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Updated Apr 04, 2024

Guide to Merchant Accounts

Is your small business ready to accept credit cards? Here is what you need to know about merchant accounts.

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Written By: Jennifer DublinoSenior Writer & Expert on Business Operations
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If you are ready for your small business to accept credit cards, then it is important to understand what merchant accounts are and how they work. Most merchants who accept credit cards have one, although some use payment facilitators ― also called payment aggregators, such as PayPal and Square. These companies place merchants under their master merchant account as submerchants to do their credit card processing. 

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If you are looking for a new credit card processor, check out our best credit card processing picks.

Editor’s note: Looking for the right credit card processor for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

All merchant service providers set up an account for each of their merchants to facilitate payment flow. In addition to enabling your business to accept credit and debit cards, a merchant account may let you accept these other forms of payment:

  • Venmo
  • Apple Pay
  • Google Pay
  • Samsung Pay
  • Automated clearing house (ACH)
  • PayPal
Did You Know?Did you know
You cannot accept credit cards and many other types of payment without either a merchant account with a top merchant services provider or a payment facilitator.

How do merchant accounts work? 

This is how merchant accounts work in the context of credit card transactions:

  1. A consumer offers their card to make a purchase.
  2. The card information is either captured by a physical card reader or point-of-sale (POS) device for an in-person sale. The data is taken by the merchant services provider’s software after the customer enters their information into an online e-commerce payment form or an employee inputs it manually into a web-based virtual terminal software interface for phone or mail sales. 
  3. This card information, plus the purchase amount and merchant identifier, go to the merchant services provider, which sends it to the bank that issued the customers’ card.
  4. The issuing bank looks at the customer’s account to see if there is enough credit or funds to cover the transaction amount. 
  5. If not, the bank sends the processor a message that the transaction is declined. 
  6. If it is approved, the issuing bank transfers the funds to the merchant account where it is held temporarily.
  7. The merchant services provider accumulates the funds from the company’s credit card sales in the merchant account and transfers the balance automatically to the linked bank account every one or two business days.

You can see all of your transactions in the software from the merchant services provider and use it to create sales reports and issue refunds. Some merchant software also enables you to schedule staff, manage inventory and keep customer records.

FYIDid you know
Basic merchant software is usually free but more sophisticated versions might incur an additional monthly fee.

Merchant account fees and rates

All credit card processors charge a rate based on sales volume. This is a percentage of the purchase amount and sometimes a flat amount per transaction. Transaction rates range from 0.5 percent to 5 percent of the purchase amount plus up to 30 cents per transaction.

Some credit card processors also charge a monthly fee, which includes customer service, statements and, sometimes, advanced software or security features, such as Payment Card Industry (PCI) compliance (a security requirement). There are also incidental fees when chargebacks take place.

If you have an in-person business such as a store, restaurant or food truck, you will probably want to get card processing hardware like a mobile card reader, fixed card reader or POS system. These must be purchased, although some credit card processors have special deals for new merchants that eliminate or reduce the cost of a basic card reader. 

How to obtain a merchant account

There are many merchant service providers, including banks and credit unions. See our best picks for merchant service providers for options. To obtain a merchant account, do some research online to find out rates and fees, what is included, the type of hardware available and the types of payments each provider enables you to accept. When you find one that meets your company’s needs, you can apply online. Not all businesses are accepted for a merchant account, here is what most providers look for:

  • Good credit ― both business and personal
  • Established business ― preferably at least three years
  • An existing business bank account
  • A good record with a previous merchant account

Some merchant service providers avoid high-risk accounts, such as cannabis dispensaries, collection agencies and online gambling.

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Learn more about some of the best merchant services providers in our review of Merchant One and review of Payment Depot.

Why should you consider a merchant account for your business? 

While having a merchant account isn’t the only way for a business to accept credit cards, it is the most common way of accepting credit cards and other types of noncash payments. There are several advantages to accepting credit cards. The more you make payments effortless for customers, the better sales you will generate. 

Nearly two-thirds of Americans have at least one credit card, which means fewer and fewer consumers are walking around with cash. This makes credit and debit cards the number one way to make purchases. Another benefit is that most merchant accounts allow you to accept digital wallets like Google Pay, Apple Pay and Samsung Pay as well as ACH payments (electronic checks).

