Online payments: Key terms & FAQs

Online payments can be a jargon-heavy area. Let's demystify that.


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  • They cannot be deposited into, or withdrawn from, by the business whose name the account is in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

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.

Term Meaning
Aggregator An aggregator is a PSP that offers aggregated merchant accounts to businesses.
Aggregated merchant account An aggregated merchant account is a type of merchant account within card payments. Unlike typical merchant accounts, which are traditionally provided on a one-to-one basis from a bank to a business, aggregated merchant accounts are typically offered by PSPs to businesses on a one-to-many basis. That is, the PSP establishes a single merchant account with a bank and offers its use to many different businesses. This allows PSPs to negotiate competitive rates for smaller businesses which wouldn’t otherwise be available to them.
Card acceptance specialist A card acceptance specialist is an alternative term that may be used to mean payment service provider. They may not offer other payment methods outside of credit and debit cards, however you could expect them to help you with every aspect of taking card payments - from physical card machines through to taking online payments.
Card payment processor A card payment processor is an alternative term that may be used to mean payment service provider. Like a card acceptance specialist, a card payment processor may not offer other payment methods outside of credit and debit cards, and you would expect them to be able to help you with all aspects of taking card payments across in-store, over the phone, and online. This is an especially confusing term, with payment processor on its own often being used to denote several different entities.
Card payment services Card payment services is a term that could be used by payment service providers, who may or may not specialise in card payments, to describe their offering.
Card payment solutions Card payment solutions is a term that could be used by payment service providers, who may or may not specialise in card payments, to describe their offering.
Card processing Card processing is a term that could be used by payment service providers, who may or may not specialise in card payments, to describe their offering.
Card processing solutions Card processing solutions is a term that could be used by payment service providers, who may or may not specialise in card payments, to describe their offering.
Credit card processing provider A credit card processing provider is an alternative term that may be used to mean payment service provider. They may not offer other payment methods outside of credit and debit cards, however you could expect them to help you with every aspect of taking card payments - from physical card machines through to taking online payments.
Dedicated merchant account A dedicated merchant account is a type of merchant account within card payments. These are the traditional type of merchant account - that is, one that a business sets up directly with a bank. While dedicated merchant accounts can have high barriers to set up, larger businesses may be able to negotiate lower fees and shorter payout times compared to establishing a merchant account via a PSP.
E-commerce platform An e-commerce platform is a term that may be used to describe software which enables a business to establish an online presence capable of facilitating sales. You would expect an e-commerce platform to help you with the whole journey to selling online - from setting up a website (possibly from pre-made, customisable templates) through to integrating a payment gateway.
Full-service merchant account provider A full-service merchant account provider is an alternative term that may be used to describe a merchant service provider.
High-risk merchant account A high-risk merchant account is a type of merchant account within card payments. Simply put, these are merchant accounts for businesses that are considered high-risk. Typical criteria used to assess the risk profile of a business include how long it’s been operating, its financial performance, the industry it’s in (gambling, for example, is considered high-risk), and the credit record of owners and directors. While high-risk businesses may be denied merchant accounts from some providers, others that specialise in servicing high-risk businesses do exist.
Independent sales organisation (ISO) An independent sales organisation is an alternative term for a PSP, within the realm of card payments. They are characterised by having relationships with member banks of the card networks, and reselling those banks’ card payment services to businesses.
Independent selling organisation (ISO) An independent selling organisation is an alternative term for a PSP, within the realm of card payments. They are characterised by having relationships with member banks of the card networks, and reselling those banks’ card payment services to businesses.
Internet merchant account (IMA) An internet merchant account is a type of merchant account within the realm of card payments. As the existence of credit cards pre-dates the internet and e-commerce, internet merchant account was likely introduced as a term to specify merchant accounts that enabled businesses to accept card payments online. Today, this could be considered an archaic term. The prevalence of online purchasing means any kind of merchant account is likely to be feature the capabilities of an internet merchant account.
ISO merchant account An ISO merchant account is a type of merchant account within the realm of card payments. Unlike dedicated merchant accounts, where a business establishes one directly through a bank, ISO merchant accounts are those resold by an independent sales organisation (ISO).
Master merchant ID A master merchant ID is the unique identifier for the merchant account an aggregator holds with a bank, within the realm of card payments. Each of the businesses using the aggregator’s services will therefore share this ID, as opposed to having separate, unique IDs.
