What is a Merchant Account? Complete Guide for Business Owners
A merchant account is a specialized business bank account that allows companies to accept credit and debit card payments from customers. When a customer pays with a card, funds are first deposited into the merchant account, held temporarily during the settlement process, and then transferred to the business's regular bank account within 1-2 business days. Every business that accepts card payments needs either a merchant account or a payment service provider account.
How Merchant Accounts Work
The merchant account serves as a holding area for card transaction funds during the clearing and settlement process:
Step 1: Authorization Customer swipes, taps, or enters card information. The payment processor sends an authorization request through the card network to the issuing bank.
Step 2: Capture Once approved, the transaction is captured and added to the daily batch of transactions waiting for settlement.
Step 3: Settlement At the end of the business day (or on a schedule you set), the batch is submitted for settlement. Funds move from issuing banks through the card networks to your merchant account.
Step 4: Funding After settlement (typically 1-2 business days), funds transfer from your merchant account to your regular business bank account.
Merchant Account vs Payment Service Provider
Business owners have two main options for accepting card payments:
| Feature | Merchant Account | Payment Service Provider |
|---|---|---|
| Account Type | Dedicated to your business | Shared/aggregated account |
| Approval Process | Application, underwriting | Quick online signup |
| Approval Time | 1-5 business days | Minutes to hours |
| Monthly Fees | Common ($10-$30) | Often none |
| Per-Transaction Rates | Usually lower | Usually higher |
| Account Stability | Higher | Risk of holds/freezes |
| Best For | Established businesses | Startups, low volume |
Payment Service Providers (PSPs)
Examples: Square, Stripe, PayPal
PSPs aggregate many merchants under a single master merchant account. This allows fast signup but provides less account stability. High-volume merchants or those with unusual transaction patterns may experience fund holds or account freezes.
Dedicated Merchant Accounts
Examples: Traditional processors, bank merchant services
A dedicated merchant account is underwritten specifically for your business based on your industry, volume, and risk profile. More documentation is required upfront, but accounts are more stable and typically offer lower rates at scale.
Types of Merchant Accounts
Different businesses need different account types:
Retail Merchant Accounts
For businesses with physical locations where customers pay in person. Lowest processing rates due to reduced fraud risk with card-present transactions.
E-commerce Merchant Accounts
For online businesses. Higher rates reflect increased fraud risk with card-not-present transactions. Requires a payment gateway for secure online processing.
MOTO Merchant Accounts
Mail order/telephone order accounts for businesses taking payments over the phone or by mail. Similar risk profile to e-commerce.
Mobile Merchant Accounts
For businesses that accept payments on the go using smartphones or tablets. Common for food trucks, contractors, and service providers.
High-Risk Merchant Accounts
For industries with elevated chargeback rates or regulatory concerns, including:
- CBD and cannabis
- Adult entertainment
- Travel and timeshares
- Firearms and ammunition
- Subscription services
- Nutraceuticals
High-risk accounts have stricter requirements and higher fees but provide stable processing for challenging industries.
Requirements for a Merchant Account
To apply for a merchant account, you'll typically need:
Business Documentation:
- Business license or registration
- EIN (Employer Identification Number)
- Articles of incorporation (for corporations)
- Business bank account information
Financial Information:
- 3-6 months of bank statements
- Processing history (if currently accepting cards)
- Financial statements (for high-volume applications)
Personal Information:
- Owner identification (driver's license, passport)
- Social Security Number for credit check
- Personal guarantee (for newer businesses)
Business Details:
- Business type and industry
- Expected monthly volume
- Average transaction size
- Refund and return policies
Merchant Account Fees
Merchant accounts typically include several fee categories:
Transaction Fees
- Interchange: 1.15% - 3.25% (paid to issuing bank)
- Assessment: 0.13% - 0.15% (paid to card network)
- Processor markup: 0.10% - 0.50%+ (paid to processor)
Monthly Fees
- Account fee: $10-$30
- Statement fee: $5-$15
- Gateway fee: $10-$25 (for online processing)
- PCI compliance fee: $50-$120/year
Incidental Fees
- Chargeback fee: $15-$50 per dispute
- Retrieval request: $10-$25
- Early termination: $200-$500 (avoid if possible)
How to Choose a Merchant Account Provider
Evaluate providers on these criteria:
Pricing Transparency Look for interchange-plus pricing with clear markup disclosure. Avoid tiered pricing with vague qualification requirements.
Contract Terms Prefer month-to-month agreements. If a contract is required, negotiate the removal of early termination fees.
Settlement Speed Standard settlement is 1-2 business days. Same-day or next-day funding may be available for additional fees.
Support Quality 24/7 support matters for businesses with extended hours. Test support responsiveness before committing.
Integration Options Verify compatibility with your POS system, e-commerce platform, and accounting software.
Setting Up Your Merchant Account
The typical setup process:
- Research and compare providers (1-2 weeks)
- Submit application with required documentation
- Underwriting review (1-5 business days)
- Account approval and agreement signing
- Equipment and gateway setup (1-3 days)
- Testing to verify everything works
- Go live and start processing
Total timeline: 1-3 weeks for most businesses.
Frequently Asked Questions
Do I need a merchant account to accept credit cards?
You need either a merchant account or a payment service provider (PSP) account. PSPs like Square or Stripe let you accept cards without a traditional merchant account, but dedicated merchant accounts offer better rates and stability for established businesses.
How long does it take to get approved for a merchant account?
Standard approval takes 1-5 business days. High-risk businesses or complex applications may take 1-2 weeks. PSP accounts can be approved in minutes but offer less stability.
Can I get a merchant account with bad credit?
Possibly. Your personal credit score affects approval, but business history, processing volume, and industry type also factor in. Some providers specialize in working with lower credit scores, though rates may be higher.
What's the difference between a merchant account and a business bank account?
A business bank account holds your operating funds and handles everyday transactions. A merchant account specifically holds card payment funds during the settlement process before transferring them to your business bank account.
Why would a merchant account application be denied?
Common reasons include poor credit history, high-risk industry classification, insufficient business history, previous merchant account terminations, or incomplete documentation. If denied, ask for specifics and address the issues before reapplying.
Key Takeaways
- A merchant account is a specialized holding account for card payment funds before they transfer to your business bank account
- Dedicated merchant accounts offer better rates and stability than payment service providers for established businesses
- The application process requires business documentation, financial information, and owner identification
- Expect fees including transaction costs (1.5%-3.5%), monthly fees ($10-$30), and potential incidental fees
- Choose providers based on pricing transparency, contract terms, settlement speed, and integration capabilities
Red Rock Payments offers dedicated merchant accounts with competitive rates and transparent pricing. Apply today to start accepting card payments.
