Guide
What is a merchant account?
A merchant account is what lets a business accept card payments. Here's who's involved, how it differs from signing up with Stripe or Square, and what a bank checks before opening one.
Key points
- A merchant account is an agreement with an acquiring bank that lets your business accept card payments.
- It isn't a bank account you keep money in. Card sales settle through it and are paid out to your business bank account.
- Stripe, Square and PayPal let you skip opening one by processing under their own accounts.
- Opening a merchant account means underwriting: the bank checks your business, its owners and its risk first.
The short definition
A merchant account is a business's agreement with an acquiring bank, a bank that is a member of the Visa and Mastercard networks, to accept card payments. The bank gives the business a merchant ID, settles its card sales, and pays the money, minus fees, into the business's own bank account.
The acquiring bank also takes a risk: if your business can't cover refunds or chargebacks, the bank owes them to the card networks. That's why it checks your business before opening the account.
Who's involved in a card payment
| Party | What it does |
|---|---|
| Cardholder | Your customer, paying with a card. |
| Issuing bank | The bank that issued the card. It approves or declines each payment and earns interchange. |
| Card network | Visa, Mastercard and others. They set the rules, route the messages and settle money between banks. |
| Acquiring bank | The bank behind your merchant account. It's responsible to the networks for your business. |
| Processor | The technology that carries authorizations and settlement for the acquiring bank. |
| Gateway | The secure link between your checkout and the processor. What a gateway is. |
| ISO or agent | A company that sells and supports merchant accounts for an acquiring bank, registered with the card networks. |
| Payment facilitator | A company that holds one master account with a bank and signs up many businesses under it, such as Stripe or Square. |
Merchant account or payment facilitator?
With a payment facilitator, your business doesn't get its own merchant account. It processes as a "sub-merchant" under the facilitator's account. Both approaches let you accept cards; they differ in how you start and what happens later.
| Question | Your own merchant account | Payment facilitator |
|---|---|---|
| Getting started | Days to weeks, after review | Minutes |
| When the checking happens | Mostly before you start | Mostly after you start |
| Typical pricing | Interchange-plus or a quote | Flat rate |
| Contracts | Sometimes multi-year, with cancellation fees | Usually none |
| Suits | Steady businesses, higher volume, higher-risk categories | New businesses and quick starts |
What underwriting checks
Underwriting is the bank's review of your business. Expect it to look at:
- Identity. Your registration and tax ID (usually an EIN), and every owner with 25% or more. Some providers also check owners' personal credit.
- What you sell. Your website, your products and their claims, your refund policy and how you deliver.
- Your history. Past processing statements, chargeback rates, and whether you're on Mastercard's MATCH list of closed merchant accounts.
- Risk. Your merchant category code, average sale size, how far ahead customers pay, and how much you expect to sell.
The bank may approve you, decline you, or approve you with conditions such as a processing limit or a reserve. Ask for any conditions in writing. Candor's rules set out what is checked and how reserves and holds work.
What a merchant account costs
You pay per payment, plus any fixed fees in your agreement. Common items are a percentage and a per-payment fee, a gateway fee, monthly or statement fees, PCI fees, chargeback fees and sometimes an early-termination fee. Our guide to credit card processing fees explains each part, and the provider comparison lists published prices.
How to get one
- Gather your documents: registration, tax ID, owners' IDs, a bank letter or voided check, and recent processing statements.
- Make sure your website shows prices, a refund policy, terms and contact details.
- Compare providers on effective rate, contract terms, reserves and payout timing.
- Apply, and answer the underwriter's questions quickly and frankly.
- Read the agreement before you sign, especially the parts on reserves, holds, fees and cancellation.
Common questions
Do I need a merchant account to accept cards?
No. A payment facilitator like Stripe or Square lets you accept cards without one. Many businesses move to their own merchant account as they grow, or when they need more predictable terms.
Is a merchant account the same as a business bank account?
No. You still need a business bank account; the merchant account is what pays card sales into it.
What is a MID?
A merchant identification number: the number that identifies your business to the card networks and your acquiring bank.
What is an MCC?
A merchant category code: a four-digit number for your type of business. It affects some interchange rates and which network risk programs apply to you.
What is a high-risk merchant account?
A merchant account for a business in a category with more disputes, fraud or regulation, such as subscriptions with free trials or supplements. How Candor handles higher-risk businesses.
Know the terms before you apply.
Candor publishes what is checked, and how reserves and holds work.