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What is a Merchant Account?

Stephen Hart

Stephen Hart

Founder - Cardswitcher

Former - Chief Financial Officer @ Worldpay

If you’re a business owner looking to accept card payments from customers for your goods or services, it is essential that you have a merchant account.

With customers no longer making payments primarily with cash, and having cards loaded on to their smartphones, it is pinnacle to your businesses success to accept card payments - and a merchant account lets you do just that.

“What’s a merchant account?” we hear you ask, well worry not. Our team here at CardSwitcher are here to help familiarise you with merchant accounts, what they are, why you need one and how you set one up.


What is a Merchant Account?

A merchant account is a specific type of bank account that enables you to accept payments from customers via credit or debit card, or electronic funds transfer. It is not like a standard business account or even a payment gateway, it holds customers payments until they are approved by the customers bank before the funds are processed and sent to the merchant (you).


How does a Merchant Account work?

A merchant account kicks in when a customer makes a purchase using their credit or debit card. Once a customer enters their card details to pay for a purchase, the card processor sends their transaction details to your merchant account. Your provider then assesses that the customer has ample funds to pay for the product or service, confirming this with the customer's card provider. Once funds are approved, the merchant account will transfer the funds into your business account.


What is the difference between a Merchant Account and a Business Account?

Although merchant accounts and business bank accounts work in conjunction with one another, they are distinctly different. As above, merchant accounts are designed to hold funds until the customer’s bank approves the transaction. Whereas a business account is used primarily for releasing funds for business related purchases.

Simply put, a business account is used to make purchases and complete commercial transactions; a merchant account is used to securely accept card payments from customers. 

The latter is significantly easier to be approved for, as the merchant account requires various documents and can take a few weeks, but we will explore this in greater detail further down. 



What are the different types of Merchant Accounts?

When you begin the process of acquiring a merchant account, you must first decide which type of merchant account is best suited to you and your business. There are three variations of merchant account:


Aggregated Merchant Account:

Aggregated merchant accounts are the most common choice for small businesses who are new or growing. This is due to their low or non-existent monthly fees and offering of basic features. 

This type of merchant account is also often referred to as a “payment facilitator”, as that is what they do. With an aggregate account, the provider pools the funds of multiple merchants transactions together into one pot, and processes (and charges) them as one transaction. 

Businesses from the same, or similar, industries are pooled together to act as one merchant, with no one's credit scores being affected and fees being kept low. 

A perfect choice for those with a low volume of monthly card transactions, who are content with processing times being a little slower in aid of saving some money.


Dedicated Merchant Account:

Unlike aggregated accounts, dedicated accounts are open exclusively for a single merchant. 

A dedicated merchant account is operated (and paid for) by a single merchant, which is perfect for a larger, more established business. Dedicated accounts are also referred to as ISO (Independent Sales Organisation) Accounts, and are known for having higher monthly and transaction fees. 

If you accept a large number of monthly card transactions dedicated accounts are perfect, as you may also be able to negotiate a bespoke pricing structure. However providers such as MasterCard expect you to have a monthly turnover >£800K before you will be accepted for an account. So unless you’re raking in those monthly figures, opt for an aggregate account. 


High-risk Account

If you’re a new business with bad credit or operate a business that may be deemed “high risk” due to the nature of your goods or services, you can opt for a high-risk account. 

More often than not a provider will deem your business “high risk” due to your industry as opposed to having bad credit. Each provider will have their own outlined definition of high-risk but typical industries may include: 

  • Subscription services
  • Travel or accommodation
  • Adult entertainment
  • Pharmaceuticals or healthcare

However, if you fall into this category it does not mean that you can’t get a merchant account or accept card payments securely, you can just opt for a high-risk account.


How much does a Merchant Account cost?

Merchant accounts vary in price, depending on what type of account you go for and what provider you sign up with. In addition to this, some providers are not entirely transparent about their pricing, but some of the typical fees associated with a merchant account are outlined below:

Transaction Fee: All providers charge a per-transaction fee, which is often a small percentage of each completed transaction plus a small charge.

Card / Virtual Terminal: All merchant account providers will either charge an up-front cost for a card terminal or a monthly fee for a virtual terminal. For an idea of costs, explore our guide to the Best Card Readers.

Payment Gateway: A payment gateway is another essential for accepting card payments securely, and as such your provider will charge you a monthly fee for this service.

Setup Fee: A one-off fee charged for the initial setup of your merchant account.

Subscription / Monthly minimum Fee: A minimum fee charged each month by some providers. If you don’t hit this amount in payment processing fees, you may be charged the difference.

Annual Fee: Much like a monthly fee, some providers require an annual fee for using the service.

Batch Fee: A batch fee covers payment processing for a “batch” of transactions that have been bundled together. 

Chargeback Fee: A chargeback fee is charged when a customer disputes a charge from your business / account and the transaction is reversed.

Early Termination Fee: A fee applied if you terminate your account with the provider out with the period of time defined in your agreement.



How do I set up a Merchant Account?

In the digital age, merchant account providers have certainly made it easy to set up an account and begin accepting payments. However, prior to beginning your merchant account application, you must have the following information prepared:

  • Business description (include what you do and who you do it for)
  • Business plan (relevant to startups)
  • Financial statements
  • Expected forecast of monthly sales
  • Average transaction amount

Some providers may not require such in-depth information about your business in order to approve you for a merchant account. In fact it is typical of providers to only request the nature of your business, monthly turnover (or forecast of), and average transaction size. Be mindful that each provider will have their own checklist for approval, something you may take into account when selecting your merchant account provider. 


How do I choose a Merchant Account provider?

So now that you’re clued up on what a merchant account is, it’s time to get one. But how do you pick one that’s right for you, your business and your customers?

Well, here at CardSwitcher we’ve explored the cheapest merchant services for new business, but we can also offer up the following advice on selecting a provider. So during your search take the following into consideration:

  • Explore and Compare: Look at every merchant account provider available (Zettle, Stripe, Square etc.) and explore everything from costs to customer support. Use comparison sites such as CardSwitcher to compare prices and services.
  • Budget: Assess what your business can afford on monthly payments and transaction fees, and choose your provider based on what you can afford. Cheaper providers often offer less features or support, more expensive providers may offer better integration options and so on.
  • Features: Are you a startup that needs the basics on a budget? Or are you a well established organisation looking for a feature rich merchant account that can keep up with your sales volume? Explore each provider's features and assess if they meet your needs.
  • Contract Terms: If a provider is transparent about their contract terms i.e. if you’re locked in for a set term or if they impose high cancellation fees, consider whether this influences your decision.
  • Customer Support: A great feature that is often overlooked is the customer support that’s on offer. If you feel like your business will require 24/7 support either due to your experience or nature of your business, then consider providers who offer this. If customer support is just a nice addition but isn’t essential, those who only offer support 9-5 are just as good.
  • Customer Reviews: The best way to determine whether a provider is worth pursuing is to find out what real customers have to say about them. Explore review platforms like Trustpilot and Capterra to gain insights. 




We hope that you now have a strong understanding of what a merchant account is and why you need one.

Whether you are a growing business and opt for an aggregate account or are well-established within your industry and open a dedicated merchant account, we are sure that your business and customers will benefit from you having one in place.

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Written by:
Stephen Hart

Stephen Hart

Founder - Cardswitcher

Former - Chief Financial Officer @ Worldpay

Stephen 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 corner, with a beer and a battered copy of Dostoevsky.