What Is a Merchant Account? Definition & Providers

A merchant account is a bank account required for a business to accept credit card payments. It’s one step of the overall payment process. Companies like Square, PayPal, and Stripe integrate the merchant account seamlessly into its payment processing. Merchant account fees are typically 1.5% to 2.9% of every transaction.

There are many factors to review when determining what company to choose as your payment processor and merchant account, one of which is transaction cost. Fattmerchant is a fast and convenient merchant account provider. It charges $99 a month and $.08 plus interchange fees on every transaction. Sign up today to start accepting payments online and in your store with Fattmerchant.

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How a Merchant Account Works

When a customer swipes their credit card, a merchant account fronts the money for the credit card transaction before the customer pays their credit card bill. The merchant account ensures the business owner gets paid when the purchase occurs. Technically, the merchant account is a bank account. However, you will not be able to access it. It is closer to an intermediary than an actual bank account. You can open a merchant account with your bank, an independent sales organization, or a payment service provider (PSP), like Square.

To be clear, PSPs, merchant service providers, payment providers, and merchant acquirers all refer to the same entity in the payment chain—the terms are interchangeable. A merchant account is one aspect they manage. PSPs are slightly different than traditional merchant accounts because they lump its users together to form a single merchant account, rather than forming one for each customer.

Think of the hardware (credit card reader), point-of-sale (POS) software, and merchant account(s) that are needed for your business to accept a credit card. The hardware has its own cost, the POS software is a separate cost, and access to a merchant account is a percentage of the overall transaction. Merchant account costs vary. You can typically expect to pay around 2.6% plus 30 cents on every credit card swipe. Once this payment is deducted from the purchase, the remaining funds are deposited into your business bank account.

Types of Merchant Account Providers

Before deciding which company you want to provide your merchant account, it’s wise to understand the different type of merchant account providers. There are three main types of merchant account providers: commercial banks, independent service organizations (ISOs), and PSPs. Depending on your needs and prior banking relationships, you may want to choose one over the other.

Commercial Bank

Many business owners go to local banks to set up merchant accounts. Often, they have a pre-existing relationship with the bank from managing their personal finances. Compared to a PSP or ISO, a bank may provide better customer service because of your prior relationship.

Additionally, building a relationship with a banker could be useful if you need funding in the future, like a line of credit. A downside of using a commercial bank is the lengthy approval process, which can take up to a couple weeks. You might also receive poor payment processing hardware and software if you use a cheap third-party provider.

Independent Service Organization

An ISO works on behalf of large banks. Many business owners go to ISOs because they have better customer service. Additionally, ISOs may work with several banks nationwide and secure a lower processing rate than the local banks.

ISOs are also good to work with if you have a high-risk business, like a vape shop. ISOs can connect you with a merchant account and processor that is comfortable working with businesses that are considered high risk. A downside to using ISOs is the potentially lengthy paperwork required to get approved.

Payment Service Provider

Broadly speaking, a PSP provides several merchant services, including a merchant account. Square essentially created the PSP industry when it combined several businesses into one merchant account, which lessened the risk of providing the overall merchant account. The low overall risk profile of PSP is why you can get approved as a merchant by a company like Square with little paperwork. Another benefit of a PSP is the quality technology and software they provide.

Downsides of a PSP include less customer service, because they have to service so many businesses. It’s difficult to build a relationship with a PSP, because they have millions of customers. Additionally, because it is often an intermediary to a bank, their processing rates may be higher.

Merchant Account Fees

There are several types of fees associated with merchant accounts and payment processing, and it can be confusing. However, it’s important to know these terms and their meanings before signing a payment processing contract.

Here are common merchant account fees you should know:

• Interchange fee: This is the fee charged by credit card companies for using their credit card. Rates vary depending on the type of card and its risk profile.
• Authorization fee: This is a flat fee charged on every credit card swipe, even if the transaction is declined. Typically, you may see this fee at 30 cents per transaction.
• Assessment fee: These fees cover administrative costs associated with a credit card, like fraud protection and network operations. Typically, this is a small percent between .11% and .15%.
• Transaction fee: On every purchase, you are often charged a percent of the overall transaction. The transaction fee may be considered the total of the interchange, authorization, and assessment fees.
• Monthly or annual fee: A flat fee that can be charged instead of a transaction-based assessment fee.
• Software fee: You may be charged a fee if your merchant account comes with software, like a point-of-sale (POS) system.
• Processing commitment fee: Some merchant account providers require a business owner to sign a one- to five-year contract. They may provide an option to not sign a contract in exchange for a monthly commitment fee.
• Chargeback fee: A chargeback may be incurred when a stolen credit card is used to purchase your goods or services. Credit card companies are obligated to pay the fraudulent charges by law. They may pass the chargeback cost on to the business with a fee.

