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What is a merchant account?

A merchant account is your golden ticket to accepting card payments. This is our jargon-busting guide to help you pick the best merchant account for your business

A merchant account is essential if you are ready to start processing card payments, whether that's in person, over the phone or online.

In 2017, debit cards were the most used payment method in the UK, with 13.2 billion payments made in this way.

By 2027, it’s projected that card payments will represent 58% of all payments, according to the UK Card Payments 2018 report published by UK Finance.

Merchant account services open your doors to the increasingly cashless customers in the UK today, whilst protecting you from card fraud.

But are you even eligible? What if you have bad credit? And how do you get a merchant account? We address some of the most common concerns you may have about this type of account.

Here we break down merchant accounts for small business owners, how they work, and tell you everything you need to know, so you can stand the best chance of being accepted for one.

Or. to compare quotes and pricing directly from merchant accounts suppliers, tell us your requirements so we can match you with suppliers that make sense for your business.

What is a merchant account?

A merchant account is a type of bank account that allows you to accept credit or debit card payments.

Is a merchant account just a business bank account, then? Not exactly – you will need a merchant account to be able to process card payments, but it's your choice whether you have a business account or not.

A merchant account is the holding or current account that lets you process card payments. You can think of your merchant account service like a holding pen for your money once it's been processed by the bank.

How do merchant accounts work?

Merchant accounts automatically process your card transactions, takes a small cut, then deposits in your bank account your earnings from the sale.

Every time you make a sale, the money doesn't pass straight into your bank account – it first needs to be authorised (by your customers' bank) and processed (by your merchant account).

There are a few steps in place to protect you from card fraud, and check the customer has the funds to pay you. Once your customers' card payments are checked, the money gets sent to your merchant account.

There is then a short settlement time for the funds to reach your account – usually one to three working days – but with some credit card processing companies like PayPal, it can be instant.

This infographic explains the four steps in processing a credit card transaction (using Worldpay as an example merchant account):

how a merchant account works

Merchant account fees

Merchant account fees include one-time fees, monthly fees, transaction fees, and discount fees – all depending on your contract.

Calculating how much it will cost to process credit card payments means adding the card machine price to the credit card processing fees – and there's more to these costs than meets the eye.

Merchant accounts fees vary according to your business. Shops will need to fork out for a physical card reader, for example, while ecommerce businesses will get an online payment gateway on board – and not all of these charges will always apply.

Here are the merchant account costs you may face:

  • Card machine price – The cost of the terminal used to enter the card
  • Payment gateway – An online service that authorises e-commerce payments
  • Interchange fee – The bank charge for processing the transaction
  • Authorisation fee – A fee for the card-issuing bank (e.g. Visa)
  • Transaction fee – The charge once the payment is authorised
  • Monthly minimum fee – The minimum amount paid each month if base costs aren't covered by sales
  • Early termination fee – An optional charge in some lock-in contracts
  • Chargeback fee – Usually £10 to £15 for any disputed charges

We know it can be tough to get your head round all the charges involved in processing card payments. To help you work out which merchant account fees are likely to hit your small business, we've made an interactive calculator for our readers. See below.

Calculate your merchant account costs

Estimate your merchant account or card processing fees here

Merchant account types

There are three types of merchant accounts: aggregate merchant accounts, ISO merchant accounts, and high risk merchant accounts. Aggregate accounts are the most common for small businesses.

merchant account types

Aggregate merchant accounts

Aggregate accounts are a popular option for small businesses, as they often have no set-up or monthly fees – you're only charged when you make a sale.

Aggregate merchant accounts are also called payment service providers or payment facilitators – and that's just what they do.

These accounts pool the funds of multiple merchants (just like you) together, so you become sub merchants to a company acting as the main merchant – just like subleasing a property.

Your business gets a code based on your industry, and you're matched with similar businesses. But don't worry, their credit score or charges won't affect yours – this group will just help you all get a better rate than going it alone.

By joining a shared merchant account, small businesses can enjoy the lower merchant fees that are usually only available to larger companies who can more easily prove their salt.

Examples of aggregate merchant account providers:

ISO merchant accounts

Your second option is to get a dedicated merchant account from an independent sales organisation (ISO).

With an ISO merchant account, you're the only merchant, so you can get a more flexible contract with all the perks you need.

But dedicated merchant account contracts generally carry set-up and monthly fees, so are only really a good idea for businesses with supercharged sales volumes.

Card processing companies set the thresholds for ISO merchant accounts, which are:

  • Visa – £80,000
  • MasterCard – £800,000
  • American Express (Amex) – £400,000

So, unless you're hovering around these annual figures, you'll probably want an aggregate merchant account, or even a high risk merchant account.

Examples of ISO merchant account providers:

High risk merchant accounts

Can you get a merchant account with bad credit? Yes, if you go for a high risk merchant account.

High risk merchant accounts can be a lifesaver for small business owners, even if you have a good credit score yourself.

