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

Key takeaways:

• A merchant account is an intermediary between the customer and the business. Once a transaction is processed, the account holds the customer's funds.

• Most merchants need a business bank account for regular operations and a merchant account to accept and hold digital payment 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 having a merchant account is essential for all businesses that want to collect funds electronically. However, a merchant account only holds incoming funds — it doesn’t process payments. To accept payments, you’ll need a merchant account and a few other partners on your financial team to handle transactions.

What is a merchant account?

A merchant account is a type of account that allows businesses to accept debit or credit card payments. When a customer makes a purchase via card, the funds are deposited into the merchant account and then transferred to the business’s regular bank account.

A payment processor facilitates this process, ensuring the transaction is secure, and funds are correctly routed. Merchant accounts are essential for businesses that want to accept card payments in-store, online, or over the phone.

The merchant account doesn’t process the payment itself. That said, you can partner with a business that offers an end-to-end solution, like Airwallex’s Payment Links and plugins, which covers everything from payment initiation to confirmation 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 accept digital payments, and that’s about it. They differ from regular business bank accounts, which help manage 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 authorization from the customer’s bank and sends the payment to the merchant account. 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 is deposited. 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 to accept electronic payments from cards, mobile banks, and electronic checks. This covers most consumer-facing businesses unless you’re a cash-only brick-and-mortar.

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

Established businesses that 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 opening 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 tokenization.

• 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 must organize 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 license, 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 provides a merchant account to hold digital payment funds. It doesn’t do any leg work to accept and authorize payment.

Most businesses seek a more holistic provider than a one-off service, which is where payment service providers come in.

Payment service providers centralize everything, including your payment gateways, processing services, and the merchant account into which funds settle.

This includes services like Airwallex that help you accept payments online, automate payments, and even customize 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 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 transfer it anywhere in the world from already-held balances. Couple this with our Expense Management solution, which 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