What is a merchant account? When and how to open one

Key takeaways

• A merchant account holds your customers' funds after a card or online payment, before the money moves to your main business account.

• You can open a merchant account on its own, or get one bundled with a payment service provider that also sorts out payment gateways and processing for you, too.

• Airwallex offers an all-in-one payment platform that covers payment acceptance, processing, and multi-currency accounts, so you don't need to juggle multiple providers.

Most customers pay digitally now. In fact, over 90% of consumers have used digital payments in the last year². So, if you want to accept card payments online or in-store, you'll need a merchant account.

This guide walks through what a merchant account is, how it works, the costs involved, and how to get one, whether you choose a standalone account or bundle it with a payment service provider. Let's get started.

What is a merchant account?

A merchant account is a type of account that lets businesses accept debit or credit card payments. When a customer pays by card, the funds go into your merchant account first, then move across to your regular business account. (We'll cover why you need to have a merchant account and a business account further down below.) Merchant accounts are essential for businesses that want to accept card payments in-store, online, or over the phone.

You should note that merchant accounts don't process the payments themselves. You need a payment processor to do this. Or, you can work with an end-to-end service, like Airwallex's Payment Links and plugins, which brings everything together in one place, from gateways and processing to merchant accounts and business accounts.

Traditional banks also offer merchant accounts for businesses, but they're less likely to manage processing. That means you may need a separate payment gateway and payment processor to accept digital payments. A lot of businesses now get merchant accounts bundled with processing services through a payment service provider. We'll cover this more in a moment.

Merchant account vs. business account

Merchant accounts are for accepting digital payments, and that's pretty much it. They're different from regular business accounts, which help you manage your cash flow, net working capital, and operational expenses.

The two work together, and most businesses need both types of accounts, especially if they operate online. In fact, you need a business account to open a merchant account for electronic payments.

So, in a nutshell, you need a merchant account to accept payments (because a standard business account won't be able to do this), and you need a business account to open the merchant account (which has payment acceptance capability).

Now that you know what a merchant account is and how it connects to your business account, let's look at what happens when a customer pays you.

How do merchant accounts work?

Once a customer starts a purchase, a few steps happen behind the scenes to move the money from their account to yours. Here's the typical flow:

• Customer submits payment. The customer enters their card details at checkout, either online or at a card terminal.

• Payment gateway encrypts the data. The payment gateway securely encrypts the card information and sends it to the payment processor.

• Processor routes the request. The payment processor forwards the transaction details to the acquiring bank (the bank that provides your merchant account).

• Acquiring bank requests approval.

  The acquiring bank asks the customer's bank (the issuing bank) to approve the payment.

• Issuing bank authorises or declines The customer's bank checks for sufficient funds and fraud signals, then sends back an approval or decline.

• Funds settle in your merchant account. If approved, the funds move to your merchant account, usually within 1–3 business days.

From there, you transfer the payment into your main business account. Whilst the merchant account communicates with the customer's bank and holds the payment, it doesn't actually process payments itself.

You should keep one thing in mind, though: your merchant account isn't free. The merchant acquirer that provides the account will charge a merchant discount rate and processing fees once the transfer is deposited into the account. You might also have extra processing fees for other provider services if you don't work with an all-in-one solution like Airwallex, for instance.

That's what's happening behind every card payment. The next question is whether your business needs a dedicated merchant account at all.

Do you need a merchant account?

If customers pay you by card, online, or through a mobile wallet, then yes, you need a merchant account. The only exception is a cash-only business.

That said, you might not need to open a brand-new account with a new provider. A lot of businesses access merchant accounts through a payment service provider (PSP) instead of opening a standalone one. PSPs like Airwallex build merchant account functionality into their platform, so you may already have one without realising it.

If you already work with a payments provider, it's worth checking whether they offer end-to-end processing. These providers can act as your payment gateway, processor, and acquirer, so you don't have to pay as many fees or manage as many contracts.

There are many merchant service providers out there, and they broadly fall into these categories:

• Payment processors: Companies that provide payment processing services, such as Airwallex.

• Point of Sale (POS) system providers: Companies that provide POS system hardware and software.

• eCommerce platforms: Some eCommerce platforms like Shopify and BigCommerce integrate payment processing directly into their product offerings, whilst others like WooCommerce support payment processing through plugins and extensions such as WooPayments.

If you do need a merchant account, the next step is deciding whether to get a standalone one or use a payment service provider that bundles everything together.

Payment service provider vs. dedicated merchant account

When it comes to accepting card payments, you've got two main options: a dedicated merchant account or a payment service provider (PSP). The right one depends on your business size, transaction volume, and how much complexity you're willing to manage.

A dedicated merchant account is like hiring a private chef, sommelier, and waiter separately for a dinner party. You get more control over each part, but you're also managing multiple relationships. A PSP is like booking a catering company that handles everything. It's simpler, but you're working within their setup.

When a dedicated merchant account makes sense

High-volume businesses processing £20,000 or more per month often benefit from a dedicated merchant account. You'll usually get interchange-plus pricing, which can mean lower per-transaction fees at scale. You also get more control over your payment stack and can negotiate terms directly with your acquiring bank. The trade-off is longer approval processes and more contracts to manage.

When a payment service provider makes sense

Most small-to-medium businesses, startups, and eCommerce operators find a PSP simpler and faster. You get one provider, one contract, and one dashboard. PSPs often include fraud detection tools and handle PCI compliance on your behalf. If you're selling through Shopify, WooCommerce, or BigCommerce, a PSP with native integrations can save you a lot of setup time.

Comparison table

Once you've decided which model fits your business, the next thing to understand is what you'll pay.

