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UK Merchant accounts

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What is a merchant account and how do they work?

Our simple guide breaks down everything you need to know about merchant accounts into tasty, bite-sized chunks


Merchant account uk

We know how confusing merchant accounts can be — and we decided to do something about it.

This guide contains everything you need to know to choose the best merchant account provider for your business.

There’s no jargon. No pushy sales pitch. Zero filler. Just useful nuggets of information written in plain english.

But enough chit-chat. Let’s cut straight to it.


What's on this page?


What is a merchant account?


A merchant account is a type of bank account which allows businesses to accept payment by credit and debit card.

Some people make the mistake of confusing a merchant account with a regular business bank account. They are two totally different things.

To be clear: without a merchant account your business will not be able to process card payments.

How does a merchant account work?

Let’s look at what happens happens when a customer — we’ll call her Jane — pays using her card in a high-street shop:

What is a merchant account?

Step 1: Jane orders a coffee. Jane is served a coffee. Jane pays for her coffee by touching her contactless card to the card reader.

Step 2: Jane’s card details are sent from the card reader to the merchant account, held with an ‘acquiring bank’, along with details of the transaction. The acquiring bank routes this information to the relevant card association — either Visa, Mastercard or Discover. Jane has Visa.

Step 3: Visa forwards the transaction details to Jane’s bank — known as the ‘issuing bank’ — to see if Jane has enough money in her account to pay for the coffee.

Step 4: Jane just got paid, so she has more than enough money. The issuing bank fires back a response to the acquiring bank, via the card association, which transmits the information to the card reader: “Transaction Approved”. Jane enjoys her coffee.

So you can think of a merchant account as a kind of holding-pen — a secure place for funds to sit while the bank checks to make sure the customer has enough money in their account to make payment.

But where is my money?!

So at this point Jane has her coffee but you, the merchant, don’t have Jane’s money. Relax, this is totally normal.

The actual transfer of funds can take anywhere between 24 hours and seven days while the acquiring bank and the issuing bank faff around with authorisation codes. This is known as the “settlement period”, and varies from provider to provider.

Most top merchant account providers will have the money in your business bank account within three working days.

Different ways to take card payments

Of course, on its own, a merchant account isn’t enough — it is after all just a bank account. In order to take card payments you need a way of collecting payment information. And this can be done in three ways:

  1. By card machine: Card machines are usually rented from merchant service providers as part of your merchant account agreement. Choose from countertop, wireless and mobile 3G/4G models.
  2. Over the phone: To take card payments over the phone you’ll need a dedicated mail order/telephone order (MOTO) merchant account, complete with ‘virtual terminal’. A virtual terminal is essentially a secure webpage accessed via a standard web browser into which you (the merchant) enter customer card details.
  3. Online: An online merchant account, sometimes called an internet merchant account (IMA), comes equipped with a ‘payment gateway’. Linked to the checkout feature of a website, a payment gateway stores and transmits customers’ payment details to the merchant bank securely.

Rates and fees: How much does a merchant account cost?

Merchant account fees vary based on the volume of card transactions processed. Essentially, the more money you take from card payments annually, the lower the rates offered to you by providers.

Core charges fall in to two categories: monthly charges and charges per transaction.

Providers are often reluctant to offer up a full list of charges in their initial quote, so be sure to ask about all nine listed below.

▶ Read: Compare merchant account fees

Fee
Typical rate
Charged
Debit cards
0.3% - 1%
Per transaction
Credit cards
1% - 2%
Per transaction
Authorisation fee
2p - 4p
Per transaction
Card terminal rental
£15 - £30
Monthly
Payment gateway
£15 - £25
Monthly
Virtual terminal
£10 - £20
Monthly
Minimum monthly service charge*
£5 - £25
Monthly
Joining fee
£50 - £100
One-off
Early contract termination*
£50 - £100
One-off

* A minimum charge if your monthly transaction volume doesn’t reach a pre agreed threshold

PCI compliance

There’s another monthly fee for you to factor in, and it’s an important one so warrants going into a bit more detail. That fee is: PCI compliance.

PCI compliance is a legal requirement for all businesses that process card transactions. It’s basically a series of checks to make sure you’re handling sensitive data in a responsible manner.

For a small fee, merchant account providers offer a PCI compliance service — and we recommend you take it. Honestly, it’s not worth the hassle of trying to do it yourself.

Key takeaway: Pay a little up-front to avoid a hefty fine.

