Setting Up a Merchant Account: What Businesses Need to Know

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Across the merchant-payment processing ecosystem, there are plenty of complex terms that are often used interchangeably. This often leads to misinformation about what businesses need to know about how a merchant account can actually impact their day-to-day cash flow.

To bust the many myths and clarify what businesses actually need to know, we’ve gathered a simple, step-by-step guide for you to keep by your side as you wade through knowing what a merchant account is, why you need one, and how it’s different than the other payment services your business relies on.

This guide includes a deep dive into the advantages of using a merchant account, why it’s separate from a payment gateway, how a merchant account functions, how businesses can set up a merchant account, and what requirements are needed to do so. By gaining a better understanding of what the process looks like, and what charges should be expected, your business can be better equipped to choose the right merchant account provider.

Tip: use the Table of Contents below to navigate the ins and outs of online payment processing to fit your business’s growing needs. 


Table of Contents

What Is A Merchant Account? | Merchant Account RequirementsDocuments, Time, & Costs Associated
Payment Acceptance Options Comparison | Merchant Account vs. Payment Gateway | How to Choose A Provider | How it Benefits Your Business



What is a Merchant Account?

In its most basic sense, a merchant account serves as the bank account that allows business to accept credit cards. As the core piece of the credit card processing equation, the merchant makes the transaction flow between consumers, merchants, processors, and banks possible.

Merchant accounts are responsible for the reconciliation of funds between a business’ account, the customer, and the credit card issuer. When a payment is approved via a payment processor — by way of a payment gateway for example — a merchant account assists in funneling funds into your business bank account. Bottom line? A merchant account serves as the final backstop before a business receives funds into their own bank account.


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Requirements to Set Up a Merchant Account

There are three core components you’ll need to open a merchant account. Similar to a consumer opening a bank account for their own financial purposes, the bank you choose to work with will want to verify that you are a legitimate business with intentions to use their services legally and within the regulations laid out between your agreement established with your financial institutions.

You’ll need to have documentation on the type of business (to established high or low risk for credit card fraud), details about how long you’ve been in business, how stable your business’ finances are, and the personal credit history of the business owner itself. All of these components are the details that help merchants establish a merchant account using a payments provider.

You’ll also need a business bank account before opening a merchant account. This can be done quickly at any bank with a business license and your Employer Identification Number (EIN), which is received from the IRS. This account helps your business cover the financials involved with necessary payment processing/software fees associated with accepting credit cards. To be considered legitimate in each of these cases, you’ll need to establish a formal business license within the state you operate.

The components to consider when establishing a merchant account are:

    • Banking Information: Merchant accounts are connected with your acquiring bank. This allows for credit card payments to actually be accepted into your account. Each bank determines the level of risk you have based on the types of goods and services you sell, how much revenue you process and how what types of payments you accept.
    • Business Verification: To establish a merchant account, banks issuers and payment processors you’ll be forming agreements with will want to know the legitimacy of your business. For any company wanting to accept credit cards, you’ll want to have your formal business details on hand to prove your business model.
    • Security Checklist: For e-commerce businesses accepting credit cards online, you’ll need an SSL certification. This is the data files that are connected to your businesses security details. When using a web server, an SSL certification allows for secure connections (https protocol, etc) to ensure activity from your server to your browser if protected. This protects credit card numbers, usernames, passwords and any other sensitive customer data that may be shared on your site.


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Documents, Time and Costs Associated with a Merchant Account

Setting up a merchant account can often be completed using an online application and can be completed in a matter of a few business days. Depending on what types of payments you accept (and the volume of payments) this determines how complicated your merchant account process will actually be. For most businesses, the process is straightforward and can be done once your application is verified by an underwriter. Establishing a merchant account is similar to any type of financial account (think mortgage, car loan or credit card application). Each triggers an underwriting process that can only be completed when details can be verified.

When going through the underwriting process, business owners should be able to provide:

  • Business bank account information and routing numbers
  • EIN for tax purposes
  • Estimated processing volumes
  • Business start date
  • Contact information
  • Business owner financial information


Merchant account providers charge you a variety of ongoing fees. This includes:

  • An Interchange fee: The fee the credit card companies charge for each transaction. This fee is set by the credit card networks and split between the networks and the credit card issuing banks. It consists of a percentage of the transaction plus a per-transaction fee. The exact percentage of the transaction varies according to a wide range of specific criteria such as what type of credit card it is, what is being purchased, who issued the card, and many other factors.
  • Additional fees: These are charged by your merchant service provider, which may be the merchant bank (the bank that provides the merchant account that allows you to accept credit cards) or an authorized independent sales organization (ISO) of the merchant bank. This fee is also a percentage of the transaction and may also include a per-transaction amount.