Merchant account fees and pricing models

Merchant account fees can feel a bit opaque, but they break down into three main layers. Think of it like a restaurant bill: the interchange fee is the cost of the ingredients, set by the card networks like Visa and Mastercard. The assessment fee is the kitchen's cut, charged by the card brands themselves. And the processor markup is the restaurant's service charge, which is what your payment provider adds on top.

Common fee types

On top of the per-transaction fees, you may also come across:

• Per-transaction fees: A percentage of each sale plus a fixed amount (e.g., 1.5%–3.5% + 20p).

• Monthly or annual fees: A flat fee for maintaining your account.

• Setup fees: A one-time charge when you open the account.

• Chargeback fees: Typically US$15–US$100 per disputed transaction.

• Minimum volume fees: Charged if you don't meet a monthly transaction threshold.

• Early termination fees: Penalties for closing your account before the contract ends.

Pricing models compared

Flat-rate pricing charges a simple percentage per transaction (e.g., 2.8% + 30p). It's predictable and easy to understand, which is why it's popular with low-volume businesses that want simplicity more than savings.

Interchange-plus pricing passes through the actual interchange fee and adds a fixed markup. It's more transparent and usually cheaper for businesses processing over £20,000 per month, since you're not paying inflated rates on low-cost transactions.

Tiered pricing groups transactions into qualified, mid-qualified, and non-qualified tiers, each with different rates. It's the least transparent model. You often won't know which tier a transaction will fall into until after it's processed.

Chargebacks and fraud protection

A chargeback happens when a customer disputes a transaction and their bank reverses the payment. Each chargeback usually costs you US$15–US$100 in chargeback fees, and you also lose the sale. Too many chargebacks can even get your merchant account shut down.

Fraud prevention tools like 3D Secure, Address Verification Service (AVS), and CVV verification help reduce chargebacks by stopping fraudulent transactions before they go through. It's worth looking for a provider that includes these tools as standard, instead of charging extra for them. PSPs often bundle fraud detection into their service, whilst dedicated merchant accounts may need separate fraud solutions.

Once you have a sense of the costs involved, you're ready to choose a provider and apply.

How to open a merchant account

Ready to open a merchant account? Here's what to look for and what you'll need. Opening a merchant account involves a bit more paperwork than a standard business account, but the exact process depends on your provider.

What to look for in a provider

You may want to consider the following when comparing providers:

• Fees: Setup fees, monthly and annual costs, chargeback fees, batch fees, and early termination charges.

• Services offered: Do you just get a merchant account, or do they provide the payment gateway and processing too?

• Security: Encryption, fraud prevention and detection, PCI compliance¹, and tokenization.

• Reputation: Online reviews and word-of-mouth from other local merchants.

• eCommerce platform integrations: Native plugins for Shopify, WooCommerce, Magento, or BigCommerce.

• International payment support: Multi-currency options and cross-border payment capabilities.

• Fraud prevention tools: 3D Secure, AVS, CVV verification, and chargeback management.

• API access and developer support: If you need custom integrations or want to embed payments into your own platform.

Required documents

You'll need to provide some personal and business details to open a merchant account. The exact requirements may vary depending on your provider, but you'll usually need:

• A business account, including proof of the account and bank statements

• Your personal identification and credit history

• The business's identification, including the business licence, address, and credit history

• Your company registration number

• VAT registration number (if applicable)

• Unique Taxpayer Reference (UTR)

Security and PCI compliance

PCI DSS (Payment Card Industry Data Security Standard) is a set of security rules that any business handling card data must follow. Think of it like the fire safety regulations for a restaurant. It's not optional, and if you fail to comply, you could face fines or lose the ability to accept card payments altogether.

PCI compliance protects your customers' data and your business reputation. PSPs usually handle PCI compliance on your behalf, which gives you one less thing to manage. With a dedicated merchant account, you may need to manage compliance yourself or work with a separate security provider.

Simplify your payment setup with Airwallex

If you're selling to customers in multiple countries, you probably don't want to manage separate merchant accounts, payment processors, and currency conversions. Airwallex brings it all together.

Our Global Accounts go beyond a standard merchant account. You can open accounts in 20+ currencies, collect payments from customers worldwide, and avoid forced currency conversions. With like-for-like settlement, you receive funds in the same currency your customer paid in, so there are no automatic FX fees eating into your margins.

Plus, our plugins integrate directly with Shopify, WooCommerce, Magento, and BigCommerce, so your customers can pay the way they prefer, and you can collect funds without the hassle of managing multiple payment providers.

Frequently asked questions

What's the difference between a merchant account and a business account?

A merchant account holds funds from card and online payments before they're transferred to your business account. A business account is your everyday operating account for managing cash flow, paying expenses, and receiving transfers. Most businesses need both.

What documents do I need to open a merchant account?

You'll usually need business registration documents, bank statements, personal ID, and your company's credit history. In the UK, you may also need your company registration number and VAT registration details. Requirements vary by provider.

What's the difference between a payment service provider and a merchant account?

A payment service provider (PSP) bundles your merchant account, payment gateway, and processing into one service. A standalone merchant account only holds funds, so you'll need separate contracts for gateway and processing. Most small-to-medium businesses use a PSP for simplicity.

How much does a merchant account cost?

Costs vary, but you'll usually pay a per-transaction fee (often 1.5%–3.5%), plus possible monthly fees, setup fees, and chargeback fees (typically US$15–US$100 per dispute). Pricing models include flat-rate, interchange-plus, and tiered. Compare providers to find the best fit for your volume.

Do I need a merchant account to accept online payments?

Yes, you need a merchant account to accept card payments online. But you don't necessarily need a standalone one. Many payment service providers include merchant account functionality as part of their platform, so you can accept payments without opening a separate account.

Sources and references

1. https://www.pcisecuritystandards.org/

2. https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/consumer-digital-payments-already-mainstream-increasingly-embedded-still-evolving