You might be surprised by the variety of businesses that are considered high risk, such as:

  • Travel – Where there are often cancellations
  • Subscription services – Where it can be tough to guarantee cashflow
  • Online healthcare – Where there is a greater risk of fraud

Opting for a high risk merchant account is a legitimate decision that may have more to do with the industry you are in than your own risk factor.

To see if your business may be high risk, take a closer look at high risk merchant accounts here.

Examples of high risk merchant account providers:

  • Instabill
  • Verotel
  • Durango
  • eMerchantBroker

negotiate merchant account

You can often negotiate better merchant account fees as your sales grow

Examples of top internet merchant account providers

Here's a quick rundown of some of the leading merchant accounts providers for UK businesses:

  • PayPal – great for Instant settlement times, good brand recognition
  • Worldpay – great for brand familiarity, being one the UK's largest and leading merchant service providers
  • Payzone – great for add-on payment services and offering shorter contracts
  • Payment Sense – great for services focused on small business and customer service
  • Barclaycard – great for catering to broad range of small businesses and ease of use
  • Elavon – great for reporting and analytics of sales and revenue
  • RMS – great for new and smaller businesses, and has an excellent Trustpilot rating
  • First Data – great for medium, more established businesses and ecommerce solutions

How do you get a merchant account?

A positive credit rating is rule number one in getting your hands on a merchant account, but even businesses in high risk industries or merchants with poor credit can be eligible.

Merchant account providers – whether a bank (like Lloyds) or an independent sales organisation (such as Payzone) – consider three main factors when approving you for their merchant account service:

  • Your business' age – The longer you've been in business, the more you understand the risks involved in accepting credit card transactions
  • Your credit history – Your credit report shows how you have managed repaying loans in the past, and whether you have defaulted
  • Any previous merchant accounts – Positive past experiences of using a merchant account makes you easier to trust

To help give yourself the highest chance of being accepted for a merchant account, your best bet is to work on your credit rating.

If you’re a start-up and you’ve just started trading, you may be wondering how to get a good credit rating.

In this instance, it’s likely that your personal finances as a business owner could be taken into account when your business’ is being assessed, so check that these are in order.

In addition, ensure that your business’ information and records are up-to-date and that your business meets the deadlines for returns and payments.

Are you eligible for a merchant account?

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, who can have any resolved blotches removed from your record to boost your credit rating.

Even if you have a few black marks on your credit report, it may still be possible to get a merchant account – and it's well worth it, so you can give your customers as many ways to pay as possible.

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.

How to get merchant status

The main high street banks offer pretty much uniform services in terms of getting merchant status: NatWest’s Streamline and Barclays’ PDQ, for example, all work in the same way. To apply get in touch with your business bank.

A NatWest spokesman confirms that the process can take up to two weeks and contrary to popular belief, you don’t need masses of trading history to get your machine. “For a start-up we’d want to see the business plan; if longer-established businesses have three years’ accounts then we’ll look at them, but if for some reason they don’t then we’ll look at projections.”

Which payment cards should you accept?

The next decision to make is which credit cards you need to accept. The packages available are:

  • Block acceptance of Visa, Mastercard, Switch, Solo, JCB and Connect
  • American Express
  • Diners Club and other specialist offerings

The first of the above is the simplest to apply for – the bank at which you hold your business account will almost certainly be able to help, unless it’s one of the smaller, specialist banks that offer interest but fewer services on business accounts.

Card fraud: What does it mean for businesses?

Of course that doesn’t mean acceptance is automatic. If you are in a high-risk business then the credit card company will use various means to ensure that fraud is kept to a minimum.

The most controversial method is chargebacks. If the card is found to be fraudulent then the money paid by the credit card company will be taken back from the merchant. The chargebacks can happen anytime up to six months after the transaction has taken place and it’s then up to the merchant to recover the fraudulently purchased goods.

If you can trace the miscreant and it’s in the UK then you stand a chance of recovering the money; however, if it’s abroad then you stand no chance, and you’ll pay for the goods and pay a chargeback fee from the credit card merchant.

A spokesman pointed to travel agents that aren’t registered with ABTA (the Association of British Travel Agents), for example: “If the worst case scenario happens and someone gets to the airport and finds their tickets and bookings are not valid for some reason, we could be involved in paying people back so we’d have to look at that business.”

Electrical suppliers offering extremely long warranties would be another area of concern, he says. The other likely exclusions would be for anything illegal, of course.

The bank at which you hold your business account will almost certainly be able to help.

What are the next steps?

By reading this guide, you’ve learned more about what a merchant account is and how to get one, as well the different types available and which might be best for your business.

From here, you can read more about small business credit card machines.

Alternatively, to compare quotes for merchant account providers, simply complete the form at the top of the page.

Bryn Glover
Bryn Glover


As Editor of Startups, Bryn runs content strategy and our annual campaigns. A lover of small business, you can find him writing about exciting entrepreneurs and UK industry trends.

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