What Is a Merchant Account? How Processing Payments Works (2025)

Merchant accounts are a must for any business that wants to accept credit card payments. Here’s what a merchant account is, how they work, and how to get one.

If you don’t use a payment provider and you want to accept credit card payments from your customers, you’ll need a merchant account.

Merchant accounts act as a bridge between your business accounts and customer card issuers, processing transactions and crediting you for sales.

Spurred on by the pandemic, retail is becoming increasingly cashless and online. So, it makes sense to invest in merchant services that allow customers to pay seamlessly with their cards.

Here are the basics of merchant accounts, account fees, and how to choose the right merchant acquiring bank.

What is a merchant account?

A merchant account is a business bank account for accepting credit card payments.

When a customer purchases a product using a credit card or other electronic payment method, a merchant account communicates with the card issuer, withdraws funds from the customer’s account, and credits the merchant. This system helps reduce payment delays.

If you have a business license, you can open a merchant account with an acquiring bank to start accepting card payments. 

How does a merchant account work?

• A transaction passes through an encrypted payment gateway.
• Your merchant account communicates with the customer’s card issuer.
• Your merchant account receives funds and credits your bank accounts.

1. A transaction passes through an encrypted payment gateway

When a customer buys one of your products with a credit card, your payment gateway contacts the credit card issuer to make sure the cardholder has enough funds for the transaction. (You can usually set up your payment gateway at the same time you create a merchant account.)

2. Your merchant account communicates with the customer’s card issuer

Your merchant account communicates with the customer’s card issuer to confirm the transaction. Once approved, the merchant account deducts the transaction amount from the customer’s credit card.

3. Your merchant account receives funds and credits your bank accounts

The merchant account provider settles the transaction by depositing funds into your company’s bank account. It will also take a transaction fee—typically 3% to 5% of the total amount.

Deposits don’t happen as soon as a transaction goes through. Instead, they’re processed in batches toward the end of the working day or week.

Merchant account fees

Merchant services should support your business, not drain it with excessive fees. It’s important to understand what credit card processing entails and the different costs involved.

• Setup fee: This is a one-time charge when you first open your merchant account. Some providers might waive this fee if you process a lot of sales or if they're running a special offer.
• Monthly minimum fee: You pay this when you don't reach a certain amount of card sales in a month. For example, if your minimum is $50 but you only processed $35 worth, you'll pay an extra $15 to make up the difference.
• Annual fee: This yearly fee covers basic account services and maintenance. It usually costs between $99 and $199 and gets automatically taken from your account once a year.
• Batch fee: You pay this each time you send a day's worth of transactions for processing at once. These fees typically cost 10¢ to 30¢ per batch, no matter how many sales are included.
• Chargeback fee: This happens when a customer disputes a charge and gets their money back. You'll pay $15 to $100 each time this happens, even if you prove the charge was valid, so keep good records.
• Early termination fee: This is the penalty for ending your contract early. It can be expensive - either a flat fee of $300-$500 or the monthly fees for the remaining contract time, so read your contract carefully.

The easiest way to get a merchant account

1. Organize the necessary documents
2. Choose a provider
3. Apply for a merchant account
4. Gain approval and set up your account

1. Organize the necessary documents

You will need to gather the following items:

• Business information and company name
• Contact details
• Documentation showing how long you've been in business
• Bank account details
• Financial statements
• Business license
• EIN (Employer Identification Number)
• Tax documents

💡 Tip: If you are already using a credit card processing tool, share this information with your merchant account provider to ensure fast approval.

2. Choose a provider

Before applying, research and select a merchant account provider that fits your business needs. Consider factors such as:

• Transaction fees and pricing structure
• Contract length requirements
• Customer support quality
• Integration with your existing systems
• Industry specialization

Each has different strengths. For example, Shopify Payments integrates seamlessly with ecommerce stores and eliminates the need for third-party payment gateways if you're already using the Shopify platform.

3. Apply for a merchant account

After you have gathered all the necessary information about your company, it's time to submit your application. The processor may want to check your personal and business credit history to ensure your business is financially sound.

At this point, you may also have to pay an application fee to your merchant account provider. Complete the application accurately and completely to avoid delays.

💡 Tip: Remember to include a cover letter along with your application stating what your business does and why you require a merchant account.

4. Gain approval and set up your account

The merchant account provider will check your risk level before approving your application. They will consider the following criteria:

• The length of time you have been in business
• Any defaulted payments or if you were ever bankrupt
• If you have had a merchant account in the past
• Your type of business

The processor will consider your business to be less risky if you process transactions in person rather than online or via phone. Online transactions are susceptible to fraud.

Respond promptly to requests for additional information or documentation during this phase. The approval process can take anywhere from a few days to a few weeks, depending on your business profile and the provider.

To lower risk, the merchant account provider may seek address verification. The merchant account provider will approve your application if you fall into its low-risk category. The provider may approve riskier applications but at a higher fee.

Choosing a merchant services provider

• Costs and fees
• Hardware
• Customer service
• Integrations
• Volume

Keep these criteria in mind when looking for a merchant account provider:

Costs and fees

Credit card processing rates vary with the type of transaction and card used, and your store’s monthly processing volume. Clarify the exact fees you’ll pay—whether they are flat fees or a percentage of your transaction volume.

