How Merchant Accounts Work

Jan 13, 2022

Figuring out how to make your business work can take a lot of effort.  

Things get even more confusing when you start thinking about how to move money around. And you probably have a lot of questions, like:   

  • How are you going to accept credit card payments? 
  • What about debit cards? 
  • Where will you deposit cash? 
  • How are you going to pay your bills?

The answer to the latter two questions is easy. You can deposit cash into your regular business bank account, and pay your bills out of it too.  

The former question is a little harder, since there is so much involved with processing payment cards.

But that’s where a merchant account can work for you.

Read on to learn what merchant accounts are, how they work, how much they cost, and how to open one. 

What is a Merchant Account?

A merchant account is a certain type of business bank account.

It enables you to securely accept credit card transactions — as well as debit card payments, payments made with gift cards, and other types of electronic payments.  

The merchant account acts as a “holding tank” between your specific business and the card-issuing banks that provide your customers with the physical cards your customers use to pay for their purchases. 

In the case of credit card payments, these banks also provide a line of credit to back the purchase.

Security Considerations with Merchant Accounts 

But wouldn’t it be easier to just give your bank details to your payment processor, so they can deposit your credit card sales directly?

Unfortunately, no.  

Doing so would mean you wouldn’t get to see your money for a while, due to delays inherent in the transaction.  

There are a lot of moving parts in any given credit card transaction — each transaction must be fully verified and vetted before the sale is actually authorized.

Not only that, but the merchant account provides a certain level of protection from fraud. The fewer entities that have your bank details, the less likely you will fall victim to fraud.

A merchant account isn’t directly analogous to a regular business bank account. It’s actually more of a business relationship between the major card networks (like Mastercard, Visa, Discover, and American Express).  

In this type of relationship, the card-issuing bank advances the funds to the merchant, and accepts funds from the customer that used their credit card.  

Before the funds are advanced, however, the banks take their cut, in the form of transaction fees — which we’ll talk about later.

When you sign up for a merchant account, you won’t be able to access it directly. But under normal circumstances, the funds that the issuing bank puts in your merchant account are automatically moved into your business bank account within one or two business days.

In short, merchant accounts make for a quicker authorization process. This means that you’ll get paid faster.

How Does a Merchant Account Work?

As we’ve discussed, a merchant account is a conduit. Using the merchant account, your business collects the money you earn through your clients’ credit card purchases.

When a credit card is used, the issuing bank advances the money for that purchase to the cardholder. 

Using a merchant account means you won’t have to wait to get that money.  Otherwise you’d have to wait for your customer to pay their credit card bills.

So when you accept credit cards for purchases, the process — and the role of the merchant account — works like this:

  • Your customer purchases your goods or services with their credit card.
  • The credit card processor sends details of the transaction to your merchant account.
  • The organization providing your merchant account then sends details of the transaction to the card issuing bank through your card processor.
  • The customer’s card issuing bank verifies there is enough money in their account to cover the transaction (in the case of debit cards), or confirms that this transaction won’t put the customer over their credit limit.
  • If there is enough money available, the issuing bank lets the processor know, who then lets the merchant account provider know.
  • The issuing bank then deposits money in your merchant account — minus the fees taken out by all parties involved in the transaction.

How Merchant Accounts Work — What’s the Cost?

A lot of different fees are assessed by the different parties involved in credit and debit card processing.

For one, merchant account providers take on a certain amount of risk when they front your business money. Also, issuing banks also run the risk of their customers not paying their credit card bills.  

These, and many other situations, are covered by transaction fees.

Card networks and card issuers also charge for their part in the whole procedure. Collectively, this is known as the interchange process, and a large part of the fees inherent in credit card processing is known as the interchange fee.

Your merchant account provider might also charge you for the tools they provide, such as hardware and software. They may also charge you fees for setup and maintenance.

Merchant Account Fees

Fees charged to merchant accounts typically depend on the volume of credit card transactions processed. If you get a lot of money from card payments, you can typically expect to get a better rate.

Usually, charges fall into one of three categories:  per-transaction charges, monthly charges, and one-off charges.

The per-transaction charges are for credit cards, debit cards, and network authorization fees.

Monthly charges could include fees for renting or leasing credit card terminals or other processing machines, a payment gateway fee, and a virtual terminal fee. Most merchant account providers also have a monthly minimum charge, which you won’t pay if your transaction volume meets or exceeds a certain threshold listed in your contract.

One-off charges include an initial setup fee, as well as a fee charged in case you terminate your contract early.

PCI Compliance

A PCI Compliance fee is another fee that is commonly charged.  

In this case, PCI refers to the Payment Card Industry, which maintains certain data security standards. Sometimes this is referred to as PCI-DSS.

PCI compliance is legally mandated for each business that processes credit card transactions.  When all the checks inherent in PCI compliance are met, the payment card industry knows that you’re handling customers’ confidential payment details in a responsible manner.

PCI compliance fees may be assessed annually or on a monthly basis.

Chargeback Fees

Every customer is entitled to dispute any credit card charge with their bank. If the dispute is honored, the customer’s money will be refunded — and the merchant will owe a one-off chargeback fee.

Chargebacks are intended to protect the consumer.

Interchange Fees

Interchange fees are a per-transaction assessment paid by the merchant’s bank to the customer’s bank. These transaction fees are not negotiable, and they are collectively set by the major card networks.  

When using debit cards, interchange fees are limited to 0.2% of the transaction. For credit cards, they are capped at 0.3%.

How to Get a Merchant Account

There are three different kinds of merchant accounts you can get:  Aggregated, Dedicated, and High Risk.


Payment aggregators collect transactions from many different merchants. They then send the transactions to the acquiring bank using one large, shared merchant account.  This makes setup quick and free, though you run the risk of having your funds frozen.

Examples of payment aggregators are Stripe, Square, and PayPal.


A dedicated merchant account is set up with an acquiring bank. Through a process known as underwriting, dedicated accounts are specific to the needs of your business.  

Using this kind of merchant account, rates can often be negotiated. 

High Risk

When you apply for your merchant account, the bank will look closely at your business and the industry you serve.  

Your “risk factor” is based on the stability and longevity of your business, as well as the credit history of the principal people involved.  

Certain industries and ways of doing business are also labeled as “high-risk.”  These include the adult, gambling, and travel industries, as well as businesses offering monthly memberships or other subscription services.

Easy Pay Direct is a high-risk merchant account provider.

Getting a Merchant Account 

To give you an accurate quotation on merchant account services, a provider will look at your:

  • Type of business — what you provide and how you provide it
  • Size of your average transaction 
  • Expected or monthly volume of card transactions 

You’ll also want to have answers to the following:

  • Will you accept payments online, in person, or both?
  • Will you need a payment gateway to accept payments online?
  • Will you need point-of-sale hardware and/or software?
  • What is your overall budget for merchant services?

With that information in hand, you can then approach several merchant account providers to request quotes.

Be sure to ask about all the fees they charge, what level of customer service they provide, and how long it will take them to deposit money in your regular business bank account.

Making Merchant Accounts Work for You

A merchant account is a special and specific type of business bank account that enables you to accept debit and credit cards. They can be considered to be “holding tanks” between your customers and the bank account your business has.  

Using a merchant account, you’ll get paid faster than you would by waiting for the banks to verify each part of the transaction.

A certain amount of risk is incurred when opening a merchant account. This is offset by the various fees charged by merchant account providers, and the different banks involved in the process of accepting payment cards.  

Easy Pay Direct is a premier provider of merchant account services. If you’re ready to start earning through a merchant account, contact us today!

Stripe Account Issues? Watch This!