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Merchant account

A merchant account is a type of bank account for businesses that allows accepting and processing credit and debiting card transactions. Merchant account is often required for various businesses, especially for online operations. This account is specifically used to identify the vendor as the owner of the purchase. Information about the owner and transactions is sent directly to the bank.

This bank account is issued by acquisition of a bank for a certain vendor under an agreement to settle payment card transactions. Sometimes, an independent sales organization, a member service provider or other payment processor takes place as the third party in the merchant agreement. After signing a merchant agreement, the vendor is contractually bound to obey the regulations of card associations, such as MasterCard or Visa.

Functions of merchant accounts

There are two main categories of merchant accounts that are usually chosen by different businesses depending on their type of operations. 'Swiped' is referred to transactions when a customer pays for his/her purchases in person and is required to swipe or insert credit or debit card. This kind of merchant account is mostly used in retail. 'Keyed' is referred to transactions when the credit or debit card information is entered through a virtual terminal, typically using internet. This kind of merchant account is mostly used by e-commerce merchants, but some merchants decide to use this method also during face to face transactions as it is less expensive.

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Utilizing merchant account

Similarly, as you are able to deposit another person’s check into a checking account, a merchant account lets you accept a card payment from a client. Meanwhile, merchant account does not hold any money like checking or other deposit accounts. Instead, card payment goes through the merchant account via payment gateway and after the funds are cleared, they are deposited on a checking account. Commonly it takes up to 48 hours from the moment of the transaction for money to be deposited onto the vendor’s checking account. In addition, instead of receiving numerous deposits for each transaction, all payments from one business day are put together into one deposit payment called a “batch”.

Merchant account can also be explained as a line of credit account due to the fact that vendor gets paid before the actual funds are collected from the customer. This means that the vendor may be subjected to a personal credit check or requirement to sign a personal guaranty.

If you have more questions regarding merchant account – do not hesitate to contact our banking specialists to get a detailed consultation!

Merchant account payment procedure

Even though merchant accounts are widely used for trading and e-commerce, you should understand that it significantly differs from other types of accounts. Those differences may be technical, but you must be aware of the merchant account payment system and its functions, prior to choosing to open one.

Merchant bank account scheme
illustration of how merchant account works

Generally speaking, when a customer performs transfer (payment) to your company via merchant account, the whole payment procedure can be split into 4 major steps:

  1. Online payment. A customer buys something, most likely online, using his debit / credit card. This is the moment when input is being made and the payment procedure is initiated;
  2. Payment verification. Transaction is being processed and authorized by the payment system service provider;
  3. Payment transfer. Once the transaction is verified and approved, the money is transferred from your customer’s bank account to your company’s merchant account;
  4. Batch. Instead of transferring every single payment instantly, within next few days all payments will be accumulated on your merchant account and then transferred to your bank account in one transfer.

Advantages and disadvantages of merchant accounts

Merchant account is useful for any business in order to expand its customer base online. Meanwhile, such alternatives as PayPal present strong competition to merchant accounts due to time-consuming and complicated procedures required by banks, most vendors are willing to open a line of credit account.


Merchant accounts have several advantages over PayPal account as well. As discussed previously, with most merchant account providers, the vendor can expect to receive the funds paid by the customer within one or two days. Meanwhile, if a customer pays using PayPal, the funds are deposited into the vendors PayPal account and it remains there until the vendor requests a transfer to its checking account in a bank. Afterwards, the transfer process can take up to seven days. Furthermore, line of credit accounts tend to be more cost effective with monthly settlement service fees and/or a per-transaction fee. Meanwhile, PayPal does not charge a monthly service fee, instead charging transaction fees, which are much higher than for merchant accounts.

In addition, merchant account providers charge a monthly fee, which covers quality customer service. Meanwhile, a drawback to a PayPal account is a lack of customer service. Not only it can complicate your business processes, it can also have a negative impact on your customers. To conclude, PayPal is a good option for online businesses with low volume of transactions. If your business is expanding, a merchant account will not only provide better customer service, but also save you money.


A disadvantage faced by the merchant account provider is the risk of vendor’s financial instability. Businesses usually receive payment in advance of providing the service or the product and in case the vendor is incapable of delivering the goods, while being unable to pay back the money received from the customer, the financial liability shifts to the merchant account provider.

Confidus Solutions

Our professional team of lawyers and bank agents will help you to choose the bank and type of account. We have many years of experience in servicing private and corporate clients. If you have any questions regarding bank accounts and their types – please check F.A.Q. section or contact us now.