Fewer and fewer customers are relying on cash to make payments. In fact, according to estimates, cash will be used in just 9% of purchases by 2028.
The bottom line? Debit cards, credit cards, contactless and smartphone payments have radically changed the way that people purchase goods – both online and in-store. In order to survive the “decline of cash”, every business needs a merchant account.
A merchant account makes it possible to accept customer payments via debit or credit card.
Essentially, a merchant account is an agreement between a company or retailer (that’s you), a merchant bank (your business account) and a payment processor. When a customer buys something from your business via card, the money is first deposited into the merchant account. Then, as frequently as everyday, these funds are transferred to your business bank account.
In short: yes, probably. But it does not have to be a dedicated merchant account.
If you aren’t able to accept card payments, you risk cutting out more than 90% of your potential customer base before the end of the decade.
Those processing relatively small amounts of card payments each month – i.e. those taking less than £2,000 in card payments per month – would probably be better off getting an iZettle or Square card reader, neither of which require you to have a merchant account.
But if your business is taking anything above £2,000 per month via card, you will find that using a merchant account saves on processing fees and allows you to keep more of the money the customer has spent with you.
As for B2B, you won’t get very far at all without a merchant account. Having a merchant account gives you freedom to scale, not to mention the fact that many merchant accounts will happily accept payments in foreign currencies.
To understand the ins and outs of processing payments via a merchant account, we’re going to break it down step by step:
Step 1: A customer buys something from your business using their credit or debit card.
It doesn’t matter how the customer pays, it could be in person, over the phone or online, the process is the same. Let’s say Helen has just popped in on her way to work to buy a latte from your growing chain of coffee houses.
Step 2: You, as the merchant, contact your merchant acquirer (the acquiring bank) for authorisation.
Some merchant account providers, like Worldpay, are also acquirers. Others simply provide a payment gateway and partner with a separate bank that is the acquirer. We’ll assume that in this example the merchant account is with Worldpay. An instant fraud check is carried out on the transaction.
Step 3: The merchant acquirer requests authorisation from the credit card issuer (e.g. Mastercard).
Worldpay would now pass Helen’s details, and the transaction she is requesting, to Mastercard who issued her credit card originally. A second fraud check is carried out in real-time.
Step 4: The credit card issuer then requests authorisation from the customer’s issuing bank (where their account is held).
Because Mastercard only issue cards, Helen’s credit card account will probably belong to one of the high street banks or an independent company like Capital One.
Helen banks with HSBC who also provide her credit account. There is a third and final fraud check. (This is to protect you as a business, and Helen as a customer.)
Step 5: The issuing bank authorises the transaction and send this information to the merchant (that’s you again).
HSBC knows Helen can afford the latte, and is confident the transaction is not fraudulent. So they authorise the purchase and send that information back to you, the merchant.
Step 6: You complete the transaction with your customer
Helen leaves to enjoy her coffee and you move on to serve the next person in line.
Step 7: The issuing bank pays your merchant acquirer’s account the amount the customer spent.
Because Helen is buying on credit card, HSBC will pay the value of the latte to Worldpay, knowing that Helen will pay them back.
Step 8: This amount is passed to you after what is called the ‘processing period’ (normally 1–3 days)
Knowing that HSBC has paid, or will pay them very soon, Worldpay deposit the value of Helen’s latte into your business bank account. The final authorisations and processing between the various banks normally take between 1-3 business days, so this is when you will receive the money for Helen’s latte.
A merchant account is not the only thing you’ll need before you can accept card payments from customers. Remember: your merchant account is what customers pay in to. But you need to give them a way of doing that.
Depending on what type of business you have, and how your customers buy from you, you will need at least one of the following:
We mentioned that a basic card reader might be suitable for businesses processing less than £2,000 per month in card purchases, but for anything above this a merchant account is strongly recommended, and they all offer card machines (also called POS, or point-of-sale machines).
You can purchase a card machine outright or rent them for a monthly fee from your merchant account provider.
For sales made over the phone or by mail, a mail order/telephone order (MOTO) merchant account is required, plus a virtual terminal. The virtual terminal allows you to manually input customer details and request payments without them being present.
