How to Get a Merchant Account for Your Business
Merchant account is an odd term. It’s technically a bank account, but it isn’t like a deposit account that your business can access and use. Instead, it’s a line of credit without which your business can’t accept credit cards as payment because someone (a bank, not you) has to take on the initial financial responsibility for every credit card payment your business receives.
Confused yet? No worries. Below, you’ll find a little primer course on merchant accounts, how they work, when you need one, and how to get a merchant account for your business.
What You'll Discover Below
Payment Processing 101
To process payments, you’ll need a merchant account. Understanding your option will help you choose the right merchant provider for your business based on your business model and sales volume.
What is a Merchant Account?
A merchant account is a line of credit negotiated with an acquiring bank (typically through the intermediary of a payment processor). Merchant accounts exist for no other reason than to process credit cards and other types of card payments.
As such, a merchant account isn’t an account you can access, and it isn’t the same thing as your business’s deposit account. Rather, a merchant account is a pass-through bank account that more or less holds the funds from card payments until the transactions get cleared and settled.
Are There Different Types of Merchant Accounts?
Technically, no. A merchant account is a merchant account is a merchant account—that is, you’re always dealing with the same concept regardless of your business type and how you process payments. Still, it isn’t rare to find references online to different types of merchant accounts—“retail merchant accounts,” “high-risk merchant accounts,” “mobile merchant accounts,” and so on.
This is a slightly misleading way of talking about merchant accounts, but it highlights an important fact: your business category (retail, restaurant, E-commerce, etc.), as well as the ways you accept credit card payments, will affect your rates and the services your business needs.
Does My Business Need a Merchant Account to Accept Card Payments?
Yes and no. A merchant account is always involved in the credit card payment process. This is because there is a time lapse between when your customer’s card payment gets authorized and when the funds for the payment reach your business’s bank account.
But there are two ways your business can process payments through a merchant account:
- Through a traditional merchant account provider, which is a payment processor that provides your business with a dedicated merchant account that’s yours and yours alone.
- Through a payment service provider (PSP) or payment aggregator, which process payments for multiple businesses through the same merchant accounts (e.g., Square and Stripe).
Which is better? There’s no one answer, but here’s some general advice:
- If your goal is to start accepting credit card payments right away, you have a relatively low sales volume, and you don’t mind high flat rates, working with a payment aggregator could be right for you.
- If your goal is to save money by getting the most comprehensive services and lower rates overall, particularly if your business is already established or likely to grow, getting a traditional dedicated merchant account with a payment processor could bring the most long-term benefits to your business.
Steps to Applying for a Merchant Account
To get a dedicated merchant account for your business, you’ll need a merchant service agreement. This agreement will establish the rates you’ll pay for each transaction, the types of payments you’ll be able to accept (credit cards, debit cards, EBT or more), and any “value-added services”—such as same-day or a hosted payment page for online transactions—that your business needs to process payments.
There are two common ways to get a merchant account for your business:
- Search for payment processors online, locate a processor that you like, and begin the application process (usually through the processor’s website); or
- Contact banks to find out what merchant services they provide (which might involve a third-party payment processor).
In either case, applying for a merchant account requires some preliminary research and planning. Here are the steps you’ll need to take:
Before reaching out to any processors, it’s wise to have a basic idea of the types of payments you want to accept and how you want to process payments. This matters because you need to make sure the payment processor you choose provides the services and payment options you need.
For most merchants, this includes accepting credit cards and debit cards, at the least, but the possibilities don’t end there. Do you only intend to take payments at a traditional checkout counter? Do you need mobile payment solutions for house calls? Do you need a hosted payments page for your website?
The trick is to look closely at how you currently do business and how you want to do business (if these differ), and then go from there. You don’t need a sophisticated understanding of the card payment industry to apply for a merchant account. You just need to know what it is your business wants to do. The processor’s sales agent can guide you through the rest.
But you’re going to have a lot of choices. The market is saturated with companies that can get your business payment processing through a dedicated merchant account, which means you’ll need to compare rates, pricing models, and contract terms for a variety of payment processors before you settle.
