What is a merchant account? A guide for small business owners

Running a small business can involve some challenges, not least making sure you’ve got a reliable way to handle payments. Merchant accounts play an important role in this. They’re a key part of the setup needed to accept card payments directly from your customers.

Whether you’re behind the counter of a brick-and-mortar store, working on online business ideas, or going out and about to conduct business and take payments in different locations, it’s good to know your options for these accounts.

This guide’s here to help with that. We’ll look at how merchant accounts work, how and where to get one, and some of the reasons why it could be a great move for your enterprise.

What is a merchant account?

A merchant account is a special type of business bank account designed for businesses (merchants) that want to accept and process card payments, whether online or in-person. Unlike regular bank accounts, these commercial accounts don’t help with things like direct debits or conducting payroll transactions. 

Instead, think of a merchant account as a temporary holding area for funds right after your customer makes a purchase. The money stays there until it’s transferred to your regular business account, where you can use it however you need to.

How do merchant accounts work?

A merchant account is an essential part of the electronic processing system, which also incorporates a payment gateway and a payment processor to ensure money gets to where it needs to go.

Here’s what these extra elements do:

• Payment gateway – This is the front-end software your customers interact with when they pay, taking the card details, encrypting them for safety, and sending them to the payment processor.

• Payment processor – This is the service working behind the scenes to talk to card networks and banks, checking that the customer can cover the payment before moving the money into the merchant account. 

Here’s a quick breakdown of how the whole process works:

1. Customer makes a payment – Whether shopping on your website, where they enter their card details at the checkout, or at your physical store, where they might swipe their card or tap their phone, the customer initiates the purchase.

2. Encryption by the payment gateway – The card information is securely dispatched to the payment processor.

3. Verification of funds by the payment processor – The payment processor reaches out to your customer’s bank to check they have enough money available to cover the transaction.

4. Approval of funds transfer – Once the funds are confirmed, the payment processor directs your customer’s bank to move the money to your merchant account.

5. Receipt of funds – The money lands in your merchant account and is typically transferred to your regular business account within a few days.

Who provides merchant accounts?

Merchant accounts are available from various financial service providers, including many major banks. To open a merchant bank account, some banks require you to hold your regular current account with them as well.

Another option is to sign up with a payment service provider. These companies offer end-to-end services, bundling up the necessary elements needed to take card payments into one package, which can simplify things for small businesses.

For example, with SumUp, you get access to a merchant account, a payment gateway, and processing services in one integrated payments solution. Factoring in our free business account and app, it’s a complete package of financial services which can be rapidly implemented by businesses of all kinds.

Benefits of merchant accounts

Unless you’re running a cash only business, setting up a merchant account will be essential to your operations. But let’s consider some of the specific perks that come with having one:

• Enhanced sales

• Increased payment security

• Improved cash flow

• Support for flexible pricing

• Simplified bookkeeping

Enhanced sales

Setting up a merchant account will equip you to take payments in a way that suits more potential customers, which can therefore boost your sales. What’s more, research shows that customers are more likely to spend more when paying by card.

For instance, imagine you’re at a local craft fair and a customer is interested in a small item at your stall. If they can pay by card, they might just decide to grab a few more items, increasing their total spend.

This kind of payment setup encourages customer loyalty and sets a solid foundation for future growth. Indeed, being able to process card payments is vital if you’re thinking about how to scale a business. 

Increased payment security

Accepting card payments isn’t just about attracting new customers – it’s also about keeping transactions secure. With a merchant account paired with a payment gateway and processing services, you can benefit from robust security features like:

• Two-factor authentication – Adds an extra layer of security by requiring two forms of verification for a transaction to proceed.

• 3D Secure – Enhances the security of online transactions through an additional authentication step.

• PCI DSS compliance – Ensures your business meets industry standards for secure card payment processing.

These measures help keep your business compliant and protect it from debit and credit card fraud, ensuring both you and your customers have extra peace of mind.

Improved cash flow

You might think getting cash in hand is quick, but using a merchant account for card payments can actually make your life a lot easier. The right payment system will ensure funds from card payments are settled into your account quickly, with no need for you to trek to the bank to deposit cash.

This swift access to funds means you can restock supplies or sort out bills right away. In other words, having a merchant account in place helps keep your cash flow healthy and will allow you to manage your small business finances more efficiently.

Support for flexible pricing

Having a merchant account in place means you’ll be ready to adjust your pricing strategies whenever necessary, safe in the knowledge that customers will be able to take advantage of your promotions via card not present transactions, wherever they are.

For example, if you run a small boutique and decide to have a weekend flash sale, you can send emails or texts to customers who’ve visited your store, encouraging them to shop online. Your merchant account will ensure swift payment processing, even with a sudden spike in transactions.

Typically, pricing changes can be instantly updated across your website and in-person payment platforms, making it simple for you to manage.

Simplified bookkeeping

Even with the best accounting tools, handling the books can be a hassle. But when you have a merchant account for taking card payments, bookkeeping for small businesses becomes that much simpler. 

Every card payment is automatically logged, streamlining how you track sales data, cutting down on errors, and saving you time. With everything neatly recorded, you can easily see your financial picture at any moment, making it easier to manage your budget, plan for small business expenses, and keep tabs on your financial health. 

How to get a merchant account

Choosing between a traditional merchant bank account or a payment service provider (PSP) can really shape how you handle transactions in your business. Each option has its perks, but PSPs tend to stand out for their simplicity and quick setup.

Here’s a quick guide to choosing the right option for your business:

1. Compare providers

Are you leaning more towards a traditional bank, or does a PSP, geared towards fuss-free setup and operation, sound more like your speed?

Banks are great for businesses that need a wide range of financial services, while PSPs are ideal for those looking for ease and efficiency.

