Last editedMar 20226 min read
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They cannot be deposited into, or withdrawn from, by the business whose name the account is in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:
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.
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