▶ Read: A complete guide to PCI compliance

Chargeback fees

Chargeback isn’t something to worry too much about — unless you’re doing shady business. It’s a measure designed to protect the consumer. If a consumer suspects that a transaction on their account is fraudulent, they are entitled to challenge it with the bank. If the challenge is upheld, the money will be refunded and the merchant will incur a chargeback fee. It’s basically a charge for wasting the bank’s time.

Key takeaway: Expect to pay £15 for every successful chargeback claim against your business.

Interchange fees

Like chargeback, interchange isn’t anything to lose sleep over — but it’s worth understanding so you can impress your friends down the pub. It’s a mandatory fee paid by the merchant’s bank to the customer’s bank, and forms a portion rates — discount rates, to use their proper name — charged by your merchant account provider. Interchange is capped at 0.2% of the transaction for debit cards and 0.3% for credit cards.

Key takeaway: Interchange fees are non-negotiable — they’re set in stone by the card processing companies. Don’t believe any merchant account provider that claims otherwise.

how to open a merchant account
Fill in this webform at to compare providers and open a merchant account for your business

Types of merchant account

There are three types of merchant accounts:

1. Aggregate merchant accounts

An aggregated merchant account is a service offered by a payment facilitator (PF), and is often the best choice of merchant account for small businesses . A PF recruits merchants on behalf of the acquiring bank. They are basically re-sellers — like a travel agent who sets you up with a hotel and takes a tidy cut of the room fee as payment.

When you sign up, your business is given a code based on industry and type of goods sold. Similar businesses are then grouped together in shared pools.

By pooling transactions from multiple merchants together and channeling them to the acquiring bank to be processed in one jumbo, shared merchant account, PFs can negotiate the same low rates for small to medium-sized businesses available to larger enterprises.

The downside of an aggregated merchant account is that you have less control over when your money is paid to you. Plus, for some businesses, it may be the case that they’re able to negotiate better rates with a dedicated merchant account.

Examples of aggregated merchant account UK providers are:

2. Dedicated merchant accounts

A dedicated merchant account is set up directly with the acquiring bank. It offers greater control over when your money is paid to you, and allows you to negotiate rates specific to your business.

Examples of dedicated merchant account UK providers are:

3. High-risk merchant accounts

Some businesses may struggle to get approved for a merchant account from mainstream providers because they’re considered “high-risk”. If this is the case for your business, don’t be offended, it’s (probably) nothing personal.

There are several criteria that the banks look at to assess risk. They are:

Longevity and stability: How long has your company been in existence? And what’s its track-record in terms of financial performance? Are there good years and then bad years or is turnover consistent?

Industry sector: Do you operate in a sector classified as being high-risk because of above average rates of chargeback and cancellation? Gambling, travel and monthly membership and subscription services are all marked down on this front.

Credit record of Directors and owners: Have you or any of the other major players in the business gone bankrupt in the past? (If you fail on this criteria it’s entirely personal.)

So, what to do if your business is refused a merchant account? Don’t despair. Rates are a little higher, but there are plenty of providers out there which specialise in merchant accounts for high-risk businesses.

Some examples of high-risk merchant account providers are:

  • Verotel
  • Zombaio
  • Instabill

Why does it matter which merchant account provider I go with?

The provider you choose matters because of two reasons: fees and contracts. Merchant account fees vary. A lot. They can vary with the same provider from month to month, let alone from provider to provider. So it’s super important you way up all the options before signing a contract.

Once you sign on the dotted line that’s it, they’ve got you. The average UK merchant account contract length is a whopping 18 months. And while early termination fees are rare, you most definitely will be required to pay any remaining rental costs. Card machine rental costs on average £20, so if you want out after six months (on an 18 month contract) it’ll cost you £240.

Learn. Compare. And choose your merchant account wisely.

How to open a merchant account

So now you know the answer to the question "what is a merchant account?", how do you open one? Well, the first step is to arm yourself with the necessary information to get an accurate quote.

Providers will need to know:

  • The nature of your business — what you sell and how you sell it
  • Monthly turnover for card payments — or forecasted turnover if yours is a new business
  • Average transaction size

Once you have this information, it’s time to compare providers — and Expert Market has another helpful article to help you do that:

▶ Read: Top 10 UK merchant account providers

Request quotes

But if you think you’re ready to talk to providers right away, simply click on one of the icons below and fill in our webform to receive same-day quote from up to four leading merchant service providers.

The questions we ask are designed to match you with the best merchant account provider for your business. We won’t charge you a penny, and the whole process takes less than a minute.

It’s guaranteed to save you time trawling the internet — and it could even save you money.