2. Application process

You’ll need to kick things off by sharing some basic details about your business. If you go with a bank, be prepared for a bit more paperwork and possibly deeper dives into your financial history.

On the flip side, PSPs tend to streamline this part, getting you through the approval process quicker and with less hassle. Usually, you can apply for a UK merchant account online.

3. Approval and setup

Setting up a merchant account with a traditional bank means you’ll have the back-end infrastructure in place for receiving money from customers. However, it’ll be down to you to implement the software and/or hardware for transactions.

Going with an end-to-end service provider like SumUp makes this part simple. Not only do we take care of the behind-the-scenes stuff, but we also offer convenient equipment like card readers and point-of-sale solutions that get you up and running in no time.

How much do merchant accounts cost?

The costs of merchant accounts can vary depending on factors such as the type of business you operate, your sales volume, and the risk level associated with your transactions.

However, many providers use one of these pricing models:

• Flat rate

• Interchange-plus

• Tiered

Flat rate

The flat-rate pricing model charges a set percentage for each transaction. It makes fees predictable, which can make managing your small business budget easier.

We adopt this simple approach at SumUp, charging a straightforward percentage for digital transactions, including invoices, payment links, gift cards, and online store purchases.

For in-person transactions with card readers or Tap to Pay options, we offer an even lower rate. Plus, if you open a SumUp business account, the rate for in-person transactions drops further.

Interchange-plus

With the interchange-plus pricing model, you pay the interchange fees set by card networks, plus a small markup by the provider. For example, if a customer buys an item for £100 and the interchange fee is 1.8% plus a 20p markup, the total fee would be £2.

If you run a shop with products ranging from £10 to £200, this model could be really advantageous. It works well for businesses with a wide range of transaction amounts, though it might make your statements a bit more complex.

Tiered

The tiered pricing model categorises card payments into three levels – qualified, mid-qualified, and non-qualified – each with its own rate. It’s a bit trickier to keep track of compared to other models because the rates vary.

For the lowest fees, qualified transactions include standard in-person card payments at checkout. Mid-qualified transactions, often involving reward cards or keyed-in details, have a higher fee. And then there are the non-qualified transactions, like those using corporate or international cards, which will cost you the most in fees.

Take a specialty tool shop, for example. With a tiered pricing model, a standard credit card purchase might incur a 1.9% fee, a premium card about 2.2%, and a corporate card around 2.9%. This system can lead to savings on typical transactions but may also make understanding your costs a bit harder.

How to take card payments

Taking card payments can make a big difference to your small business, but it’s not just about signing up for a merchant account and associated services like a payment gateway and processor – you’ve got to have the right kit too.

With a payment services provider, you’ll unlock a range of payment options for small businesses, including:

Point-of-sale systems

For brick-and-mortar locations like retail stores or hotels, a professional point-of-sale system connected to your merchant account can streamline check-in and check-out.

In hotels, staff can quickly settle customer bills for stays or services with just a few taps, keeping things running smoothly even during peak times. In the food and drink industry, restaurants can use connected card readers to allow customers to pay directly from their table, speeding up service and improving the experience.

Self-service kiosks

Adding self-service kiosks can really step up efficiency in customer-facing environments, especially hospitality businesses like quick-service restaurants and bars.

These kiosks allow customers to place orders, browse services, and check out items on their own, cutting down on wait times and letting your staff focus on providing great customer service.

Mobile card readers

If you’re on the move with a business like food trucks or pop-up market stalls, mobile card readers are ideal.

Devices like the SumUp Solo allow for quick, contactless payments, letting you serve your customers quickly without fumbling for change. This setup keeps the line moving and allows you to focus more on engaging with your customers.

Online stores

Integrating card payment functionality into your e-commerce website is typically straightforward, whether you’re using platforms like WooCommerce, Wix, or even a custom setup.

SumUp also offers a free customisable online store that’s ready to use from the get-go, with a built-in editor for the swift creation of a virtual shop front. It simplifies transactions and allows customers to quickly check out with their preferred payment method.

It also includes useful features like automatic fraud checks and detailed sales analytics, making it easier to manage your online sales.

Virtual terminals

Virtual terminals linked to your merchant account make taking card payments over the phone easy by letting you handle things right from your computer or smartphone. This setup is great for businesses like catering companies and restaurants that often take orders and bookings over the phone.

To use a virtual terminal, you just type your customer’s card details into a secure webpage that your payment processor sets up for you. You can do this from anywhere you’ve got a signal with no extra equipment needed. It’s perfect for offering your customers a quick way to pay while they’re on a call with you.

Virtual terminals are also equipped with payment security features, minimising the risk of falling foul of card not present fraud.

QR codes

For mobile businesses or events, QR codes provide another convenient way to accept payments. Customers simply scan the code with their smartphone to pay, which is perfect for environments where quick service is essential.

For example, at a festival or in a pop-up shop, QR codes speed up transactions, allowing you to handle high traffic easily. Typically, the QR code will either display a set amount or redirect the customer to a payment page where they can enter the amount themselves.

Digital gift cards

Offering digital gift cards becomes an option when you take card payments. Not only do they keep customers coming back, but they can also attract new ones who are hunting for that perfect gift.

Take a small homeware store, for instance. When customers buy gift cards for their friends or family, they’re essentially introducing new people to your business. Plus, selling gift cards puts money in your register upfront, which can really help if you’ve been thinking about how to improve cash flow. 

Payment links

Payment links can be shared by text, email and social media, allowing customers to pay for items and services without having to download any apps or create new accounts. 

They are sent to customers in just the same way as any other link, and open up a secure portal through which payments can safely be made. Payments are also tracked, so you’ll know if a link needs to be re-sent to remind a customer to pay. It’s a handly alternative to traditional invoicing.