A merchant account is a specific type of bank account that enables your business to receive credit or debit card payments from customers. They are different from standard business bank accounts.
Merchant accounts cannot be “accessed” in the traditional sense - they only accept payments electronically and hold those funds from your customer for a short period before transferring them to your standard business bank account.
The barriers to obtaining a merchant account can be 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.
A payment gateway is a software / service that authenticates the credit or debit card details your customer provides you, when making an online purchase from your business. It can be thought of as the virtual equivalent of a card machine / terminal you might find in a physical shop.
This process involves relaying the transaction details (including the customer’s card details) to your payment processor / acquirer, which reaches your customer’s issuing bank via the relevant card network. The response sent back from the customer’s issuing bank will eventually make its way back through the process to the payment gateway, where the success or failure of the transaction will be made known to both the customer and merchant. (For more details on this process, see 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, including the questions to ask to find the right one for you, take a read of our guide here.
A payment service provider is a company that helps businesses accept payments. 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.
‘Payment processor’ is a term that is often attributed varying definitions. Within this guide, we use ‘payment processor’ to mean the facility of an acquirer which transfers transaction details to the relevant card association. (Learn more about the card payment process earlier in this guide.)
In other contexts, you may see the term used interchangeably with ‘acquirer’ (A.K.A. ‘acquiring bank’ or ‘merchant bank’) 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.‹ View table of contents Next page ›