This simple guide explains what a merchant account is, how merchant accounts work and how to choose the best merchant account for your business.

A good deal of time in the office is devoted to teaching businesses the basics on merchant accounts and the subtleties of how merchant accounts from various providers operate. We thought much of this information can be summarised here to make merchant accounts easier to understand.

We’ll also give you a few choice tips on choosing the best merchant account provider for you.

What Does a Merchant Account Mean to You?

A merchant account is a particular type of bank account, used specifically to enable businesses to take payments by credit or debit card, including some of the new forms of electronic transactions using Apple or Google payments on your phone.

Your merchant account is administered by an “acquiring bank” and is used to hold customer funds until the customer’s bank approves the transaction. Once approved the customer payment is transferred to you, the merchant, in your business bank account.

What Happens when Someon Makes a Payment?

In a regular “face-to-face” card payment transaction, for example at a point-of-sale or sales counter in a store; once a customer decides to pay for an item using a payment card …

Paying for an item:

The customer is asked to follow directions – usually presented on the screen of the card machine – and if the payment amount is below the limit, the customer is given the option to pay “contactless”. The customer is directed to position their payment card near the contacless sensor on the merchant’s card machine.

The card payment process

Electronic payment processing

The customer card details are transmitted from the merchant’s card machine over broadband or mobile, to the business’s merchant account together with all the details needed to process the payment, such as the payment amount and order details. The acquiring bank that holds the merchant account transmits the information to the relevant card provider (VISA for example).

The information relating to the order transaction is then forwarded on to the customer’s bank or the issuing bank as it is known. The issuing bank then returns information that “approves” the transaction – assuming the customer details are correct – passing fraud checks – and that the customer has enough funds available.

Once all parties involved in the transaction are informed that the transaction has been approved, a message is sent back to the card reader to inform the customer and merchant of a successful transaction.

Getting Paid

Once all the various checks have been passed, there is a settlement period – which could be anywhere from a day to much longer depending on the transaction and the provider. During this time the payment is held in the merchant account until all concerned parties agree the payment should be authorised.

Assuming all this has gone well, the customer payment can be transferred into the merchant’s business bank account. As you can understand, there’s a lot going on behind-the-scenes in even the most simple card payments. In real-life, many of the well-known merchant services providers will complete this process in three working days.

Merchant Accounts and Card Payments

A merchant account alone isn’t “all” you need to take card payments, as we looked at above, there’s a big stack of technology used to enable merchants to process card payments.

As a merchant, if you want to take card payments you’ll need a merchant account, and a mechanism to process and transmit the customer order details.

Card Machines

There is an ever-growing range of card machines integrated into EPOS systems on the countertop, wireless throughout your places of business or mobile card readers that use a mobile phone data connection either integrated into the device or in-tandem with your mobile phone.

Virtual Terminals

Traditionally a secure web page that could be accessed via a login on a web page, the merchant manually types the order and customer payment details into a web form that is then transmitted to the merchant account provider. Today, virtual terminal functionality is often bundled into an app or software suite from the merchant services provider that may aggregate other useful functionality such as advanced sales reporting.

Online Payments

Traditionally and online store or e-commerce website connected to or integrating a Payment Gateway. In many ways similar to a virtual terminal but with a web interface accessible to the public – for example a checkout page – where the customer fills their details before they are sent to the merchant account. Payment gateways are now found integrated into all kinds of apps and IoT devices.

Merchant Account Costing

Writing on this subject a few years ago to today has seen a huge increase in the number of merchant service providers available to UK businesses including some providers now offering more than one “brand”. The choice of merchant accounts and merchant services in today’s marketplace is overwhelming – each with their own seemingly obfuscated pricing plans that are often self-described as being simple.

However, confusing as costs of merchant accounts can seem, the background processes are required to fit with the rest of the process and other parties involved such as the card providers, issuers and acquiring banks.

On a fundamental level, the more successful card transactions you take from your customers – the more you can save on merchant account costs. This involves making sure your business can perform at and sustain a decent level of card sales, and that your sales don’t incur chargebacks or trigger fraud security warnings. The various parties involved in processing transactions still have to work of attempting to process your transactions even if they ultimately fail or are reversed later by chargebacks – this is costly.

Merchant Account Charges

Merchant account charges are usually divided between the monthly charges paid the the merchant services provider for providing the service. Then there are the various charges per transaction for the different transaction types that you take throughout a given month. Some merchant services providers provide pricing on their website but others insist you make contact to discuss the costs involved in the provision of the merchant account. We can list a few common example price ranges for merchant accounts here, keep-in-mind this is a rough-guide by way of example only.

Fee Type Cost
Set Up Fee £50 – £100
Monthly Service Charge £5 – £25 monthly
Terminations £50 – £100
Card Machine Rental £15 – £30 monthly
Debit Card Transactions 0.3% – 1%
Credit Card Transactions 1% – 2%
Payment Gateways £15 – £25
Virtual Terminals £10 – £20
Payment Authorisation Fees 2p – 4p
PCI Compliance £30 – £60
Chargebacks Per chargeback

Set Up Fee: An admin fee to cover the costs of setting up your businesses merchant services provision – usually a one-off payment unless you change contracts.

Monthly Service Charges: A fee charged by the card provider to cover their costs that can depend on whether you made the minimum value of transactions agreed in your contract.

Terminations: A charge made by your provider if you choose to terminate your contract permaturely – however, you may have further contractual obligations to fulfill, for example card machine rental agreements.

Debit Card Transactions: Fees applied to debit card transactions you take in payments from customers.

Credit Card Transactions: Fees applied to credita card transactions you take in payments from customers.

Payment Gateways: Fees that can be charged for provision of your payment gateway access.

Virtual Termails: Fees that can be charged for provision of your virtual terminal access.

Payment Authorisation Fees: Fees charged for the process of payment authorisations.

PCI Compliance: Fees charged to handle PCI compliance issues for your customer payment process.

Chargebacks: Something to be avoided, chargebacks are when a customer payment is returned to the customer as their complaint about your product or service is deemed to justify a refund of their money. Some business sectors are automatically assumed to be a “high risk” for chargebacks while businesses in other sectors are expected to carry on their business to a respectable standard and therefor incur fewer chargebacks.