Merchant Accounts Explained: Fees, Setup & Requirements

Having a merchant account for your business comes with a load of benefits. This account allows you to accept electronic card payments and increases sales since you get to offer your customers more flexible payment options. They won’t have to pay via cash and checks only.

Everything You Need to Know About Merchant Accounts

But what is a merchant account? Why do you need it, and how does it work? Today’s post will bring you up to speed on everything you need to know about merchant accounts, from definition and requirements to ways to set one up.

What Is a Merchant Account?

A merchant account is a specialized bank account that connects a merchant to a service provider and an acquiring bank. This account exists for the purpose of accepting and processing electronic card payments. It acts as a holding account for credit and debit card payments.

When a client pays for goods or services via a credit or debit card, the funds first go to your merchant account. They are then wired to your business bank account daily or weekly.

Why Do You Need a Merchant Account?

Any business that accepts credit and debit card payments as a transaction option needs to set up a merchant account. If your company allows only cash and check, you don’t need a merchant account. You can work with a bank deposit.

Online and e-commerce businesses need to set up a merchant account for transaction purposes. Credit and debit cards are the most common forms of payment online. Your business can’t accept payments via credit card without a merchant account.

What are Merchant Account Fees?

The fees payable for establishing and using a merchant account depend on the provider and the card-acceptance environment. There are two types of card-acceptance environments: card-present and card-absent.

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In a card-present environment, the customer hands their credit card to the cashier or business operator to settle the payment. This transaction type works best for brick-and-mortar stores, and it requires the use of a credit card terminal or POS system.

For a transaction to be card-present, there needs to be a physical reading of card details through swiping or dipping. Cards that use the NFC contactless method (like Apple Pay, for example) are also part of a card-present environment.

A card-absent environment occurs when customers enter their payment information via phone or computer rather than handing over the card. This transaction type works for online payments and e-commerce purchases, and no hardware is required at the time of sale.

Fees for card-present transactions are generally lower than those for card-absent transactions. This difference exists because a card-present environment is less prone to fraud and chargebacks, so there is less risk involved. Service providers are thus comfortable offering lower rates on these transactions.

When choosing a merchant account, the fee models you may encounter include:

Flat-Rate Model

The flat-rate model works by charging a fixed percentage plus a small per-transaction fee on every processed transaction — commonly somewhere in the 2.6% to 3.5% range depending on the provider and whether the sale happens in person or online. There are no surprise charges. This model is straightforward, and it gives you an idea of how much you need to pay each month. Flat-rate pricing is ideal for businesses with low sales volumes that want a predictable, easy-to-calculate cost per transaction.

Interchange-Plus Pricing

Interchange-plus is a popular option offered by many merchant account providers. In this fee model, the service provider charges you the exact fee set by the card issuer plus a separate markup. The card issuer’s fee is called the interchange rate, and it varies depending on the card type and network. Interchange rates aren’t fixed forever — Visa and Mastercard periodically update their published interchange rate tables, which is part of why your effective rate can shift over time.

Interchange-plus pricing gives you a clear breakdown of each fee: the interchange rate itself, and the provider’s markup on top of it. For example, a qualified transaction’s interchange rate commonly runs in the 1.4% to 2% range, plus a small per-transaction fee, before the provider’s markup is added. For businesses with steady or higher transaction volume, interchange-plus is often the least expensive model available, though your actual cost still depends on your provider’s markup.

Tiered Model

Tiered pricing divides transactions into three general categories: qualified, mid-qualified, and non-qualified. Each category has a different rate. Qualified transactions get the best rates, while non-qualified transactions are the most costly. Card-present transactions fall under the qualified category in the tiered pricing model. Card-not-present transactions are, in most cases, non-qualified.

An example of a mid-qualified transaction is one where you key in the credit card details and use an AVS (address verification service) to check the billing address. AVS adds an extra layer of security, which reduces risk for the card issuer and acquiring bank.

Besides these pricing models, here are other fees you may encounter:

Monthly fee – Some processors charge this if you don’t hit the minimum transaction volume they require.
AVS fee – Some processors charge this for businesses that use address verification to check cardholder addresses.
Chargeback fee – Charged when a customer disputes a transaction with their card issuer and the bank reverses the payment. This is different from a refund, which the merchant initiates directly.
PCI non-compliance fee – You may be subject to this fee if you don’t comply with PCI DSS, the current data security standard for handling card payments (version 4.0).
PCI compliance fee – The payment processor might charge this fee to help you meet PCI DSS 4.0 requirements.
Cross-border fees – Charged for international transactions.

