Merchant Accounts For Small Businesses Explained

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A merchant account is the holding or current account that lets your business process card payments.

Having a merchant account is essential if you want your business to start processing card payments, and with so many providers available to choose from, it can be difficult to find the cheapest, most suitable merchant account for your business needs.

If you’re just getting started, then you may have concerns, like are you even eligible? What if you have bad credit? And how do you get a merchant account for your business?

Below, we address all your concerns by breaking down merchant accounts for small business owners, how they work, and informing you of everything you need to know so you can stand the best chance of being accepted for an account.

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Key takeaways

Merchant accounts allow your business to accept and process payments from debit cards, credit cards and contactless payments.
The main fees you’ll encounter are transaction fees, recurring & scheduled fees, and incidental & penalty fees.
The four types of merchant accounts are aggregators, ISO merchant accounts, high-risk merchant accounts, and internet merchant accounts.
While aggregators give you instant approval, dedicated merchant accounts can take days or even weeks to set up.
To get approved for a merchant account, you must have a regulatory status, low financial risk, operational legitimacy, and be fully registered in the UK.

What is a merchant account?

A merchant account is a specialised business account that allows you to accept and process electronic debit and credit cards, as well as contactless payments.

When a customer uses their card to pay, the money doesn’t go straight into your regular business account. Instead, it temporarily sits in the merchant’s account while the payment gateway verifies and processes the transaction.

Once everything clears, the funds are automatically transferred to your business bank account. This usually takes around 1-2 business days, but with some providers – such as PayPal – it can be instant.

Source: Startups

Cash dominates the high street today, but faces a steep decline

A report by LINK found that 46% of in-person transactions are still cash-based, particularly in independent retail, cafes and pubs, convenience stores and launderettes.

However, cash usage is still expected to decline over the next few years, as UK Finance predicts it will decline and account for only 4% of all UK payments in 2034.

Merchant account fees

Merchant account fees are the costs a business has to pay to payment processors, banks, and credit card companies to accept electronic payments.

Here’s a breakdown of the three main merchant account fees you’ll encounter:

1. Transaction fees

Each time a customer uses their card, you’ll pay a fee. This is usually a percentage of the sale, as well as a per-transaction charge (1.5% + 20p, for example). Transaction fees are actually made up of three parts, which are:

Interchange fee: the percentage that goes directly to the card-issuing bank (such as HSBC or Barclays)
Assessment fee: a small percentage that goes directly to the card network (like Visa or Mastercard)
Processor markup: the cut taken by your merchant account provider for facilitating the transaction

2. Recurring and scheduled fees

Recurring and scheduled fees refer to the flat costs of keeping your merchant account active and your hardware running, regardless of how many sales you make. These include:

Monthly statement/service fee: a monthly fee (usually £10-£30) for account maintenance and customer support
Terminal rental: if you have a physical retail store, you’ll pay a monthly lease for the card machine hardware.
PCI compliance fee: a fee that’s charged to ensure your business complies with Payment Card Industry data security standards.

3. Incidental and penalty fees

Incidental and penalty fees are charges that only apply under specific circumstances. For example:

Chargeback fee: if a customer disputes a charge and their bank forces a reversal, you will be hit with a penalty fee (usually £15-£25 per instance) to cover the administration costs
Minimum monthly fee: some providers require you to hit a minimum amount of transaction volume each month, and if you don’t, they’ll charge a top-up fee to meet that minimum threshold

For more information on this, you can visit our page on the best payment gateways.

What are merchant accounts really costing you? The complete fee breakdown

There are many merchant account costs your business may face, and it can be tough to get your head around all the charges involved.

To help, we’ve published an extensive guide to merchant account and credit card processing fees so you can calculate how they may impact your business.

Merchant account types

There are four types of merchant accounts – aggregate merchant accounts, ISO merchant accounts, high-risk merchant accounts, and internet merchant accounts. Here’s a breakdown of each one, what they entail, and their pros and cons.

Aggregate merchant accounts

An aggregate merchant account – or more commonly known as a payment aggregator or Merchant Service Provider – is a setup where multiple separate businesses process their credit and debit card transactions under a single merchant account.

