Skip to content

A guide to merchant accounts for small businesses

Written by

Last editedApr 20235 min read

A merchant account is used to hold funds from debit and credit card purchases while banks check there is enough money in the customer's account to cover the card payment.

The merchant does not have direct access to this account, instead, once the customer’s bank has confirmed that funds are present to cover the card payment, those funds are then released from your merchant account into your business bank account. 

Merchant Accounts

Payments are a difficult area of business to get to grips with, particularly when you’re in the early stages of starting a company. After you’ve set up a business bank account, it’s a good idea to set up a merchant account as well.


Because without access to some form of merchant account, you may not be able to receive payment by credit or debit card.

But what exactly is a merchant account, how do they work, and do you really need one? Find out everything you need to know with our guide to merchant accounts for small business owners.

How to collect payments with GoCardless


Create your free GoCardless account, access your user-friendly payments dashboard & connect your accounting software (if you use one).


Easily set up & schedule one-off or recurring payments via payment pages on your website checkout or secure payment links.


From now on you'll get paid on time, every time, as GoCardless automatically collects payment on the scheduled date. Simple.

Get started in minutesLearn more

What is a merchant account?

A merchant account is an account into which funds from debit and credit card purchases are transferred after processing. It’s a very important part of the payments process, along with payment gateways and payment processors.

While you own the account, you won’t have direct access to it. Instead, the funds in your merchant account are automatically transferred to your business banking account once the customer’s bank has confirmed that the funds are present. This usually takes 1- 2 business days but can take up to 7 days in certain circumstances.

So, why should you open a merchant account when you can’t access the money directly?

It’s simple. Without some form of merchant account, you won’t be able to receive payment from your customers via credit card or debit card. 

Whilst there are disadvantages to accepting card payments, American consumers are frequent credit card users, so it’s important to be able to accept credit and debit cards as one of your payment options. 

Why do I need to set up a merchant account for small businesses?

As a small business owner, you should try to accept as many forms of payment as possible. If you only accept one form of payment - e.g. only cash, only checks, only cards - you will end up turning away potential customers. 

With a merchant account, you’ll be able to accept online credit and debit card transactions and in-house card payments. Plus, merchant accounts offer additional features that can help you get started when running a small business, such as check processing services or online reporting features. In addition, there are merchant accounts that offer services to ensure your account remains PCI DSS compliant, helping you keep your customers’ transaction data safe and secure.  

How to set up a merchant account for small businesses

It is not difficult to open a merchant account but be sure to research who is the best provider for your small business. Each provider will have its own features, pricing schedules, and contract terms. Make sure you pay attention to how much you will be charged and compare the services offered by different providers.

Once you’ve chosen your provider, it’s time to actually create your merchant account. You will need to provide your business name, contact information, and tax information, as well as your routing and account numbers for the business bank account where you want to accept your deposits.

How do merchant accounts work?

After you’ve signed up for a merchant account, you can start using it to take payments by credit and debit card. Here’s a step-by-step guide to what you can expect:

  1. Taking payment – For in-house payments, you’ll need to use a card reader, which is generally provided by your payment processor. If you’re selling online, customers will simply need to submit their card details.

  2. Processing payment – After payment has been accepted, the customer’s card details are sent from the card reader to the payment gateway before they are forwarded to the payment processor. Then, the information is sent to the card network before it’s forwarded to the customer’s bank. Assuming sufficient funds are contained in the account, the transaction is authorized, and a confirmation is sent back to the card reader.

  3. Receiving payment – This is where the merchant account comes in. The customer’s bank will deposit the funds here, where they’ll wait before being sent to your business bank account. There’s usually a downtime of around 24 hours to seven days (known as the “settlement period”).

Merchant account - who needs one?

You will need access to merchant account services in order to accept payment by credit and debit cards. If you have a brick-and-mortar business, you will also need a card reader to accept in-person payments. If you are doing business online, online payment processors such as PayPal or a card specialist like Stripe provide aggregated merchant services - they take care of the whole process on your behalf under one roof.