Merchant Account Versus Payment Gateway

One common misconception is that a merchant account and a payment gateway perform the same function. Some business owners assume you only need one or the other. In reality, your merchant account and payment gateway work together — their functions complement each other. If you have an e-commerce business and need to process a credit card payment, you need both services.

Okay, but what’s the difference between a merchant account and a payment gateway? A payment gateway is a service that links your customer’s bank to your merchant account. A merchant account, by contrast, is the holding account where the customer’s funds go and await transfer to your business bank account.

Here’s a simple illustration. When your e-commerce website processes a credit card transaction, it talks to the payment gateway. The payment gateway links to your merchant account and allows the transfer of the customer’s funds from their bank. Your merchant account holds the money and waits for the transfer to your bank account.

What Is a Merchant Identifier Number?

A merchant identifier number, also known as a MID, is a unique numerical code that comes with your merchant account. The acquiring bank assigns this number when opening your merchant account. It helps them identify your account and distinguish it from others.

Without a MID, you can’t accept credit card payments. If you could, the acquiring bank would have a hard time figuring out where to route the transaction.

Merchant Account Requirements

The process of applying for a merchant account requires you to submit certain documents and meet specific conditions. Each provider has its own requirements. Here’s a general view of what you may be asked for:

Financial statements

When applying for a merchant account, the service provider may request financial statements such as tax returns and bank statements — sometimes two years’ worth, depending on your business’s size. The provider needs these documents to check whether you’re financially credible and dependable, and whether you present a fraud or chargeback risk.

Voided check

The provider may ask you to submit a voided check to verify your business account information. Your business name (or personal name, if you’re a sole proprietor), routing number, and account number should be visible on the check. Alternatively, the provider can accept a bank letter in place of a voided check.

Business license

Another document providers often ask for is a business license, to confirm your business is legitimate. Depending on your state’s requirements, you can provide a local business license, DBA, or state business license.

Physical address

Before granting you a merchant account, the service provider needs confirmation of a physical address for mailing purposes. For a brick-and-mortar business, you can use your store’s location. If you run an online business with no physical office, you can use your home address.

Employer identification number (EIN)

An employer identification number is a distinctive identifier issued by the IRS for tax reporting. Your provider may request this nine-digit number. If you run a sole proprietorship with no employees, you can submit your Social Security number instead.

PCI compliance

PCI compliance is necessary when applying for a merchant account. Every business that processes and stores cardholder payment information must comply with PCI DSS, currently version 4.0 (the prior version, 3.2.1, was retired in 2024). That includes you, the merchant, and the merchant account provider. PCI DSS helps protect customers’ card information and ensures proper data handling.

Business bank account

The last requirement providers typically ask for is proof of a business bank account. Whether you run a company or a sole proprietorship, open a business bank account before applying for a merchant account — it will be the final destination for every transaction.

Tips for Choosing a Merchant Account Provider

Many businesses choose a provider based on price alone. Price matters, but it shouldn’t be the only factor. Here are other things to consider:

Payment Security

Go for a provider that takes measures to prevent fraud and secure card payments. Beyond PCI compliance, look for an additional security layer such as encryption and tokenization. You want a partner who takes payment security as seriously as you do.

Customer Support

Choose a provider that’s available 24/7 and easy to reach through multiple support channels.

Expandability

You might be running a physical store today, but what if you plan to move online or into new markets later? Choose a provider that doesn’t limit your future options — one that supports multiple payment technologies so you can scale, including card types like Apple Pay and Google Pay and multiple payment channels such as virtual terminals, card-present, and card-absent processing.

Contract Type

Your provider will likely issue a contract before granting you a merchant account. Before signing, check:

The contract length
Termination policy
Processing and cancellation fees
Minimum or maximum number of transactions
Any limitations that come with the contract

What to Ask the Merchant Account Provider

Here are some questions you may want to ask before settling on a provider:

How long have they been in business?
How long do they take to transfer funds to your business bank account?
Can they provide any references?
Which payment services do they offer?

How to Get a Merchant Account

Getting a merchant account requires entering into an agreement with either an acquiring bank or an authorized agent, such as a member service provider (MSP) or an independent sales organization (ISO).