So, let’s say you decide you do want to have your business accept credit cards. Why go with a merchant account rather than an alternative? Here are some reasons:

  • Lower processing fees: Companies that place merchants in a submerchant account typically charge a higher, flat processing rate compared to merchant accounts. This can make a big difference when you have high processing volume.
  • More control over your money: Typically, you will have quicker and more consistent access to your sales revenue with a merchant account with fewer account freezes.
  • Higher transaction limits: If you process a large volume of credit card payments, you may be stymied by low daily or weekly transaction limits with an aggregator, but this is usually not a problem with a merchant account (unless you are showing unusual activity without first notifying the processing company).

Alternatives to merchant accounts

Although a merchant account is an important element in the whole payment process, it is not necessary to have one. Several credit card payment facilitators use a different business model from traditional merchant services companies. Rather than setting up a merchant account for each business, they have one giant merchant account, so your company can be set up as a submerchant under that. All money coming in from the submerchants goes into this account and then is divided up into separate ones for each merchant, which can then be transferred to your company’s bank account.

Here are some advantages and disadvantages to this approach:

Pros of submerchant account

  • It’s easy to get approved, especially if your business is a startup or very small and does not have much credit history.
  • All PCI compliance is taken care of without additional costs.
  • It’s easy to integrate with online platforms, such as shopping carts and marketplaces.
  • There are no monthly fees (this also goes for some merchant service providers).

Cons of submerchant account

  • It has higher transaction rates.
  • It’s more sensitive to potential fraud, which may result in freezes and holds of your funds.
  • It has higher chargeback fees.

Here are some of the major credit card facilitators.


PayPal was the original credit card facilitator and, as the oldest, has some advantages. One of those is that many online platforms already offer PayPal as a payment option. All you have to do is input your PayPal business account information. PayPal also has a huge user group, with more than 430 million active users. Customers with PayPal accounts often prefer it as a payment method. Of course, when you have a PayPal business account, you can accept not only credit and debit cards but also PayPal accounts. For e-commerce, PayPal has an intuitive interface and displays payment buttons for payment types that it knows the customer has, such as Venmo and PayPal.

Another plus is that PayPal credit card processing allows you to accept Venmo, Apple Pay, Google Pay, Samsung Pay and PayPal Credit (Buy Now, Pay Later), making it more convenient for your customers. PayPal is used across the globe in 25 currencies, so it is a good solution for international sales.

On the negative side, PayPal is known for freezing and holding merchant funds whenever it suspects credit card fraud. Its customer service is not rated particularly well, partly because of this issue. Additionally, its rates can be high, especially for online transactions and invoicing. However, its rates through the Zettle program for in-person and multichannel sales are competitive.


Square’s offerings in the credit card processing arena are similar to PayPal’s. Its rates for online sales and other card-not-present transactions are lower than PayPal’s but higher than PayPal Zettle’s. Square has two plans plus a custom-priced plan, all but one of which involves a monthly fee, unlike PayPal, which has no monthly fee.

Square has hundreds of integrations with other platforms and robust software, including industry-specific versions for the complete management of retail and restaurant businesses. E-commerce setup for Square requires a web developer for most companies while PayPal benefits from prebuilt installations with a variety of partners.

Square is much less likely than PayPal to freeze or hold merchant funds, but it refuses service to merchants in a long list of prohibited industries. Learn more in our full review of Square


Stripe is another credit card facilitator, but it is geared toward online sales. It has little software, hardware or support for POS or mobile transactions. It does require a web developer to set it up, so it is not suited for nontechnical entrepreneurs on tight budgets. On the plus side, its security is stellar. Stripe’s rates are comparable to Square’s, without the monthly fee. International transactions incur an extra 1 percent, plus another 1 percent if it is a different currency, so it is not the best choice for international sales. Learn more in our complete review of Stripe.

author image
Written By: Jennifer DublinoSenior Writer & Expert on Business Operations
Jennifer Dublino is an experienced entrepreneur and astute marketing strategist. With over three decades of industry experience, she has been a guiding force for many businesses, offering invaluable expertise in market research, strategic planning, budget allocation, lead generation and beyond. Earlier in her career, Dublino established, nurtured and successfully sold her own marketing firm. Dublino, who has a bachelor's degree in business administration and an MBA in marketing and finance, also served as the chief operating officer of the Scent Marketing Institute, showcasing her ability to navigate diverse sectors within the marketing landscape. Over the years, Dublino has amassed a comprehensive understanding of business operations across a wide array of areas, ranging from credit card processing to compensation management. Her insights and expertise have earned her recognition, with her contributions quoted in reputable publications such as Reuters, Adweek, AdAge and others.
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