Online payments: Key terms & FAQs

What is a merchant account?

A merchant account typically refers to one of two special types of bank account businesses use to accept payment from their customers.

Merchant accounts in card payments

Within the area of card payments, a merchant account allows businesses to receive payments from credit cards and debit cards.

This is only a generalised definition - merchant account is not a universal technical legal term, and despite being used in card networks’ rulebooks (see Visa’s core rules here and Mastercard’s rules here), is also not explicitly defined by them either. As such, different organisations may interpret the term merchant account differently. This is worth keeping in mind wherever you see the term being used.

With that in mind, the general defining traits of merchant accounts tend to be:

• They are not the same financial product as a regular business bank account

• They cannot be deposited into, or withdrawn from, by the business whose name the account is in

• They accept payments electronically, holding the funds typically for a few days before transferring them to the business’ regular bank account

But why can’t a card payment be made directly into a business’ regular bank account? Why have merchant accounts at all?

Put simply, by holding the funds for a short period, merchant accounts help reduce fraud. When a transaction is disputed by a customer - known in card payment terms as a chargeback - the funds transferred to the merchant need to be returned. Without merchant accounts, there are two primary fraud risks:

1. The merchant doesn’t want to give the money back - If a merchant hasn’t fully delivered on the promised product or service, their customer deserves the right to a refund. However, once those funds are in the merchant’s hands, the customer has no power to have them returned.

2. The merchant is a fraud - If a merchant is intending to defraud customers by selling a product or service they have no intention of delivering on, once they have the funds in their bank account, they can just pack up and run.

Within the world of card payments, an acquirer is responsible to the card network for the behaviour of its merchants. So in the above two cases, the merchant’s acquirer is bearing the financial risk of the chargeback. With merchant accounts acting as holding accounts for funds, acquirers are able to freeze funds or return them (via the card network) to the customer where necessary, reducing their risk.

Traditionally, the only way for businesses to open a merchant account would be directly via their bank. The barriers to obtaining a merchant account this way were, and largely still are, high. You need to prove you have significant capital, a solid business plan, and a professional online presence. Your bank may require a substantial bond to set one up for you, and the whole process could take several weeks.

Today, a wide variety of payment service providers (PSPs) provide merchant accounts of their own, or have relationships with banks that enable them to help businesses open a merchant account with a bank. The notable advantages for businesses taking this route are:

• It’s cheaper to get started - For newer or smaller businesses who don’t have the capital to secure a merchant account directly from a bank, PSPs can offer a cheaper path.

• Convenience - PSPs often bundle together various payment services a business would require, making using them a quicker and easier path to get started accepting payments.

Merchant accounts in Direct Debit

Like with card payments, merchant account is not a technical legal term within the area of Direct Debit, and the rules governing each of the different Direct Debit schemes around the world may not make use of the term at all. As such, different organisations are likely to use and interpret merchant account differently, and this is worth keeping in mind when you see it being used.

Typical definitions of merchant account include:

• The regular bank account a business holds (Note: This is in direct contrast to how this term is used in card payments, where a merchant account is a distinctly different financial product to a regular bank account)

• A virtual holding account where a Direct Debit provider (i.e. a PSP which provides Direct Debit services to businesses) temporarily holds funds from the customer before transferring them to the business’ regular bank account

As a Direct Debit provider, here at GoCardless we use merchant account to mean the latter definition.

But again, why are these kind of merchant accounts required? As part of Direct Debit payment flows, there can be a period of multiple days between funds being credited to the Direct Debit provider and notification of payment failure (which would result in that credit needing to be reversed). Therefore, to accommodate for the possibility of payment failure, Direct Debit providers need to hold the funds until they are cleared, after which they will transfer them to the merchant’s regular bank account.

Interested in learning more about Direct Debit timings? Check out our guidance on each region below:

• 🇬🇧Direct Debit timings in the UK (Bacs)

• 💶 Direct Debit timings in Europe (SEPA)

• 🇩🇰Direct Debit timings in Denmark (Betalingsservice)

• 🇸🇪 Direct Debit timings in Sweden (Autogiro)

• 🇺🇸Direct Debit timings in the US (ACH)

• 🇨🇦Direct Debit timings in Canada (PAD)

• 🇦🇺 Direct Debit timings in Australia (BECS)

• 🇳🇿Direct Debit timings in New Zealand (BECS)

What is a payment gateway?

