What are Merchant Accounts? How Do They Work?

A merchant account is a specialised business account that allows companies to accept electronic payments, primarily through credit and debit cards.  It is important bridge between the business owner and the customer’s bank to ensure transactions are securely authorised and settled.

Whether you operate an online store or a service-based business, a dedicated merchant account can be essential for streamlining payments and improving cash flow.

How Do Merchant Accounts Work?

When a customer makes a payment, the funds are held in the merchant account before being transferred to the business’s main bank account.

This process ensures that all transactions are verified and compliant with security standards, reducing the risk of fraud and chargebacks on debit card payments.

Customer Makes a Purchase

The payment process begins when a customer chooses to buy a product or service using a credit or debit card. This can happen in various ways:

In-Store Transactions

The customer taps, swipes, or inserts their card into a point-of-sale (POS) system or a card reader. Contactless payments via mobile wallets like Apple Pay or Google Pay may also be used.

Online Transactions

The customer enters their card details into a checkout form on an eCommerce website or app. Payment gateways encrypt this information to ensure secure transmission.

Mail Order/Telephone Order (MOTO) Transactions

The customer provides card details over the phone or through a mail order form, which the merchant manually enters into a virtual terminal.

Transaction Authorisation

After the purchase request is initiated, the merchant's payment gateway securely transmits the transaction details to the acquiring bank (merchant account provider).

They then forward the request to the relevant card network (e.g., Visa, Mastercard, American Express).

The card network processes the request and sends it to the issuing bank. The issuing bank evaluates whether the transaction should be approved or declined.

Approval or Decline

The customer’s bank checks for sufficient funds and security risks.

If approved, the transaction moves forward. If declined (due to insufficient funds, fraud suspicion, or incorrect details), the customer's payment information is rejected.

Transaction Settlement

Once the transaction is approved, the settlement process begins.

This is when the issuing bank transfers the transaction amount to the merchant’s acquiring bank (merchant account provider).

However, these funds don’t go directly to the merchant’s bank account yet. Instead, they are temporarily held in the merchant account until the transaction is fully processed.

This temporary holding period allows for fraud checks, chargeback prevention and batch processing of multiple transactions for efficiency.

Payment Completion

After a short settlement period (typically 1–3 business days), the funds are transferred from the merchant account to the standard business bank account.

This marks the completion of the payment process and the merchant now has access to the revenue from the sale.

The time it takes for funds to reach the merchant’s bank account depends on the payment provider, the merchant’s risk profile, and the terms of their agreement with the acquiring bank.

Types of Merchant Accounts

A business may not always require its own traditional merchant account to accept payments. But it is important to understand the different types available to you.  

Retail Merchant Accounts

These are tailored for businesses with physical stores that use POS systems.

The accounts support chip-and-PIN, contactless and swipe payments, offering lower transaction fees due to the decreased risk of fraud in face-to-face transactions.

eCommerce Merchant Accounts

Are essential for online businesses that accept payments through websites and mobile apps.

These accounts require integration with a payment gateway to ensure secure transactions.

Because online payments are more susceptible to fraud, they typically include enhanced security measures, like encryption and fraud detection tools.

MOTO (Mail Order/Telephone Order) Merchant Accounts

Used by businesses that process payments via phone or mail orders. These accounts rely on virtual terminals, where merchants manually enter card details to complete transactions.

This type of account is common among call centres and catalogue-based retailers.

High-Risk Merchant Accounts

These are designed for industries with higher chargeback rates or regulatory risks, such as travel services and subscription-based businesses.

Due to the increased risk, these accounts often come with higher transaction fees and may require businesses to maintain a rolling reserve as financial protection.

Aggregated Merchant Accounts

These are provided by third-party payment facilitators like PayPal and Square. Instead of opening their own merchant account, businesses share a pooled account under the payment service provider.

This option offers fast setup and minimal requirements, but merchants have less control over transaction policies and may experience account freezes if suspicious activity is detected.

Who Needs a Merchant Account?

Any business that wants to accept credit card payments requires a merchant account. This includes:

1. eCommerce stores selling products and services online.
2. Retail businesses with physical stores accepting card payments.
3. Service providers (e.g., consultants, freelancers) invoicing clients for payments.
4. Subscription-based businesses collecting recurring payments.
5. Non-profits and charities accepting online donations.

Without a mobile merchant account however, businesses would be limited to cash or bank transfers, reducing payment flexibility and customer convenience.