How to get started? You can start with a simple online search for payment processing companies, but might soon find that the complexity of the card payment industry gets in the way. Complicated fee structures, confusing terminology, and weird credit card pricing structures are endemic to the industry, which makes it difficult for businesses to compare companies effectively and choose the right option.
A payment processor’s underwriting department will want to dig into your business before approving your application for a merchant account. This will include a range of details—basic information about your business, your current or estimated sales information, your business type, the goods or services you sell, and your credit history.
Scroll down to the section titled “Information You’ll Need to Get a Merchant Account” for a detailed list of the common information payment processors ask for.
After you have your business information in hand and have decided on a payment processor, you’ll need to complete and submit your application for a merchant account. The initial stage of the application process, for most payment processors, will take place through their website (often a secure client portal), but don’t be surprised if you end up dealing directly with a sales agent over the phone.
In fact, that’s often ideal. Merchant applications are complex, and merchant agreements (the agreement you’ll eventually sign with the processor) are even worse. Any payment processor worth pursuing should have knowledgeable sales agents willing to speak to you directly and explain the terms of any potential merchant agreement. If they don’t, it’s usually best to move on to another option.
Information You'll Need to Get a Merchant Account
When you submit a merchant application to a payment processor, you can expect to reveal important details about your business. This is because merchant services is a risk-driven industry, such that the terms of your merchant agreement and the rates you’ll pay both hinge on the level of risk your business poses to the processor.
Note, however, that you might not disclose all of this information right away. Most processors have merchants submit an initial application first (often through a sales agent), and then their underwriting department will reach out to gather the gritty details about your business (such as your financials).
That said, here are the details about your business most payment processors will want to know:
There’s no secrecy in the card payment industry (at least not for merchants). If you want a dedicated merchant account with a payment processor, expect to reveal most of the following basic information about your business:
- Your business’s legal name (as it appears on state filings)
- Your business’s address
- Your business’s website address if applicable
- Your business’s contact information
- Your business’s DBA (“Doing-Business-As” name) if applicable
- How long you have been in business
- Detailed ownership information
- The name, address, and contact information for the authorized representative who will sign the merchant application
- Bank account information for receiving deposits
- Your business’s Federal Tax ID# (most often an EIN)
Note that processors might ask for more information if your business has accepted credit cards or other payment types in the past, including recent merchant statements. This is because the processor needs to evaluate the risk posed by your business. If your business has a history of receiving large numbers of payment disputes (called credit card chargebacks), for example, that fact could influence your costs and the terms of your merchant service agreement.
The terms of your contract and your overall processing costs largely depend on what you sell and how you sell it. As such, you can expect most processors to ask for the following information related to your business type:
- Your business’s legal structure (sole proprietor, LLC, public corporation, private corporation, etc.)
- Your business’s market type (restaurant, supermarket, retail, E-commerce, etc.)
- The goods or services your business sells
- Your type of location (office building, storefront, etc.)
- If you have more than one location
- If your business is seasonal
Why do these details matter? Because the card networks, such as Visa and MasterCard, set interchange rates that vary depending on your type of business—with higher rates typically going to the merchants that pose higher risks of chargebacks and fraud. Understanding how your business works is the key detail the processor needs to determine your rates and fees.
Your business’s sales volume, average transactions, average ticket size, and even how your customers pay, all influence your eventual rates and the terms of your merchant agreement. This can be tough for new merchants without an established sales history, so you’ll need to work up reasonable (and honest) estimates based on your current expectations.
Most processors will ask for sales information like the following:
- Your current or estimated monthly/annual sales
- Your current or estimated average ticket
- Your current or estimated monthly/annual sales by card brand (Visa, MasterCard, Discover, etc.)
- The % of your sales that are “card-present” (swiped, dipped, etc.)
- The % of your sales where the card details are manually keyed-in
- The % of your sales made online, over the phone, or by mail
- The % of your sales that are business to business (B2B)
- The number of chargebacks your business received, usually in the last year (if applicable)
- Information about your business’s return/exchange policies
- Whether or not you offer subscriptions or warranties
Of course, the precise details required can vary somewhat from processor to processor, but the key thing to notice is that all of these details work toward painting a picture of the level of risk your business poses. For example, brick-and-mortar store that only accepts payments in person presents a lower risk of fraud than a business that takes card information over the phone or online.
