What is a merchant account? When and how to open one

Key takeaways:

• A merchant account acts as an intermediary between the customer and the business, and holds a customer’s funds once a transaction is processed.

• Most merchants need a business account for regular operations and a merchant account to accept and hold digitally-collected funds.

• You can open a merchant account in days after you select a provider and submit the required documents.

Over 90 percent of consumers have used digital payments in the last year¹, so a merchant account is essential for businesses.

But, a merchant account only holds the incoming funds — you’d need other systems to accept payments. So, if you want to accept payments, you need a merchant account and a few other tools in your financial stack. Often, these tools are all grouped into one solution or provider, but we're going to specifically focus on the merchant account feature for this article.

What is a merchant account?

A merchant account is a type of account that allows businesses to accept debit or credit card payments before being transferred to the business's regular account. For example, when a customer makes a card purchase, the funds are deposited into the merchant account, then transferred to the business’s regular account.

This full process is facilitated by a payment processor, which ensures the transaction is secure and that funds are correctly routed. Merchant accounts are essential for businesses that want to accept card payments in-store, online, or over the phone.

It's important to note that the merchant account doesn’t process the payment itself - it's more like the postage address. That said, you can partner with an end-to-end service, like Airwallex's Payment Links and plugins, which covers everything from gateways, processing, merchant accounts and business accounts in one place.

Traditional banks also offer merchant accounts for businesses, but they’re less likely to manage processing. You may need to work with a separate payment gateway and payment processor to accept digital payments.

Merchant account vs. business bank account

Merchant accounts are used to accept digital payments, and that’s about it. They're different from regular business bank accounts, which help manage your cash flow, net working capital and operational expenses.

They work collaboratively, and most businesses need both types of accounts — especially if they operate online. In fact, you need a business bank account to open a merchant account for electronic payments.

How do merchant accounts work?

Once a customer initiates a purchase and submits their information to a payment gateway, a payment processor collects and shares that data with the merchant account’s bank.

This bank requests authorisation from the customer’s bank, which then sends the payment to the merchant account. From there, the merchant account holds the funds until the account holder transfers the payment into the primary business bank account.

So, while the merchant account communicates with the customer’s bank and holds the payment, it doesn’t actually process payments itself.

Keep in mind: Your merchant account isn’t free. The merchant acquirer that provides the account will charge bank fees once the transfer deposits into the account. You might also owe processing fees to cover other provider services if you don’t partner with an all-in-one solution like Airwallex.

Do you need a merchant account?

Most likely, yes. You need a merchant account if you want to accept payments from cards or online. This covers most consumer-facing businesses, unless you’re a cash-only brick-and-mortar.

That said, you might not need to open an entirely new account with a new provider.

Established businesses that already partner with a financial solutions provider should check out what end-to-end payment processing services are available. These providers can serve as your payment gateway, processor and acquirer, so you don’t have to pay as many fees or manage as many contracts.

There are many merchant service providers out there, and they broadly fall into these categories:

• Payment processors: Companies that provide payment processing services, such as Airwallex.

• Point of Sale (POS) system providers: Companies that provide POS system hardware and software.

• eCommerce platforms: Some eCommerce platforms integrate payment processing into their product offerings.

How to open a merchant account

Opening a merchant account is a little more intensive than how you open a regular business bank account, but it ultimately depends on your needs. While you might already have a merchant account included with an eCommerce or finance partner, you should browse and compare providers yourself.

You may wish to consider the following when comparing business accounts:

• Fees, including setup fees, monthly and annual costs, chargeback fees, batch fees and early termination charges.

• Services offered — do you just get a merchant account, or do they provide the payment gateway and processing too?

• Security, including encryption, fraud prevention and detection, PCI compliance and tokenisation.

• Reputation from online reviews and word-of-mouth from other local merchants.

Once you know what provider you want to open a merchant account with, you’ll need to organise your paperwork and submit an application.

Required documents

You’ll need to provide some personal and business details to open a merchant account. What’s required may vary depending on your provider, but you'll typically require:

• A business account, including proof of the account and bank statements

• Your personal identification and credit history

• The business’ identification, including the business licence, address and credit history

• An employer identification number (EIN)

Payment service provider vs. merchant account provider

The difference boils down to how many providers you work with. A merchant account provider just provides a merchant account to hold digital payment funds. It doesn’t actually do any of the leg work to accept and authorise a payment.

Most businesses are looking for a more holistic provider than a one-off service, which is where payment service providers come in - nowadays, this is most likely how you will access a merchant account.

Payment service providers keep everything in one place, including your payment gateways, processing services and the merchant account that funds settle into.

This includes services like Airwallex that help you accept payments online, automate payments and even customise your payment links for customer convenience.

We also offer Business Accounts with international virtual cards and Expense Management so you can group incoming and outgoing payments with one provider.

Merchant account fees

Merchant accounts often charge per-transaction fees and monthly account fees. Some services also charge:

• A one-time setup fee

• Annual or monthly service fee

• Chargeback fees when a customer disputes or reverses a payment

• Fees if you fail to meet monthly minimums paid

What you require from a merchant account may vary depending on your business. Compare account providers to find the best fit and consider bundling multiple processing services with one provider.

Get the most from your merchant account

A merchant account is just one of the many components of accepting payments and there’s more to processing customer transfers than that alone. If you want to keep contracts simple and process payments faster, consider a full-service solution like Airwallex.

Airwallex Global Accounts have more features than a regular merchant account. They let you open accounts in different currencies in your country and in other countries so you can grow around the world without having to set up new banking relationships.

Our Global Accounts can then enable you to collect money from customers and make transfers to anywhere in the world from already held balances. Couple this with our Expense Management solution that bundles our Airwallex Borderless Cards and Bill Pay to help you streamline your operations.

Sources:

1. https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/consumer-digital-payments-already-mainstream-increasingly-embedded-still-evolving