What is a Merchant Account | Complete Overview | CatalystPay

What is a Merchant Account | Complete Overview

  • 14 min read
  • 28 october 2022

Nowadays, consumers are turning to non-cash transactions – such as debit and credit cards, mobile payments, and e-wallets – for their everyday purchases. This shift away from cash has been driven by a variety of factors, including the growing availability of alternative payment options, the increasing use of digital devices for shopping and banking, and the increasing preference for contactless payments. 

There are a number of merchant services available that can help businesses go cashless. These services provide businesses with the ability to accept credit and debit cards, as well as other online payment methods. Businesses that seek to get online presence must evaluate their needs in order to determine which merchant service are right for them. Either way any business that wants to accept card payments in-store or online must open a merchant account.

What is a merchant account?

A merchant account is a type of bank account that allows businesses to accept credit and debit card payments from clients. Merchant accounts are provided by merchant account providers or payment processors. 

Contrary to traditional bank accounts, a merchant account functions as an intermediary between the card issuing banks and the merchant. This type of account is essential for businesses that accept credit or debit card payments, as it allows them to process these payments quickly and securely through a merchant acquiring bank.

How does a merchant account work?

When a payment is done, it passes through the payment gateway. This allows to accept credit card purchases from your customers and ensure that the transactions are processed securely and there are enough funds to perform the payment. Merchants can set their gateways up once they have their merchant account opened. 

The payment gateway will contact the customer’s bank or credit card company to get approval for the payment. Once the payment is approved, the merchant account takes the money from client’s bank account and deducts the transaction fee. The remaining amount is sent from the merchant account to company’s bank account in the form of settlement which is usually paid once per week.

Why should you open a merchant account?

Setting up a merchant account is not just about allowing clients the make payments online. A merchant account can be set up in a matter of days and business owners can experience the full potential of business by benefiting from: 

  • Increases sales: According to recent years’ trend, about 80% of consumers find it easier and faster to make purchases online with a credit or debit card. With the advancement of security standards for online payments, customers now feel safer when paying on websites. These two factors affect positively businesses’ sales volumes.
  • Enhance cash flow: Payments to client’s bank account get authorized quicker compared to regular accounts that may hold merchant’s money more than 30 days. With a merchant account, this transition usually takes 1 to 2 working days.
  • Better money management: The convenience of managing your money through an online platform is what makes merchant accounts so attractive. With transactions happening almost exclusively on debit and credit cards, you can eliminate the need for cash registers by eliminating transaction tracking altogether!
  • Improved customer experience: Giving the clients the freedom of choice in how to pay is always better. This leads them back for more, which ensures your business grows with ease.
  • Secure payment processing: Integrating payment gateways with your business operations can reduce the likelihood of fraud and theft. With a seamless checkout process, you ensure that customers are getting what they want while boosting conversions by giving them options to pay how they prefer.

There are three types of merchant accounts depending on the different businesses’ specifications:

Retail account:

Businesses that have a physical shop where they offer their goods and services use a retail account which allows them to have low transaction and setup costs. 

Mobile account:

Mobile credit card processing is perfect for any business that needs to process payments on the move such as pop-up shops and food trucks. A mobile merchant account will allow you to process payments from potential customers wherever there's an internet connection.

E-commerce account:

Merchants who offer their goods and services on the internet should use an e-commerce account. These accounts are different from the ones for physical shops and are split into three groups based on their characteristics:

  • Offshore: An international account, operating in a foreign country
  • Local: An account available on a national level
  • Direct: When a merchant bank is contacted directly to open a merchant account

How to open a merchant account?

The onboarding process is divided into three parts:

  • Document collection: merchants would need to share some of the basic information for their company such as company name, address, contact and banking details, processing history and others.
  • Applying: once all the required documentation is collected the application is sent to the acquiring bank for a review. At this stage, the bank may request additional documents
  • Final approval and setup of the merchant account: when the application has been evaluated, the bank determines merchant’s risk level based on his previous credit history, type of business, time in the industry and past merchant accounts (if such).

Merchants who offer goods online are generally classified as higher risk merchants compared to merchants who sell their products at a physical location and process customers’ transaction in person. The reason for this is that online payments are subject to more fraud. Nonetheless, with the advancement of online security standards and the increasing use of chargeback and fraud alerting platforms, the merchants are now able to detect fraudulent transactions faster than before thanks to their ability to identify risks and help consumers avoid them completely

How much does a merchant account cost?

It is essential for merchants to understand how each fee works and make sure this is the best pricing model for the needs of their businesses. The three pricing models are follows:

Flat-rate pricing

This fee, also known as blended rate, is fixed for all credit/debit payment and is charged by the processor regardless of the type of card the client pays with. This configuration is one of the most widely used and is suitable for businesses with lower sales volumes.

Interchange-plus pricing

There are two components of this pricing: an interchange and a plus. The interchange is what the credit card company sets as a rate for processing transactions, while the plus rate is the markup put by the credit card processor.

Tiered pricing

This structure counts on the volume of transactions the business has generated as well as the type of cards used for the transactions. The produced payments are divided into three based on their status – qualified and non-qualified, where qualified transactions would be charged at a lower rate while non-qualified would require merchants to pay a higher fee.

There are also additional fees associated with the above-mentioned models such as:

  • Monthly Minimum fee: applicable in cases when a minimum amount of transactions is required and merchants have not been able to match this volume, they would need to pay a fee.
  • One-time Setup fee: charged when a merchant account is created.
  • Gateway fee: paid when a merchant requires a payment gateway solution to operate
  • Chargeback fee: if a payment gets cancelled or a product is returned, the merchant would need to pay a chargeback fee for each case.
  • PCI Compliance fee: in order to keep their accounts safe from thefts and fraud, merchants pay a fee to merchant account providers in order to make sure they are compliant with the Payment Card Industries regulations.

How to make the right choice when opening a merchant account?

One of the most important aspects when choosing a merchant account provider is how they can help you scale your operations. For example, some processors offer discounts for large-scale businesses because it’s easier to manage their costs that way and not every company needs or wants this service. Though finding an affordable rate should still be one of the most important factors. In addition, often a single channel payment processing company is the first place merchants look to open a credit card processing account. However, major single channel providers have numerous rules and regulations that businesses must adhere to use their services and complying to them all can be challenging for small businesses, resulting in merchant account being shut down.   

  • Costs:
  • Understanding the different types of fees that are involved in credit card processing can be difficult. Make sure to clarify any fee you'll pay, regardless if it's a flat rate or based on your monthly transaction volume - and watch out for those 'hidden' charges such as termination fees, account change fees and others that can quickly generate a substantial amount that the merchant would need to pay. 
  • Customer Service:
  • Merchants need to be sure that their provider can maintain a good quality service even in the busiest times to resolve any issues in a timely manner.
  • Hardware:
  • There are two important factors to be taken into account here – affordable price and type of hardware required for merchant’s specific needs (ex. POS terminal for physical shops, mobile apps or simple card readers 
  • Volume:
  • Scaling means producing bigger volumes. This means you should find a provider who will allow you process transactions without limitations on the volume of payments and their currency.
  • Integrations:

Merchants should check if the integration they chose will allow them to process the coming transactions with ease. Some integrations offer an end-to-end solution that may help businesses use the payment gateway as well as many other capabilities that the platform has.


We at Catalystpay thrive to enable online businesses by providing a merchant accounts with low processing fees, low commissions, and enhanced security. If you are not sure which is the best path for your business, Contact us to discuss what business opportunities we can start together.

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