You can also expect to identify the processing tools you’ll need (the hardware and/or software) as part of applying for a merchant account. This is because having a merchant account isn’t enough to accept credit card payments, debit card payments, and the like. You have to have a way to send transaction information to your payment processor.
How to proceed? First identify which of the various ways to accept credit card payments match the way you do business (in-person, mobile, online, or over the phone). Brick-and-mortar stores that only take in-person payments can often get by with a simple desktop payment terminal, although more sophisticated point-of-sale (POS) systems are available for things like inventory tracking, tracking employee hours, and the like. Mobile businesses will need a wireless mobile solution. So-called “virtual terminals” can make it easier for you to take orders and credit card information over the phone securely. Online businesses will need a payment gateway and a payments page.
In fact, the possibilities for the hardware or software your business could use are practically endless, and this is why speaking directly with your sales agent is so important. Be sure to discuss your processing needs in detail with your agent, ask for product lists that include processing options provided by the processor and compatible third-party providers, and get clear about any monthly fees, set-up fees, and transaction markups involved with any piece of equipment or software you use.
Merchant Account FAQs
Will my business qualify for a merchant account?
Most business types will qualify for a merchant account with a typical payment processor, so long as the products or services the business sells are legal, but there are other circumstances where a payment processor will decide not to approve a merchant’s application.
This could include new businesses with very low sales volumes, businesses owned by people with low credit scores, and businesses operating in high-risk industries (such as firearms merchants and the adult entertainment industry). However, there typically are options out there if you’re willing to shop around.
What is an aggregated merchant account?
An aggregated merchant account is a merchant account that processes payments for more than one merchant. This is the model used by well-known payment service providers (PSPs) like Square and Stripe.
One benefit of going with PSP or payment aggregator is that it’s fairly easily to apply and qualify. Common drawbacks include that you’re more likely to experience account freezes if you process payments through an aggregated merchant account, and you’ll typically pay higher processing rates as well.
What is a dedicated merchant account?
A dedicated merchant account is a merchant account that processes card payments for a single business (the account, in other words, is yours and yours alone—unlike an aggregated merchant account). This is the traditional way to accept card payments, and the route we usually recommend for most businesses.
Is it difficult to get a merchant account?
Not really (so long as your business qualifies with the processor). The real challenge is choosing a payment processor that provides the services you need at affordable rates. To ensure that happens, it helps to work with a payment processing agent whose goal is to save your business money—a service Northwest can provide.
Is a merchant account the same as a business bank account?
No. A merchant account exists solely to process payments. It’s essentially a place where the money from a credit card or debit card payment “sits” while the banks, processors, and card networks do their work to settle a payment. However, the funds from payments (minus processing fees) will get deposited in your business’s bank account when the payment process comes to an end.
How much does it cost to open a merchant account?
That depends on the payment processor you choose and the terms of your merchant agreement. Some processors have general start-up fees while others don’t, but you can typically expect to pay a monthly fee between $10 and $30, on average, for keeping your account active (this is often called a “statement fee” or “account fee”), along with interchange fees, card network assessment fees, and fees set by your payment processor for the services it provides.
Check out our page on credit card processing fees to learn more.
How long does it take to open a merchant account?
The time it takes for your merchant account to be enabled depends (like so much else) on the payment processor you choose and the processing tools (the hardware or software) your business needs.
Payment service providers (PSPs) that use aggregated merchant accounts tend to have the fastest turnaround time—often a matter of days—because your business won’t be subject to an extensive approval process.
Applying for a traditional, dedicated merchant account with a payment processor will usually take a little longer (from a matter of days to a couple of weeks). This is because the processor’s underwriting department needs to approve your business’s application.
What is a merchant account provider?
The term “merchant account provider” is a little ambiguous, but it essentially just refers to any provider that can set your business up with a dedicated merchant account. This includes many banks, the big back-end payment processors, and independent sales organizations (ISOs) that resell the services of payment processors.