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As for the additional costs, these are what businesses should expect to see in the merchant account setup process:

  • Application fees
  • Startup Fees
  • Monthly Fees
  • Per-Transaction Fee
  • Cross-Border fees (for business who deal outside the U.S.)
  • Credit card terminal software/hardware fees


It’s worth shopping around when determining which merchant account provider is best for you to find the one that has the most transparent fee structure that fits best within your budget. You’ll also want a provider that is built with speed and flexibility in mind so you can adapt your merchant account needs as your business evolves.


How a Merchant Accounts Differs From Other Payment Acceptance Options

Let’s set the record straight for those who might be confused. The offerings from Square, Braintree, Stripe, and PayPal are not true merchant accounts. They provide payment processing services but fall short in fully providing the types of services included in a merchant account. Accepting credit cards via a merchant account is much different than working with an account processor.

For business owners wondering “Why is a merchant account a better route?”, there are a few easy answers to that question.

  • Improved cash flow: Using a merchant account can streamline the flow of transactions into your accounts. With a merchant account, the money is deposited within one or two business days and eliminates any unnecessary delays that can be associated with other services, such as PayPal. Because regular cash flow is a key component for daily business operations, this is an important consideration.
  • Cost-Effective Solutions: Merchant accounts and third-party payment processors charge regular fees (varies by type of business), but they tend to be more standard than the fees associated with other payment acceptance options. For businesses producing high transaction volumes each month, a merchant account is the route to go. Merchant accounts also provide your business the peace of mind of extra customer service should there be issues with transactions. When needing to act quickly, a merchant account provider can streamline the transaction process.

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How Merchant Accounts Differ From a Payment Gateway

Merchant accounts are the agreements that exist between a business and a credit card processing company. They allow you to accept credit/debit card payments. A payment gateway serves as a payment processing method to securely authorize credit card payments for card-not-present transactions.

For businesses that accept payments online, they’ll need both a merchant account and a payment gateway. While a merchant account allows for payments to physically get into your business accounts so funds can be settled, a payment gateway acts as the online version of a payment card reader. E-commerce businesses must have the following to operate: payment gateway, online merchant account and the ability to integrate with an online shopping cart.

A payment gateway is needed to properly and securely process the details provided by a merchant account provider once a transaction is approved and processed. A payment gateway is necessary for providing an added layer of security to protect your business and your customer. Following the authorization request, a gateway payment processing system is equipped with the knowledge from the proper party to determine if a transaction can actually occur.

A gateway allows for the payment to properly move across a business’ online channels without fear of being compromised during the payment processing flow. This critical component in the e-commerce ecosystem prevents issues that could hinder your business’ reputation with your merchant account provider — such as accepting payments that come from an expired card, a closed account, a credit card over its limit, or lack of funds.

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How To Choose a Merchant Account Provider

As we’ve established, a merchant account is necessary for any business who wants to accept credit cards online and must be done before your business establishes its online payments strategy. There are three basic components every business needs to take when selecting a merchant account provider.

  • The type of credit card network agreements available
  • The ability to streamline accepting credit card payments
  • How quick and easy it is to establish account setup


After determining what credit card payment networks are best for your business (based on terms and fees), you should compare merchant account providers. This allows you to pick a partner that best fits the needs of your business and your customers. When choosing a merchant account provider, there are a few key features to consider:

  • Transparent pricing options
  • Customer service
  • Merchant account support
  • Enhanced technology
  • Flexibility to choose a plan that matches your processing needs

How a Merchant Account Can Benefit Your Business

Finally, you’ll need to consider the benefits of selecting the right merchant account provider to power your business’ daily activities with your customers. With the ability to help you get your online payment processing needs up and running in a cost-effective manner, a merchant account is a necessary step in bringing together all the elements of an e-commerce transaction.

The first benefit is obvious: The ability to accept credit cards. This can lead to an increase in sales, greater customer loyalty and improved cash flow. Relying on electronic payments keeps your business payments organized in a way that can help your business use online payments to scale. With the ability to boost internal productivity, keep customers happier and streamline your online payment process, businesses that rely on merchant accounts have a clearer path to enhanced revenue streams.  

For businesses who need flexibility, customer service management and the ability to effectively process larger volumes of payments, a merchant account should be the obvious choice. Unlike other processing options, a merchant account is the only option to check all of these boxes.

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Anna Kragie is a content contributor for Payline Data. She previously wrote for, as a Sr. Content Producer, where she focused on financial services and payments innovation, fraud and security, emerging payments, and FinTech news, research and thought-leadership content across the payments industry.

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