Instead of getting your own dedicated merchant account from a bank, you essentially “rent” a piece of a large master account owned by a third-party company.

Some famous examples of an aggregate merchant account include PayPal, Square, Stripe, and SumUp.

Pros of aggregate merchant accounts

Instant setup, as you're onboarding onto an existing account
No monthly fees, as most providers operate on a pay-as-you-go model
You usually pay one fixed percentage per transaction

Cons of aggregate merchant accounts

Lower transaction limits, which isn't ideal for scaling businesses
Highly sensitive security systems, which could lead to account freezes or holds
Heavily automated customer support, making it difficult to speak to a human

ISO merchant accounts

An ISO merchant account is a dedicated merchant account provided by an Independent Sales Organisation (ISO).

ISOs are third-party companies that act as official brokers for major banks like Barclays and NatWest. As banks aren’t set up to efficiently handle customer service and sales for thousands of businesses, they partner with ISOs (such as Worldpay and Clover) to manage merchant accounts on their behalf.

With an ISO merchant account, you get your own dedicated Merchant ID (MID), meaning your business has its own direct relationship with the payment processing network.

Pros of ISO merchant accounts

Offer tailored and cheaper rates for high volume transactions (unlike aggregators that charge a flat rate)
As ISOs approve your account before starting, the risk of sudden account freezes or fund holds is incredibly low
Dedicated human support, such as your own account manager or direct customer phone line

Cons of ISO merchant accounts

Longer setup time, as approval can take from a few days to a couple of weeks
ISO accounts often come with terms and may charge early termination fees if you leave
Even if you make zero sales, you'll still be charged fix monthly overheads

High-risk merchant accounts

A high-risk merchant account is a specialised payment processing account made for businesses that banks and credit card networks consider to have a high risk of financial loss, legal issues, or fraud.

If a traditional bank or standard provider believes your business has a high probability of generating chargebacks, you won’t be able to get a standard account. Instead, you would have to use a specialised high-risk provider.

Businesses considered to be “high risk” are:

Travel & hospitality: airlines, cruise lines, and tour agencies (services are paid for far in advance, leaving a large window for cancellations and business bankruptcy)
Regulated goods: CBD products, e-cigarettes/vape shops, alcohol, and firearms.
Entertainment & gaming: online gambling, casinos, adult entertainment, and dating apps.
Subscription models: monthly subscription boxes or SaaS software (customers often forget they signed up and file chargebacks rather than cancelling)

To see if your business may be high risk, take a closer look at our in-depth analysis of high-risk merchant accounts.

Pros of high-risk merchant accounts

As high-risk processers expect volatility, your account is stable nd won't be randomly terminated over a few disputes
Often allow chargeback ratios of 2%-5% before taking disciplinary action
Provide robust fraud prevention systems, including 3D Secure (3DS2) protocols, AI fraud screening, and chargeback mitigation tools

Cons of high-risk merchant accounts

Have much higher transaction fees, which can be from 3.5% to 6%+ per transaction
The processor will hold a percentage of your gross sales in a secure holding account for a rolling period (usually 90-180 days) before releasing it to you
Usually have longer settlement periods (often 7-14 days)

Internet merchant accounts

An internet merchant account (IMA) – also known as an ecommerce merchant account – is a business bank account designed specifically for processing online transactions.

Unlike a standard retail merchant account, which handles card payments that are physically tapped, swiped or inserted into a reader, an internet merchant account handles Card-Not-Present (CNP) payments over the web.

You can get an internet merchant account either through an all-in-one provider (such as Stripe, PayPal, and Shopify Payments) or a traditional high street bank or ISO and connect it to a separate gateway (like Authorize.net or Opayo).