Try to understand any “hidden fees” charged by your provider, such as:

• Cancellation fees. Money you pay when you stop using the credit card service.
• Early termination fees. Extra charges if you quit before your contract is done.
• PCI non-compliance fees. Penalties if you don't follow the safety rules for handling credit cards.
• Chargeback fees. What you pay when a customer says "I didn't buy that" and gets their money back.
• Account change fees. Costs for updating information like your business name or bank details.
• Equipment rentals. Monthly payments for using card machines that you're borrowing instead of owning.

These kinds of fees may be charged separately from your processing fee and can add up quickly. Before opening a merchant account, compare multiple vendors and price out what a typical day of sales and transactions might look like.

Hardware

Can you manage with a mobile app and a simple card reader, or do you need a full POS system? Choose a provider that gives you the hardware you need at an affordable price.

Customer service

A merchant account is a fundamental part of your business operations, so once you’ve chosen a provider and set up its services, you’ll likely be using it for some time. Because of this, look for providers who are ready to help with any issue you may encounter, big and small.

Test providers’ service quality by calling them during peak hours and noting their response and resolution times.

Integrations

Find out what integrations the merchant account supports and whether they offer flexibility for your storefronts and customers. For instance, with Shopify and Stripe, you can instantly get end-to-end merchant account solutions and reap the benefits of payment gateway and merchant account functionalities combined.

Volume

Your business is going to scale, which means increased processing volume. Choose a provider with the ability to process an unlimited number of transactions and dollar volume without hitting you with fees or limits. 

Tips for getting a merchant account

Separate your personal and business affairs

Don't mix business with pleasure when it comes to banking. Establish a dedicated business bank account before applying for your merchant account. Providers will take your business more seriously, and your retail accounting will be far more manageable come tax season.

Polish your credit profile first 

Your credit history tells a story about financial responsibility. Before submitting applications, request your business and personal credit reports, address any errors, and consider delaying your application if your scores need improvement. A stronger credit profile often translates to better rates and faster approval.

Understand that approval takes time

Build the approval timeline into your business launch plans, allowing 2-4 weeks for the process. Using this time to perfect other aspects of your business setup keeps the momentum going while decisions are being made behind the scenes.

Know your risk profile 

If your industry has high chargeback rates (like subscription services or digital products), or if your business model raises traditional flags, don't waste time with conventional providers. 

Seek specialized high-risk merchant account providers who understand your business model and offer appropriate solutions, even if they come with higher fees.

Benefits of a dedicated merchant account

Unless you plan to use an integrated solution like Shopify Payments, you’ll need a merchant account to accept credit card payments. 

But there are other benefits to setting up a merchant account and payment gateway:

• Increase sales. Cash is dying with only 9% of Americans using it daily and 18% of total US payments. Card processing prevents lost sales in our increasingly cashless economy. 
• Improve cash flow. Sales are usually deposited within one or two working days, instead of individually billing your customers and waiting up to 30 days or more to receive payment.
• Easy money management. There’s less need to track, count, and manage physical money. You may process all payments with a point-of-sale (POS) system and go fully cashless for smoother money management. 
• Better customer experience. Your customers are in for a hassle-free shopping experience when they have the liberty to shop and make payments using the payment methods of their choice. 
• Secure payment processing. Payment gateways reduce fraud risks and protect both your business and customers during transactions.

Accept card payments with a merchant account (or Shopify Payments)

Whether you run a brick-and-mortar store or an ecommerce website, your business needs a way to accept customer card payments.

The traditional solution is a merchant account, which acts as a bridge between your bank account and the customer’s card issuer, settling your sales so you don’t have to wait for customers to pay their credit card bills.

All acquiring banks charge transaction fees for running a merchant account, so do your research to find the right account type and pricing structure for your store.

Or, use an integrated payment solution like Shopify Payments. With Shopify Payments, retailers get all the benefits of a merchant account—secure payment processing, fast deposits, and competitive rates—without the application process, third-party fees, or integration headaches. More importantly, they gain a unified view of customers across all channels, enabling personalized experiences that drive loyalty and growth.

Merchant account services FAQ

What is a merchant account example?

A merchant account is a type of bank account that allows businesses to accept payments from customers via credit cards, debit cards, and other payment methods. Merchant accounts are typically set up by merchant banks or payment processors in order to process payments. Examples of merchant accounts include PayPal, Stripe, Square, and Authorize.net.

What is the difference between a merchant account and a business account?

A merchant account is used to process credit cards and other electronic payments. It is established with a payment processor, such as a bank or credit card provider, and is used to accept customer payments. A business account is a more general type of account used for managing a business’s finances. It typically offers more features, such as online banking and check writing, but it does not include credit card processing capabilities.

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

Merchant accounts and payment processing services perform similar functions. Both allow you to accept customer credit card transactions. A merchant account is a bank account intended to collect customer funds, while a payment processor is a card processing service.

How do I get a merchant account?

To get a merchant account, you must find a payment processor or bank that offers merchant services. To get approved, fill out an application and provide the right documents, such as your tax identification number and business bank account information. Additionally, you may need to pay a setup fee and provide proof of your business identity.