in online healthcare, risk of cancellations in the travel industry or the lack of a reliable cash flow if you sell certain subscription services. 

If you or your business are considered high risk, you can still get a merchant account, you just may need to pay higher fees. Keep in mind that fees can always be negotiated as time goes on and your business changes and grows. 

Aggregated Merchant Accounts

Aggregated merchant accounts are what payment service providers use and are very common among small businesses. These accounts are called “aggregated” because the payment service providers group together merchants in similar businesses into one merchant account in order to get a better rate on fees. The biggest benefit to you as a business owner to using an aggregated merchant account is the pricing as you are likely to only have to pay a fee per transaction and not also a set-up fee or ongoing monthly fee. 

Independent Sales Organization (ISO) Merchant Accounts

An ISO merchant account is what we referred to above as a dedicated account. You do not share the account with other businesses and it is tailored specifically to your needs. The downside is the higher fees including an upfront set-up charge as well as ongoing monthly fees. If you have a large business and a high volume of sales, you may want the personal service that comes with your own merchant account. 

Internet Merchant Accounts

All online businesses must have an internet merchant account in order to accept payments online. You may already have one of the other types of merchant accounts, but in order to operate an online business you must also set up an internet merchant account. This type of account usually does involve a one-time set-up fee and then additional fees per transaction. If you already have another merchant account, it is worth considering using the same provider to open the internet account too. 

Types of Merchant Services 

Merchant accounts typically come as part of a suite of services that you need in order to accept credit and debit card payments from customers. These services include all of the financial tools, hardware and software that you may need in order to process credit and debit card payments. Such services may include:

  • Mobile Payments - the technology and infrastructure needed to be able to accept mobile payments through a cell phone or tablet (i.e. Apple Pay, Google Pay, etc.) are offered by merchant service providers.
  • Credit Card Terminals - particularly for merchants with brick and mortar stores, service providers offer the device that is used for customers to swipe (or tap) their credit card in order to make payments.
  • Ecommerce Solutions - the infrastructure needed for ecommerce sellers to be able to accept credit card information online - i.e. the checkout page - is another example of a merchant service.
  • Payment Gateways - another merchant service is the software referred to as the payment gateway. This is what allows for the actual processing of credit and debit cards in the back end once the customer enters in their information. 

Which Businesses Need Merchant Account Services?

Any business that plans to accept credit or debit cards as a payment method needs to create a merchant account. Again, it is not required to go through the extended application process necessary to apply for a merchant account that will be used only by you and your business. Instead, you can opt for a payment service provider that will set you up with an aggregated merchant account that is a much quicker process. 

How Do Merchant Accounts Work?

Merchant accounts are a key cog in the wheel in the payment process and make it possible for transactions to be processed and settled. The accounts are established via a detailed account agreement between the merchant acquiring bank and the business that describes all of the terms including any and all fee structures. 

Once the account is set up, it is ready for use. When a customer makes a payment electronically using a credit or debit card, a communication is sent to the merchant acquiring bank. The bank then contacts the card processor who contacts the issuing bank of the card. That issuing bank is the one that authenticates the transaction and makes sure the cardholder has the available funds and that no fraudulent activity is taking place. Once the transaction is authenticated, the merchant acquiring bank is notified and authorizes the transaction and moves the funds to the merchant account. 

While this may sound like a convoluted and complex process, it actually all happens within minutes. Remember, the merchant account is just a holding place for the funds before they are released to your business bank account. The funds are not in the merchant account for very long and you should have access to them within a couple of business days. 

Without a merchant account, it would take much longer because there is a significant time lapse between when a customer buys something using a credit card and when they pay the credit card bill. It is the merchant account that essentially “fronts” your business the funds until the customer pays their bill. 

How to Open a Merchant Account

There are a number of steps you should take before opening a merchant account:

Research and Due Diligence

There are so many options when it comes to merchant accounts. Different providers charge a range of fees and offer differing capabilities. You will want to understand exactly what is necessary for your business and then find a provider who can give you the type of service that you need. You may want to look for a merchant account provider that specializes in your industry, for example. 

It is important to compare the fees that different providers charge, but also look at the cost of any initial hardware that you may need to purchase as well as what customer support is like (read reviews!) and whether there are cancellation penalties. As you begin the application process, the providers should tell you exactly what types of documentation you must provide as well as how long to expect the approval process to take. If it sounds too good to be true, it probably is. 

Collect Paperwork 

There are certain key documents that you will need to supply to any potential merchant account providers. It will save you time if you make sure you have all of this information at hand before you start the process. The needed information includes: company name, contact information, tax ID number, financial statements, business bank account information, and possibly a credit card to pay for an application fee. 

Wait for Review

Once you have submitted your application, expect to wait a while for a response (if you are applying for a dedicated merchant account). During this time, the provider is looking into your history and checking your personal and business credit reports, whether you have had a merchant account in the past and examining the type of business and transactions you expect. 