Pros of internet merchant accounts

Allows your website to accept payments from all over the world 24/7
Lets you easily plug in multiple digital payment methods at checkout, including Apple Pay, Google Pay, Klarna, and PayPal
Advanced ecommerce fraud protection, like Address Verification Systems (AVS), CVV checks, and 3D Secure 2 (3DS2) protocols

Cons of internet merchant accounts

Higher transaction fees, as CNP transactions are riskier for banks
More vulnerable to "friendly fraud" chargebacks, with a high number of these leading to penalisation or account shut down
If you experience technical problems (like your payment gateway crashing), your ability to take money stops

The best merchant account providers for your business

For support with finding a merchant account that suits your business’s needs, we also have a detailed review of the best merchant account services and credit card processing companies in the UK.

How do you get a merchant account?

The exact steps of getting a merchant account depend on whether you choose an all-in-one aggregator (like Stripe or Square) or a traditional dedicated account through a bank or ISO. Either way, here are the typical steps involved in obtaining a merchant account.

1. Choose the right kind of provider

First, you’ll need to decide which model best fits your business size and sales volume. Here’s how you should decide:

Choose an aggregator if you are a startup, small business, or sole trader processing under £5K-£10K a month, as they offer instant approval and no monthly fees.
Choose a dedicated merchant account if you are an established business with high sales volume (over £10k a month) and want lower and tailored transaction rates.

2. Gather your business documents

If you’re applying for a dedicated merchant account, a provider’s underwriting team need to review your business to determine their financial risk. In this case, you will need the following documents ready:

Business identification: your company registration number (if you are a limited company), your Unique Taxpayer Reference (UTR), and business address.
Personal ID: a Government-issued photo ID (like a passport or driver’s licence) for the business owners.
Financial statements: 3-6 months of corporate bank statements and processing history (if you’re switching providers).
Business model details: an estimate of your average transaction size and expected monthly care sales volume.

3. Ensure your business is compliant

For online stores, your website must be fully functional. This means it must clearly display your terms and conditions, return policy, privacy policy, contact details (email and phone), and delivery timeframes.

For physical retail businesses, you may need to provide a photo of your storefront, inventory, or a copy of your commercial lease.

4. Complete underwriting and technical setup

If you’re choosing a dedicated merchant account, the provider’s underwriting team will review your application, which often takes around 2-7 business days.

Once approved, you’ll receive your unique Merchant ID (MID). For physical stores, the provider will ship you your card terminals, which plug into your internet or connect through WiFi/SIM.

For online sales, you’ll receive API keys or a plugin to connect your new payment gateway directly to your website’s checkout page.

After a few test transactions clear successfully, you are officially ready to do business with your new merchant account.

Are you eligible for a merchant account?

To be eligible for a merchant account, you must prove to a payment processor or acquiring bank that your business is legitimate, low-risk, and legally compliant. Here’s a quick breakdown of what makes a business eligible for approval:

Legal and regulatory status: this includes being a legally recognised entity, having a business bank account, and having the right permits if you operate in a regulated industry (like alcohol, CBD, and gaming).
Low financial and credit risk: proof of a strong business credit score or low chargeback history (under 1%).
Operational legitimacy and transparency: a fully live business website, a clear explanation of your products, and your pricing strategy.
Location: your business must be legally registered in the UK, where the payment processor officially operates.

Even if you have a few black marks on your credit report, it may still be possible to get a merchant account.

In these cases, you might face slightly higher charges, but once you have a good track record behind you (and healthy sales), you can always renegotiate your merchant account fees.

Pro tip: improving your credit rating

If you have any past bankruptcies or late payments on your credit report, just write to a credit reporting agency such as TRW Credit Services or Experian, which can have any resolved blotches removed from your record to boost your credit rating.

Are you interested in opening a merchant account?

Merchant accounts allow you take payments in ways that improve efficiency across your business. The best way to find the right deal is to speak to suppliers that understand your needs. We can help with that - simply complete our quick and easy form and we'll connect you with relevant providers.

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Final thoughts

A merchant account is an essential part of accepting card payments, helping businesses process transactions securely before funds are transferred to their bank account.

While the right solution depends on your business model, sales volume and payment channels, understanding the different types of merchant accounts, the costs that come with them, and the approval process will help you make a more informed decision.

In the end, it comes down to comparing providers carefully and choosing a solution that best matches your current needs and future growth plans, as this will help you create a reliable payment experience for customers while supporting your business’s long-term success.

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