Before signing a merchant account contract, it’s important to review all of the fees. Many merchant accounts, like PSPs, will only charge a percent transaction fee and a flat authorization fee. However, some merchants will charge additional fees and you need to need to be aware of them before signing a one- to five-year contract.

Popular Merchant Account Providers

As we discussed above, there are three main places to apply for a merchant account. Depending on your needs, a bank, ISO, and PSP are all great options to open a merchant account. When reviewing which company to choose, evaluate its transaction pricing, fees, software, and customer service.

Here are five companies that offer merchant accounts:

Frequently Asked Questions (FAQs) About What a Merchant Account Is

This section includes the most frequently asked questions about what a merchant account is. If you don’t see your question, head over to our forum and post your question there. We have a whole team of industry experts who answer questions from small business owners every day.

How do you get a merchant account?

Typically, you can get a merchant account from three different sources. A bank can set you up with a merchant account. Many business owners use their personal bank to set up commercial-related banking if they already have an existing relationship.

Another option is an independent sales organization (ISO). These companies work on behalf of banks and typically provide better customer service than banks because they specialize in payment processing. Often ISOs charge a low processing rate because they work with several banks. There can be paperwork involved with getting a merchant account from a bank or ISO.

The third option to get a merchant account is a payment service provider (PSP). These are companies like Square, Stripe, and PayPal. They technically won’t provide you with your own merchant account because they group users together to share one merchant account. The customer service tends to be lower with PSPs because the requirements to join and required paperwork are minimal.

How do merchant accounts work?

Merchant accounts are one part of the overall payment process involved with accepting a credit card payment. When a customer swipes their credit card and the transaction gets approved, the merchant account fronts the business the purchase amount (minus a fee) so the business gets paid and doesn’t have to wait until the customer pays their credit card.

Is a merchant account the same as a business account?

A merchant account is not the same as a business account. The merchant account is called a bank account by some entities, but you will never gain access to it. It’s closer to an intermediary than a business bank account. When you open one, you’re essentially gaining the ability to process credit cards in your store or on your website; you still need a bank account to deposit the funds from customers, though.

How much does a merchant account cost?

A merchant account can have several different types of fee structures. Typically, there is a cost associated with every credit card transaction. For example, Fattmerchant charges $99 per month and 8 cents plus the interchange rate on every credit card transaction. Square charges a flat rate of 2.75%. Chase Merchant Services charges 2.6% plus 10 cents on every transaction.

Keep in mind that different type of transactions have different processing rates. For example, keying in a credit card typically has a higher transaction higher cost than payments accepted through terminals and registers.

What merchant account is the best?

Determining which merchant account is best depends on your needs and prior relationships. Some business owners go to their local bank to open a merchant account because they have a prior relationship. Some use a payment service provider, like Square or ShopKeep, because they like the point-of-sale software that comes with signing up for a merchant account. Other business owners use an independent sales organization (ISO) for a lower rate and better customer service, although this may require more paperwork.

Is a merchant account necessary to accept payments?

Technically, yes, a merchant account is necessary to accept payments. However, that doesn’t mean you must open an account before you can accept payments. Many companies, like PayPal, Square, Stripe, and FreshBooks, have a merchant account built into their payment processing services. The average small business owner isn’t aware they are using a merchant account even though they are.

Bottom Line

As a small business owner, it’s wise to understand what a merchant account is, even if you don’t technically have to open one. If you’re a startup and have under $100,000 a year in sales, you can run a successful business using a payment service provider (PSP), like Square or Stripe. However, as you grow your business and get more sales, finding a merchant account that will process payments at a rate that is .2% less on every sale could result in tens of thousands of dollars in additional profit.

Fattmerchant is a merchant account provider that charges a flat rate on all credit card purchases. In addition to processing payments, it also provides small and medium-sized businesses with ecommerce payment assistance, online invoicing, and mobile payment capabilities. You can sign up with Fattmerchant for $99 a month and 8 cents plus interchange fees on every credit card transaction.

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