The providers will assess the risk that they are taking on by opening a merchant account for you. For example, if you process cards online only, you might be perceived as higher risk than if you were processing transactions in person just because of the potential for fraud. 

While most businesses do not have a problem in getting a merchant account, if you are considered a higher risk for any reason, it may not be smooth sailing and you may face higher fees. 

Committing to a merchant account provider is a long-term endeavor as you will not want to go through the process of applying for a new provider, so you should put in the time to do the research and find the right solution from the start. A few factors to keep in mind when thinking about that solution include:

  • Transaction volume - think about how many transactions you expect to process in a given time period as well as the size of each transaction. Calculate the fees you will need to pay per transaction in order to determine if a particular provider’s offering makes sense for you.
  • Hardware - look at what hardware will be required - do you want to have mobile card readers and point of sale terminals? Or is your entire business online?
  • Miscellaneous features - what features are important to you - do you want custom integrations? Loyalty rewards? Think about the features that you would like to have and look for providers that offer them. 

Benefits of Opening a Merchant Account

While opening a merchant account is requirement in order to be able to accept credit or debit card payments, it does also offer a number of important benefits:

Accept Credit Card Payments on Your Website

This one is obvious, but we already know that accepting credit card payments on your website is a crucial part to growing your business. Opening a merchant account ensures that you will be able to do this.

Get More Sales Faster

The more payment options you offer your customers, the more people you will attract to your site and the more sales you will make. When the process runs smoothly, the customers will keep coming back for more and you can sit back and watch your sales and profit grow.

Manage Money Better

When you open a merchant account, you are removing the risk involved in processing payments from yourself to a third party. Someone else is responsible for making sure that the transaction settles and that the customer has sufficient funds. If something goes wrong, they will handle it and you can focus on making more sales.

Avoid Check Rejects

When accepting payment via check, there is always the risk that the check will bounce. Opening a merchant account so that you can accept credit card payments means you do not need to accept checks and take on that risk. 

Convenience for Consumers

Today’s customers want to be able to use their credit or debit cards to buy any and everything. If you don’t offer this convenience, they will find another seller who does, so ensuring that you have the infrastructure in place to accept card payments is important. 

Should I Set Up Merchant Services for my eCommerce Business?

The short answer is a resounding yes! While you do not necessarily need to expend the time, energy and financial resources in setting up a dedicated merchant account, you should at the very least set yourself up with a payment services provider who will take care of the merchant account services for you. 

Alternatives To Merchant Account Processing

There are two viable alternatives that can be used instead of a merchant account for those businesses who are unable or do not want to set up a merchant account:

Third-Party Payment Processors

You can use third-party payment processors like PayPal to process both online or offline credit or debit card purchases. This can be a viable option for a very small business with a low sales volume or if you are not ready to take on the complex process of setting up your own merchant account. 

Money Transfers

Services like Zelle and Venmo can be used to transfer money directly from one person/location to another. Wire transfers from bank to bank are another option. Direct money transfers tend to be secure, but they also come with high costs so may only be worth it for very large corporations dealing with high-value transactions. 


Bottom line - if you would like to allow customers to pay for your products using a credit or debit card (and you most definitely do want this!), you need a merchant account. You can choose whether to open a dedicated merchant account or go with a payment service provider, but either way the end result is the same. Opening a merchant account one way or another is a key step in running your business. 


Why do I need a merchant account?

A merchant account is a necessity for any business that wants to be able to accept payment using a credit or debit card.

What is the difference between a merchant account and a payment gateway?

A merchant account and a payment gateway work together and complement each other, but they are two separate pieces of infrastructure that you need for your business. A merchant account is the bank account in which funds transit from the customer’s credit card to your business bank account. A payment gateway is the technology that enables the processing of card transactions. In effect, the payment gateway enables the funds to move from the customer to the merchant account to your bank account.

How hard is it to get a merchant account?

While it is not difficult to get a merchant account, it can be a long process. Each provider has their own requirements - most are easy to satisfy and just involve gathering and submitting the appropriate paperwork. One potential roadblock is if you or your business have a history of bad credit. In that case, you may want to look for providers that specifically service people with less-than-stellar credit histories.

What is the difference between a merchant account and a normal account?

Unlike a normal bank account, you do not have access to the funds while they sit in the merchant account. It is merely a temporary holding place until the transaction settles and the funds are transferred to your bank account where you can access them.

Do I need a merchant account to sell online?

Yes, if you would like to be able to sell online and accept payments by credit or debit card you need a merchant account.

Is PayPal a merchant account?

PayPal can operate as a merchant account, allowing a business to accept credit card payments using PayPal instead of opening their own merchant account. The downside to this is the fees tend to be higher than a standard merchant account.

What banks offer merchant accounts?

Most banks offer merchant accounts as part of their services. If you already have a bank account at a particular bank that you have a good relationship with, it is worth asking about their merchant account services. You are not required, however, to open a merchant account with your existing bank.

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