Benefits of Having a Merchant Account

A traditional merchant account that offers several advantages:

• Accept Multiple Payment Methods – Process and accept credit cards, debit cards, and digital wallets.
• Faster Payment Processing – Funds are received quicker than traditional bank transfers.
• Increased Sales & Customer Convenience – Enables seamless transactions for customers.
• Security & Fraud Protection – Transactions undergo authentication and fraud checks.
• Better Cash Flow Management – Predictable deposits help businesses manage finances efficiently.

How to Get a Merchant Account

There are a number of steps you will need to take to obtaining a merchant account.

Choose a Provider

The first step is selecting the right merchant service provider.

Some providers offer bundled payment processing solutions, including payment gateways and fraud protection, while others require separate integrations.

Businesses should also consider whether they need a domestic or international merchant account, depending on their target market.

Apply Online

Once a provider is chosen, businesses need to submit an application online.

This typically requires providing essential business details, including company registration documents, banking information, processing history and estimated transaction volume.

Providers may also request information about the nature of the business, as some industries are considered higher risk and may require additional verification.

Undergo Risk Assessment

After submitting an application, the merchant account provider will evaluate the business’s risk level.

This assessment involves reviewing the business’s financial stability, industry type, chargeback history and compliance with security regulations.

Approval & Setup

Once approved, businesses can integrate their merchant account with a payment gateway to begin processing payments. The provider will guide merchants through setting up their POS system, website checkout, or virtual terminal.

Testing transactions ensures that payments are processed correctly before launching full operations.

At this stage, businesses can also set up fraud protection measures, recurring billing options and multi-currency payment capabilities if needed.

What are the Costs of a Merchant Account?

Merchant account fees vary based on the merchant service provider and business type. Common costs include:

• Transaction Fees: Charged as processing fees per transaction (e.g., 1.5% – 3% of the transaction amount.) Some providers charge a fixed fee per transaction, while others use a percentage-based fee structure.
• Monthly Fees: Some providers charge a fixed monthly service fee.
• Setup Fees : One-time fee for account registration.
• Chargeback Fees: Additional costs if a customer disputes a transaction.

Is a Merchant Account the Same as a Business Bank Account?

A merchant account and a business bank account serve different purposes.

A merchant account is a temporary holding account where funds from card transactions are stored before being transferred to the business’s main account.

Whereas a business bank account is where businesses store and manage their funds for operational expenses and financial transactions. Unlike a merchant account, it does not handle payment processing fees.

A business must have a merchant account if it wants to accept electronic credit and debit card payments. However, the final funds from sales are always deposited into the business' bank account.

What is an International Merchant Account?

An international merchant account enables businesses to accept payments in multiple currencies from customers worldwide. This type of account is ideal for:

• Global eCommerce businesses that sell products or services internationally.
• Companies with multi-currency payment needs, such as businesses operating in the USD, GBP, EUR, or other foreign markets.
• Businesses expanding into new regions and looking to reduce currency conversion fees and transaction rejections.

International merchant accounts often include multi-currency support, global fraud prevention tools, and local acquiring partnerships to improve payment approval rates.

How to Choose a Merchant Account Provider

Businesses should consider:

Transaction Fees & Pricing

Providers charge different transaction fees, monthly fees and hidden charges.

Businesses should compare flat-rate and tiered pricing models to find the most cost-effective solution.

Integration & Compatibility

It is important to ensure that the provider integrates seamlessly with existing eCommerce platforms (e.g. Shopify) or POS systems.

Compatibility with mobile payment apps and invoicing software is also beneficial.

Security & Fraud Protection

Businesses should choose providers that are PCI DSS compliant and offer fraud prevention tools. These features help protect against data breaches and fraudulent transactions.

Customer Support

Reliable 24/7 customer support is essential for addressing payment issues promptly. Providers with live chat and a dedicated account manager can offer better assistance.

Contract Terms

Some providers require long-term contracts with early termination fees, while others offer month-to-month plans.

Payments Made Simple with Cardflo

Cardflo simplifies payment processing with seamless online merchant account integrations for businesses of all sizes. Our payment solutions also provide:

• Fast & secure transactions with real-time authorisation.
• Multi-currency support for global payments.
• Customisable integrations for eCommerce, retail, and subscription businesses.
• Advanced fraud protection to secure your transactions.
• Transparent pricing with no hidden fees.

Whether you're starting out or looking for a better payment processing services solution, Cardflo helps businesses accept payments efficiently and securely. Take the first step towards better payments with Cardfo.