What is a Merchant Account? — Understanding the basics

Backspace Tech
6 min readMar 31, 2023
Merchant Account- understanding the basics

In any transaction, there are multiple parties involved, but in every purchase or service availed, it is the customer and merchant who are almost always the highlights of the transaction. And that literally brings us to the question of who is the customer and who is a merchant.

Well, a customer is a no-brainer, it is a person who pays for a service or a product. But who is a merchant? The standard textbook definition of a merchant is that it is an individual or entity that sells a product or service and accepts cash or any other form of payment in return.

Let’s take a walk-through history:

In the olden days, these merchants often accepted only cash as payment and stored it in their very own private safe or "strong box," as banking was still in its infancy. However, as trade expanded and the demand for reliable and convenient access to funds grew, banking institutions emerged to cater to the needs of merchants and other clients.

Merchants and traders would entrust their wealth to goldsmiths, who would issue receipts for the deposited gold that could be utilized as a means of payment. With time, these receipts came to be recognized as a form of currency, and goldsmiths began lending out the deposited gold to earn interest.

In medieval Europe, banking establishments started emerging in the form of money changers and bankers. These institutions provided a range of financial services to merchants, including currency exchange, loans, and secure storage of funds. Merchants would deposit their money with these establishments and receive letters of credit or bills of exchange that could be used to pay for goods and services in other parts of the world.

In the early modern era, banks developed in their current form, offering a diverse range of financial services to merchants and other clients. And today, banks take on the two distinct roles of the acquirer (the merchant’s banker) and the issuer (the customer’s banker).

And today acquirers offer merchants an account called the merchant account to accept payments that stem from both scenarios of card-present transactions and card-not-present transactions, along with cash payments.

What is a merchant account?

A merchant account refers to a bank account that enables businesses to receive payments via credit and debit cards. These accounts are usually offered by acquirers or payment processors to facilitate the smooth transfer of funds from a customer’s card to the merchant’s account.

One of the most significant advantages of having a merchant account is the potential for increased sales and revenue. By accepting credit and debit cards, businesses can cater to a wider customer base that prefers electronic payment methods. This, in turn, can result in higher sales and revenue, as it offers convenience and many options for payment to the customer.

Another benefit of having a merchant account is the ability to process transactions quickly and efficiently. Armed with the right payment processing capabilities, payment gateways, and a variety of payment method options, merchants can process transactions in real-time, ensuring that funds are transferred to the account almost immediately. This can help minimize the risk of fraudulent activities and chargebacks while also providing customers with a more seamless checkout experience.

Also, there are different parties involved in a transaction, whose primary purpose is to funnel the funds seamlessly to the merchant, which is only possible when the merchant has an account.

Who are the parties involved in a transaction?

Let’s start from the merchant’s side

  • Well, we have the acquirer (the merchant’s banker) who offers the merchant account that empowers the merchant to accept both debit and credit card payments.
  • Then comes the payment processor who essentially functions as the middleman between the issuer and the merchant.
  • The issuer who issues the card to the customer to make the purchase.
  • The card network (RuPay, Visa, Mastercard, and others) who are the gatekeepers of the payment ecosystem.
  • The payment gateway who transmits information to and fro between the merchant and payment processor.

All these parties are a must for a transaction to successfully go through, and they also are the conduit to send information when a chargeback arises.

Who can offer a merchant account?

There is a common misconception that only an acquirer, ISO (Independent Sales Organization), or a payment processor can offer a merchant account. But it is not so, there is another entity called the Payment Service Providers, or PSPs, in short, who can offer a merchant account.

However, while these entities empower the merchant to accept card payments, there is still a fundamental difference in how they operate.

Acquirers, ISOs, and Payment Processors:

They provide the merchant with a unique merchant account and MID (Merchant Identification Number) that indicates the merchant’s relationship with the entity. The account is assigned to the merchant after a thorough agreement and underwriting process between the merchant and acquirer. Here, the merchant is wholly responsible for following the agreement to the “T.”

Payment Service Providers (PSPs):

They operate as a single merchant account and act as the merchant of record with acquirers and processors. Here, the merchant is a sub-merchant to the PSP's master merchant account. In this method, the merchant’s liability is taken over by the PSP, and the approval window for securing a merchant account is considerably reduced.

In summation, here’s the difference between an acquirer and PSPs when it comes to offering merchant accounts:

A table listing the difference between acquirer and PSP when availing a merchant account
Difference between Acquirer and PSP

Also, there is a class of merchants called "high-risk merchants." Broadly speaking, a merchant classified as high-risk is one whose industry or type of service tends to result in a significant number of chargebacks.

These merchants must compulsorily maintain a merchant reserve account in addition to the merchant account. This account will protect the acquirer and cover any potential losses arising from chargebacks or fraud.

How to get a merchant account?

Getting a merchant account typically involves a few steps, and here is a general overview of the process:

Determining eligibility: Before applying for a merchant account, the merchant must meet the eligibility requirements of either the acquirer or PSPs such as a good credit score, a low volume of chargebacks, a minimum monthly volume, and so on.

Choosing a payment processor: Choosing a payment processor that offers competitive rates, features, functionality, and reliable up-time to process incoming traffic of transactions is a must.

Documentation: To secure a merchant account, the merchant must have a clean document record, such as bank account information, legally approved documents of business registration, tax ID, credit history, and bank account information.

Application: Once the necessary documents are in place, the merchant must apply for a merchant account with the acquirer or PSPs of their choice. The merchant must fill out the entire application, including details about the nature of the business, products or services offered, and processing requirements.

Approval: Once the necessary documents and application are submitted, the acquirer or PSP will review the same to approve or reject the application. Usually, this process can take a few days to a few weeks to complete, depending on the complexity of the merchant’s requirements.

Account set-up: If the application is approved, the merchant will be provided with instructions on how to set up the merchant account and integrate the same with their website by the acquirer/PSP. Along with this, the merchant might also have to integrate payment gateways or physical equipment such as card readers, and QR scanners to tie back to their merchant account.

Once the entire process is established, the merchant can begin accepting payments immediately. In summary, merchant accounts offer various advantages to businesses, such as enhanced sales, increased efficiency, and valuable customer behavior insights. However, merchants should thoroughly assess their eligibility and the expenses involved in establishing and maintaining a merchant account before coming to a decision.

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