If customers want to pay you online, then you need a payment gateway. Most merchant acquirers offer their account holders a payment gateway, as do the big ecommerce names like Amazon and Shopify.
A payment gateway gives customers a secure way to pay for products or services online, with features including pay by link, possible integrations with accounting and CRM software, and the ability to customise and give your customers a great online shopping experience.
Every merchant account comes with fees attached. Here is our breakdown of the average costs for the various services on offer.
|Fee||Typical Cost||Charge Frequency|
|Debit Card Processing||0.5% – 1.5%||Per transaction|
|Credit Card Processing||1% – 3%||Per transaction|
|Authorisation Fee||1p – 3p||Per transaction|
|Card Machine Rental||£15 – £25||Monthly|
|MOTO Virtual Terminal||£10 – £20||Monthly|
|Payment Gateway||£15 – £30||Monthly|
|Minimum Monthly Service Charge (MMSC)*||£10 – £20||Monthly|
|PCI Compliance**||£10 – £20||Monthly|
* this will only apply if you do not process the contractually agreed number of purchases in any given month.
** you don’t have to pay your merchant account provider for PCI compliance as long as you have proof of compliance from elsewhere.
But there are other fees to consider too, like chargeback and interchange fees. Chargeback fees are rare and interchange fees are set by the EU at 0.2% for debit cards and 0.3% for credit cards.
There are 3 main types of merchant account, and they suit different types of businesses.
Larger businesses will find the best rates by opening a dedicated merchant account and negotiating a bespoke pricing structure. Dedicated merchant accounts are available from major merchant acquirers such as Worldpay, Global Payments or Lloyds Bank Cardnet.
So why are dedicated merchant accounts worth the money? Not only do you get exceptional support, but merchant account providers also give you everything else you need to accept card payments including POS machines, virtual terminals and payment gateways. What’s more, the payment period is reliably swift.
Often the best option or smaller businesses, aggregate merchant accounts offer lower rates by pooling (or aggregating) a lot of purchases together, and processing them as one large transaction.
Aggregate merchant accounts are offered by payment facilitators (payfacs) like like Sqaure or Zettle which are often better choices for business with a relatively low level of card transactions per month. Transactions will be processed along with those from other businesses with the same code.
Processing times are a little longer as a result, but small businesses can save 1-2% on processing fees as a trade-off.
The same principle of financial risk that applies to individuals applies to merchant accounts. If your businesses is viewed as high risk, whether because it’s a new business, you serve a high-risk market or one of the directors has a less-than-stellar record, you might find you can’t get an aggregate or dedicated merchant account.
If this is the case, then are specialist high-risk merchant account providers could help. Rates are, predictably, higher with these companies. But for the sake of getting your business up and running – and accepting card payments – that might be a cost you have to bear. At least temporarily.
Companies like Instabill, CCBill and Paydoo cater specifically for high risk sectors.
Before you go about opening a merchant account, you will need to make sure you have merchant status. Your business banking provider is normally the best place to start with this, and the process is generally straightforward.
Once you have that, you’ll need to contact your chosen merchant account provider. They will want to see some information before approving you for an account, so make sure you have the following to hand:
Some merchant account providers can have everything ironed out within 24 hours of being accepted. But, more often that not, you’re looking at 1-2 business days before you’re able to start accepting card payments.
If you’re reading this, then you’re off to a good start. Research should always be your first step, to help you decide which is the best merchant account for your business. Then make sure you have all the necessary information before getting in touch with them to set up your account.
No, your business bank account is where money ultimately gets deposited after customers pay you. Before it gets there, it comes via a merchant account (if the customer paid by card).
If you want to accept card payments from customers and expect to process more than £2,000 in card payments per month, then a dedicated merchant account is likely to be the least expensive way to process card payments.
A merchant services account deals with all aspects of processing card transactions on behalf of a business, or ‘merchant’. Customers pay the merchant by card, the merchant account provider handles all the back end processing, and the merchant receives the funds within 1-3 business days.
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