A payment gateway is a software that is involved in processing of payments made by credit card or debit card. As with the term merchant account, payment gateway is not a universal technical legal term, and although you might see it being used by card networks like Visa or Mastercard, is also not explicitly defined by them either. As such, different organisations may interpret the term payment gateway differently. This is worth keeping in mind wherever you see the term being used.

Within the online card payment process, a payment gateway links the merchant’s website (where the customer makes their purchase) to the payment processor / acquirer. When the customer enters their card details into the merchant’s website during checkout, the payment gateway securely transfers them, along with the rest of the information about the transaction, to the payment processor / acquirer. From there, the transaction information makes its way through the relevant card network to the customer’s issuing bank. The response from the customer’s issuing bank makes its way back via that same path, eventually reaching the payment gateway again, where both the customer and the merchant are informed of whether the transaction is a success or not. (For more details on this process, see how online payments via credit or debit card work, earlier in this guide.)

Companies such as Authorize.net and Payment Express provide the services of a payment gateway.

Before applying for a payment gateway, you'll typically need an approved merchant account first. Some providers of payment gateways will help you apply for one. If you’d like to learn more about payment gateways, check out the 10 questions to find the right payment gateway for you.

What is a payment service provider?

A payment service provider (PSP) is a company that helps businesses accept payments. Although the term is relevant within the area of card payments (although it is not specific only to card payments), neither Visa or Mastercard explicitly define the term in their rules. In the UK, the term payment service provider is legally defined within The Payment Services Regulations.

In the context of online payments, payment service providers offer businesses various bundled services required to accept payments online - for example, both merchant account and payment gateway facilities. As these facilities can have high barriers to entry for smaller businesses, payment service providers - in a broader sense - help reduce the barriers for businesses to accept payments.

Companies such as PayPal and Adyen are payment service providers.

Credit and debit card payments aren’t the only payment methods that payment service providers can handle. They often handle a variety of methods, including Direct Debit and bank transfers, all channelled into the same account for the business. They also tend to offer additional services such as fraud protection.

What is a payment processor?

A payment processor is the facility of an acquirer which transfers transaction details, provided by a merchant through their payment gateway, to the relevant card association (e.g. Visa, Mastercard). (See how online payments via credit or debit card work, earlier in this guide.)

As with the terms merchant account and payment gateway, payment processor is not a universal technical legal term, nor is it explicitly defined by card networks such as Visa and Mastercard. As such, different organisations may use the term payment processor differently, and this is worth keeping in mind wherever you see the term being used.

Commonly, you may see payment processor used interchangeably with acquirer or payment service provider.

How do I set up recurring payments online?

The two most popular payment methods to set up recurring payments or subscription payments online are Direct Debit and credit / debit card.

Similar to how businesses can try setting up their own merchant account and payment gateway, or they can engage the services of a payment service provider, they can also try accessing Direct Debit schemes themselves or engage the services of a Direct Debit provider or Direct Debit bureau.

The advantages and disadvantages of Direct Debit versus credit / debit cards in taking recurring payments online are explored later in this guide.

What is a continuous payment authority?

A continuous payment authority (CPA) is permission from a customer for a business to take recurring payments from them via credit or debit card. They may also be referred to as a ‘continuous payment transaction’, ‘regular card payments’, or simply ‘recurring payments’.

Although similar to Direct Debit and standing orders - the other primary methods of taking recurring payments - CPAs have one critical difference. CPAs are an instruction directly from the customer to the business, whereas Direct Debit and standing orders are an instruction from the customer to their bank. This gives the business more flexibility in taking payments, allowing them to charge fixed or varying amounts, and not requiring them to specify the date they’re going to take payment.

It’s worth noting while this can be seen as advantageous for many businesses, it is possible customers may see CPAs as a lack of control or confidence from their point of view. For more info on CPAs, from both a merchant and a customer perspective, see our guide on recurring card payments.

Alternative payments terminology

While this guide explores some of the most common online payments terminology you’re likely to come across, there are a number of lesser-used, alternative terms out there that may cause confusion. We break down what these mean below.