Here are three steps to follow:

1. Determine Your Payment Needs

Take some time to think about your card payment needs. Which payment methods do you want to offer? Which card brands do you want to accept? MasterCard and Visa are the most common, but you can also accept Discover and American Express. Assessing your needs will help you select a provider that meets them.

2. Choose a Provider

Compare different providers to find the one best suited to your business. As highlighted above, factors to weigh include pricing, security, expandability, and contract type.

3. Gather All the Required Documents

Once you’ve picked a provider, ask them which documents they require for the application. Gather the paperwork and submit it. Underwriting can take anywhere from a couple of hours to a few days.

Payment Facilitators (PayFacs): A Faster Alternative

If a dedicated merchant account sounds like more setup than you want, a payment facilitator (PayFac) is worth considering. Instead of applying for your own MID with an acquiring bank, a PayFac lets you process payments as a sub-merchant under its larger master account. That’s significantly faster than the days or weeks a traditional merchant account application can take, which is why many small businesses and startups use PayFacs to start accepting payments quickly.

The trade-off is control. A dedicated merchant account typically gives you more say over pricing and account features, while a PayFac’s simplified onboarding can come with less flexibility, a higher chance of funds being held in reserve — especially for newer businesses — and sometimes added security or verification steps. For a business with steady, predictable volume, a dedicated merchant account may pay off over time; for a business that wants to start accepting payments fast with minimal paperwork, a PayFac may be the better fit.

Conclusion

Today, many customers expect your business to accept credit cards as a payment option. Having a merchant account will help you meet that expectation and accept electronic card payments.

A merchant account essentially acts as a holding account for a customer’s funds. When a customer pays with a credit card, the money goes to your merchant account and awaits transfer to your business bank account.

There are several factors to weigh when selecting a provider: payment security, customer support, expandability, and contract type. You’ll typically need to submit a business bank account, financial statements, and an employer identification number, among other documents, during the application — or consider a payment facilitator if you want to skip the dedicated-account setup entirely.

Key Points and Facts About Merchant Accounts

A merchant account is a holding account that receives card payment funds before they’re transferred to your business bank account.
Card-present transactions typically cost less to process than card-absent (online or keyed-in) transactions.
The three common pricing models are flat-rate, interchange-plus, and tiered.
Interchange rates are set by the card networks and updated periodically.
PCI DSS 4.0 is the current data security standard all card-processing businesses must follow.
A payment facilitator (PayFac) lets you accept payments under a shared master account instead of applying for your own dedicated merchant account.

Action Steps for Choosing a Merchant Account
Assess Your Needs

List the card brands and payment types you want to accept.
Estimate your monthly transaction volume and average sale size.

Compare Providers

Request pricing details for flat-rate, interchange-plus, and tiered models from at least two or three providers.
Ask each provider directly about contract length, cancellation fees, and fund transfer times.

Weigh a PayFac Option

If speed matters more than pricing control, get a quote from a payment facilitator alongside your merchant account quotes.

Prepare Your Documents

Gather financial statements, a voided check, your EIN, and proof of a business bank account before applying.

Checklist for Setting Up a Merchant Account

Determine your payment needs
- Decide which card brands and payment types to accept.
Compare providers and pricing models
- Get quotes for flat-rate, interchange-plus, and tiered pricing.
Decide between a dedicated merchant account and a PayFac
- Weigh setup speed against pricing control and flexibility.
Gather required documents
- Financial statements, voided check, business license, EIN, proof of business bank account.
Confirm PCI DSS compliance
- Make sure your payment handling meets PCI DSS 4.0 requirements.
Submit your application
- Expect underwriting to take anywhere from a few hours to a few days.

FAQ: Merchant Accounts
Do I need a merchant account if I only accept cash?

No. If your business only accepts cash or checks, you don’t need a merchant account — a standard bank deposit works fine.

What’s the difference between a merchant account and a payment gateway?

A payment gateway links your customer’s bank to your merchant account. The merchant account itself is the holding account where the funds sit before transferring to your business bank account. E-commerce businesses typically need both.

What’s the difference between a chargeback and a refund?

A refund is initiated by the merchant directly. A chargeback is initiated by the customer’s bank after the customer disputes a charge, and it reverses the payment without the merchant’s direct involvement in that first step.

Is a PayFac cheaper than a dedicated merchant account?

Not necessarily. A PayFac is usually faster and simpler to set up, but a dedicated merchant account can offer more control over pricing and features, which may cost less for businesses with steady, higher transaction volume.

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