What Is a Merchant Account and How It Works


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Cash is no longer king for most customers. And if as a business you are yet to embrace cashless forms of payment such as credit and debit cards, it’s about time you did. Contactless forms of payment are convenient, efficient, and secure.   One of the major things you need to invest in for you to start accepting electronic payments in the form of credit and debit payments is a merchant account. Internet merchant accounts are the golden tickets that allow businesses to process cards and other electronic payments. Getting a merchant card processor account involves seeking the services of a merchant services provider. Unfortunately, with so many internet merchant account service providers in the market, it can be difficult to know what to look for in a provider and how to go about opening your merchant account. The good news is that in this article we answer the questions: how do merchant accounts work and how to set up one? But before we get right into it, let’s learn what a merchant card processor account is.

What Is a Merchant Account?

A merchant account is a business bank account that allows your business to accept and process credit and debit card payments.  The account acts as a link between your business and the financial institutions that process electronic payments.

How Does A Merchant Account Work?

merchant card processor account If you’re wondering how a merchant card processor account works, read on. When a customer pays for a product or service using their credit card, their card processor will send the transaction information to your merchant account. The service merchant account will then route the information to the cardholder’s bank. The bank will then confirm if the holder has enough funds in their account to cover the transaction. In case there are sufficient funds in the account, the issuing bank will contact the card processor with this information. The processor also briefs the merchant account with the approval details. Once this exchange of information is complete, the transaction is completed, whereby the issuing bank deposits the transaction funds to your merchant account.

What Are Merchant Services?

Merchant services include the products and technology that businesses use to accept and process credit cards and other forms of electronic payments. The merchant services are provided through a merchant account that is set up by a merchant service provider. Examples of merchant services often provided by merchant account service providers include:

What Are Merchant Services Providers?

Merchant services providers are third-party organizations that provide credit and debit card processing services. These providers act as the bridge between businesses and credit card processors.  In addition to enabling businesses to accept and process card payments, merchant service providers also offer the following services:

  • Accept and process paper checks
  • Accept and process mobile payments
  • Accept e-commerce payments
  • Provide customer loyalty reward programs
  • Accept payments integrated with a point of sale system
  • Establish gift card programs
  • Offer financing services

Merchant service providers often comprise banks, credit card companies, point of sale payment service providers, and other third-party providers such as PayPal, Stripe, and Square.

What Are Merchant Services Fees and Rates?

When choosing your merchant service provider, one of the crucial factors to consider is the service fees and rates. This also means you need to understand the pricing models used by different providers to make an informed decision. Below, let’s look at the three common pricing models used by merchant services providers: Flat rate pricing model – In this model, the service provider will require you to pay a flat fee for each transaction, regardless of the card used. For example, you may be charged $0.04 for every transaction made. Other merchants that use this model will charge you a flat fee plus a percentage of the transaction value. For instance, you may be charged a flat rate of $0.40 plus 2.5% for every transaction value. Interchange plus pricing model – The merchant services provider will charge you an interchange fee, which is equivalent to the money they pay the credit card network. In addition to this fee, the provider will charge you a flat fee or a percentage fee for every transaction. This pricing structure is popular as it’s easy to understand. It’s also transparent, as you’ll be aware of the amount of money that goes to the card network and the amount that the provider gets. Most business owners also find this pricing model affordable. Tiered pricing model – For this type of payment mode, the service provider offers their services in the form of priced tiers. The tiers will be based on the risk level and the volume of the transactions.  For instance, a provider can bundle the services they offer into credit card payments, online payments, and debit card payments and then charge you based on the level of risk and the number of transactions of each tier. Unfortunately, this model is costly and more confusing than the other models explained above. In addition to the above rates, some merchant account providers may charge you one-time or monthly fees, as explained below.

  • Minimum processing fee – Some providers charge you this fee in case your transactions are less than the number required in a given period
  • Account maintenance fee – Account fees are charged monthly or annually. Some providers will also charge an account setup fee when you’re opening an account with them.
  • Chargeback fee – This fee is charged when a customer gets a refund after a transaction dispute
  • Statement fee – This fee is charged if you request an e-statement or a hardcopy of your statement
  • Cancellation fee – if you close your contract before the end of the contract period, some providers will charge you a cancellation fee
  • PCI compliance fee – This fee is meant to ensure that you comply with the set credit card security requirements
  • Non-sufficient fund fee – Also called the NSF fee, it is paid in case you have insufficient funds in your bank account to pay your service provider

Before you sign a contract with your service provider, ensure you’re informed about all the merchant account fees. Ask about any hidden fees, read the fine print of the contract terms, and ask for a price breakdown. Notably, a good service provider will be transparent about any additional costs. Most merchant account providers also waiver some fees such as statement, cancellation, minimum processing, and account setup fees.

Why Do You Need a Merchant Account?

what is a merchant card processor account A merchant account protects you from delays associated with credit card payments. When a customer pays for a service with their card, in a typical scenario you’d have to wait until they pay their credit card bills to get your payment. However, thanks to merchant service accounts, you’re able to get your money immediately provided the customer has sufficient funds in their bank account. A merchant account is also beneficial for your business in the following ways:

  • Enables you to accept credit and debit card transactions
  • Ensures that credit card transactions are done smoothly and automatically
  • Protects you from card fraud by ensuring the card payment process is secure
  • Modern merchant service accounts also offer other services that improve the flexibility and scalability of your business

Things One Needs to Apply for a Merchant Account

Opening a merchant account isn’t a complicated process. However, you need to do your homework first before you chose your merchant service provider. Some of the factors you should consider before choosing your provider include:

  • Additional features
  • Fees and pricing structure
  • Transaction types
  • Processing volume
  • Account contract length
  • Availability of customer support

To open a merchant account, you’ll need to fill out an application form with a merchant provider and wait for its approval. The merchant service provider may need to know a few details related to your business, such as your credit history and how long you’ve been in business. Some other details they may require from you are the following:

  • Financial statements – You’ll need to give the provider the financial records for your business. This allows your provider to verify that you’re in a good financial position.
  • Business name and tax ID number – Your business name and identification number allow the provider to verify taxation and legality matters related to your type of business
  • Bank account and a routing number – This information will enable the provider to determine if you have a separate business account for your business.
  • License – This helps verify that your physical or online business has met the required license requirements.
  • Credit report – Your business credit report helps the provider verify if you’ve been able to pay past loans. A good credit rating improves the chances of your application being approved
  • Past merchant accounts – You should disclose if you have had a previous high-risk merchant account. A positive past merchant account experience will make it easier for your provider to trust you


Now that you know what a merchant service account is and how it works, you have no excuse not to open one.   When shopping for a merchant services provider, look for a provider who is transparent about their payment model and fees. Luckily, merchant services providers such as the eMerchant Authority give you a detailed breakdown of their pricing and contract terms. You can contact us today and start enjoying the services we offer.