Whether you decide upon a traditional dedicated merchant account or an aggregated all-in-one service will depend on business requirements and the volume of transactions.

For a low volume of transactions, the hassle and costs of setting up a dedicated merchant account may not be worth it, and aggregated services may be an easier and ultimately cheaper option.

What you need to know about card payments

Although cards are a popular payment method, they present several problems for small businesses.


Firstly, accepting card payments is relatively expensive - it is a complicated process with several intermediaries involved, each of whom takes a cut of the transaction.

Here are some of the costs associated with accepting card payments that you will need to research and consider:

  • Card transaction fee

  • Authorisation fee

  • Card terminal rental fee

  • Payment gateway fee

  • Virtual terminal fee

  • Monthly service charge

  • One-off set-up fee

  • PCI compliance fee

  • Early contract termination fee

  • Merchant account fees 

Payment failure

Secondly, cards get lost, expired and cancelled, leading to failed payments and involuntary churn - the loss of customers, not because they no longer require the service but because their card payment failed.

Time-consuming admin

Furthermore, card payments offer little visibility on payment status and require a lot of manual accounting admin. In particular, failed payments require chasing and manual reconciliation, which takes up valuable working time.

Expanding your payment mix

While cards are popular with consumers, as we have seen, they are not ideal for businesses due to:

  • high costs

  • high payment failure rates

  • high level of manual admin

It’s sensible to offer customers several payment options, both to give them a choice and so the business can access any benefits one payment method has over another. 

Bank payment methods, such as ACH Debit, are a good option for businesses that do not need instant payment because they are cheap, secure and reliable. 

ACH Debit

ACH Debit is a direct account-to-account payment method that is affordable, has high success rates (95%+ compared to 80% - 90% for cards), and is less susceptible to fraud. Additionally, with GoCardless, payment collection can be automated, as can much financial admin, saving businesses time and money in the process. 

Adding ACH Debit to your payment options is quick and cost-effective with GoCardless - can still accept card payments, but every customer that chooses ACH Debit saves you money on transaction fees and time on payment admin.

Learn how ACH Debit via GoCardless is more affordable, more secure and collects payments more reliably than credit and debit cards.

Merchant accounts for international transactions

If your small business has one eye on global expansion, you will need to be able to accept international payments, so you may want to consider opening an international merchant account. This will allow you to accept credit and debit card payments from customers worldwide. 

While the same drawbacks apply in terms of cost, payment failure and security when accepting card payments internationally, there is not such a strong preference for card payments in other countries as global customers are typically more drawn to bank payment methods like ACH Debit. 

GoCardless offers easy and affordable cross-border payments covering over 30 countries and major currencies such as Sterling, US Dollars, Australian Dollars and Euros

GoCardless can help with payment processing

GoCardless offers businesses an affordable and secure way of collecting payments that enjoys a high payment success rate, significantly reduces failed payments and allows you to retain more customers.

Adding GoCardless to your payment mix also helps you automate payment collection and bank reconciliation, cutting down the amount of financial admin your team needs to deal with.

Learn more about how GoCardless can save you time and money on payment collection.

Case Study: How PremierePC saves over $14k annually with GoCardless

PremierePC used to collect over 85% of their payments via credit cards, which meant hefty processing fees.

Switching to collecting payments through ACH Debit via GoCardless was simple and allowed the company to reduce payment collection fees by 85% and save around $1200 every month.

GoCardless and ACH Debit: an easy, secure & affordable way to collect payments online.

Get StartedLearn More

Interested in automating the way you get paid? GoCardless can help
Interested in automating the way you get paid? GoCardless can help

Interested in automating the way you get paid? GoCardless can help

Contact sales

Try a better way to collect payments, with GoCardless. It's free to get started.

Try a better way to collect payments

Learn moreSign up