Member bank A bank that is a member of a card network, such as Visa or Mastercard. With this membership, they are able to act as an issuer and/or acquirer on the card network in question.
Member financial institution A bank or other regular financial institution that is a member of a card network, such as Visa or Mastercard. With this membership, they are able to act as an issuer and/or acquirer on the card network in question.
Member service provider (MSP) A member service provider is an alternative term for a PSP, within the realm of card payments. They are characterised by having relationships with member banks of the card networks, and reselling those banks’ card payment services to businesses.
Merchant account provider A merchant account provider may refer to either a bank or a PSP, which either provides or helps provide, a merchant account to businesses.
Merchant account solutions Merchant account solutions is a term that may be used by merchant service providers to describe their offering.
Merchant ID (MID) A merchant ID is the unique identifier for a merchant account, within the realm of card payments.
Merchant service provider A merchant service provider is a term that may be used to refer to an entity which provides businesses the facilities to accept card payments. You could expect this to include provision of a merchant account, point of sale equipment, payment gateways, and more.
Merchant services Merchant services is a term that may be used by merchant service providers to describe their offering.
Merchant services account A merchant services account is a term that may be used interchangeably with merchant account.
Mobile payments Mobile payments is a term that refers to a wide variety of payments made via a mobile phone. This includes digital wallets designed for mobile phones. When this term is used by a payment service provider to describe the services they offer, it may simply mean offering businesses payment gateways that are accessible via mobile internet browsers.
Omnichannel payments Omnichannel payments is a term that may be used to refer to services provided by a payment service provider (PSP). In these cases, you could expect that the PSP would be able to help your business take payments across any medium - whether in-store, over the phone, or online - and any payment method (including Direct Debit, card payments, bank transfers, and more).
Online merchant account An online payment processor is an alternative term that may be used to mean payment service provider. An online payment processor may help businesses accept various types of payment methods, online. As with the term card payment processor, this can be a confusing term, with payment processor on its own often being used to denote several different entities.
Online payment solution An online payment solution is a term that could be used by payment service providers, which specialise in online payments (and which may refer to themselves as online payment processors), to describe their product or service.
Payment facilitator A payment facilitator is an alternative term that may be used to mean payment service provider. You could expect them to help businesses with a significant amount of the setup involved in taking payments - across many mediums (in-store, over the phone, and online) and via many methods (Direct Debit, credit and debit cards, etc.).
Payment services Payment services is a term that may be used by payment service providers to describe their offering.
Payment solutions Payment solutions is a term that may be used by payment service providers to describe their offering.
Payment solutions specialist A payment solutions specialist is an alternative term that may be used to mean payment service provider. You could expect them to help businesses with a significant amount of the setup involved in taking payments - across many mediums (in-store, over the phone, and online) and via many methods (Direct Debit, credit and debit cards, etc.).
Payments provider A payment provider is an alternative term that may be used to mean payment service provider. You could expect them to help businesses with a significant amount of the setup involved in taking payments - across many mediums (in-store, over the phone, and online) and via many methods (Direct Debit, credit and debit cards, etc.).
Shared merchant account A shared merchant account is a type of merchant account within card payments. Unlike typical merchant accounts, which are traditionally provided on a one-to-one basis from a bank to a business, shared merchant accounts are typically offered by PSPs to businesses on a one-to-many basis. That is, the PSP establishes a single merchant account with a bank and offers its use to many different businesses. This allows PSPs to negotiate competitive rates for smaller businesses which wouldn’t otherwise be available to them.
Sponsor bank A sponsor bank is a bank that is a member of a card network, such as Visa or Mastercard, and which partners with PSPs (i.e. “sponsors” them) to enable them to offer their services (as they may be unable to access the card networks directly).
Sponsoring bank A sponsoring bank is a bank that is a member of a card network, such as Visa or Mastercard, and which partners with PSPs (i.e. “sponsors” them) to enable them to offer their services (as they may be unable to access the card networks directly).
Third party merchant account provider A third party merchant account provider may be used as an alternative term to refer to a payment service provider. Specifically one that has its own merchant account, and which allows a business (or potentially many businesses) to make use of it where that business is unable to meet the requirements of getting its own merchant account.
‹ View table of contents Next page ›

Latest features

When, why & how to use proforma invoices

If the goods or services you deliver are liable to change, proforma invoices could help reduce your admin and create a smoother invoicing process.

Moving to the cloud: A guide for accountancy firms

We spoke to leading accountants about their experience and advice for firms moving to the cloud. This is what they said.

What is invoice factoring and how does it work?

Invoice factoring can boost cash flow and simplify business planning – could it work for you?

View all


Reference guides

View all